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Creative Real Estate Financing

Chapter 12

5 Creative Ways For Financing Your Home Purchase

Traditional financing is sufficient in most cases, however, if you are having difficulty getting a traditional mortgage from a bank, unconventional or "creative" financing may allow you to purchase (or control) homes which you did not think you could. You could buy homes sometimes without money out of your pocket or without having good credit. Here are a handful of creative financing strategies:


Home Equity Financing:

The easiest way to get a loan is to utilize your home and borrow money against its equity.  Home equity is calculated by the current market value of your house minus what is left on your mortgage. So if your home is worth $500,000.00 and you have a $300,000.00 mortgage remaining, that means that you have $200,000.00 equity which you can borrow against. Note that the interest on your home equity loan may be tax deductible.

Hard Money Lending:

If you have a very lucrative deal and time is of the essence in securing the deal or losing it, the best option if you do not have enough funds to finance it would be to get a hard money loan. This type of loan does away with the usual formalities, bureaucracy, and paperwork conventional banking loans are tbound with. Application and approval is generally quicker and less tiresome, compared to regular loan applications. However, the catch is that hard money loans come with higher interest rates, ranging from 12% to 18% in a year or higher. Hard money loans are commonplace with real estate investors especially when the property being sold is relatively cheap. After purchasing, they fix these properties and come up with hefty profits after selling them at higher prices - so that high interest is not a big concern.

Lease Option (Option To Purchase With Rental Agreement):

A lease option is an agreement where you rent the property for a certain length of time while you have the option to purchase the property at a set price during that period. The advantage of this strategy is that you have the "option" to buy the home, but not the "obligation" to buy the home. Therefore if prices rise quickly, you can execute your option to buy the home at the low price that you previously agreed upon with the seller. Conversely, if prices drop, you are not obligated to buy the home, so you are not at risk. Usually, to get into a lease option, the deposit required is much lower than a typical down payment for the home. This allows you to control a large property with very little money.

Share Equity:

If you do not have enough money to shell out for a proper down payment, especially when you are just beginning your real estate financing venture, equity sharing offers a good chance of success. The most familiar equity sharing setup includes one party financing the buyout and the other party living in the bought property. The benefits? Both parties get the best from tax benefits and they both share the profits. However, just like any other venture, equity sharing poses its own issues. If the resident does not continue to pay the financial obligations attached to the property like mortgage and property tax payments, the one who put up the initial investment will end up on the losing end.  Another problem that may arise is that the property may not increase in market value, hence, the invested money will “sleep” for a long time, earning no profit at all.

Partner With Investors Who Have Money Or Credit Or Both:

To reduce the downside of the equity sharing, be very cautious of who you take on as your partner. Being a friend or a relative is not an assurance of profitability or loyalty. However, gaining the right partner may prove this endeavor a rewarding and lucrative one, especially when you have found one who is well-versed in the real estate industry and has had previous financial sources. Having a partner whose resources can cover what you lack can bring about the success of many of your real estate projects. The only negative aspect to a good joint real estate undertaking would be you losing total control on the project and not being able to make decisions alone. You always have to come to a decision jointly.

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