What is creative financing?
Commonly used phrase which involves non-traditional types of funding that are not commonly used. Most of these techniques involve the seller not having to use much or any of their own money.
Lease Options
Subject2 deals
Hard Money loans
Seller financing
Private loans
Wrap-around Mortgages
Definition of Wrap-around mortgage
A seller financed deal where the sellers existing loan stays in place and a 2nd loan agreement is created between the seller and the new buyer.
Example
Owner of a property has a $100k existing mortgage at 5%. Current payment is $537. You make offer to buy the property for $105k at 7% interest and create a loan with the seller resulting in a pmt from you of $699. Seller will continue paying on the 100k mortgage or $537 a month and collect your $699 and pocket the $162 difference.
Benefits of a Wrap-around mortgage
Benefits to Buyer
• Smaller down payment (or maybe no down payment)
• Easier qualification
• Lower closing costs
• Don’t have to work through lender – no arduous underwriting process
• Don’t have to have good credit
• Don’t have to be employed
Benefits to Seller
• Quicker sale
• Increase the pool of potential buyers
• Create stream of cash flow
• Collect high rate of interest
• Defer taxes on the sale
Wraps to Create Streams of Cash Flow
• As investors we are always looking for huge discounts 30-50% off
• Using wraps you don’t have to find deals at these huge discounts
• Investors can create streams of cash flow by collecting cash on higher rates of interest than they are paying the bank on the underlying loan.
Mkt value $100k
Buy (assume mortgage) for $95k at 6% – Pmt = $570
Sell for $105k at 10% – $921
Positive CF = $351
How do they work?
Many sellers will have never heard of a wrap-around mortgage. Don’t expect people to be offering their homes on a wrap; you will need to put the numbers together and incorporate this type of financing into your offer. You will play the part of consultant as you educate them on the strategy as well as show them how it is beneficial to them to do this type of a deal.
This is how you create creatively financed deals. I hear many people say they “can’t find good deals”. Well, we don’t always find good deals, we have to create them.
What to watch out for
What if the seller doesn’t make the payment on the underlying mortgage? You need to make sure they ARE paying. You can do this buy using a third party to make those payments, you can make the payment directly to the bank for them and send the additional amount to the seller, or get access to their bank via internet or phone so you can verify payment.
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