Creative Finance - Sell or Buy

<p> <strong>These are all legal. There is liability in these techniques. Many of these techniques will be either pro buyer or pro seller.</strong> </p> <p> <b>Creative financing</b> is a term used widely amongst <a title="Real estate investors (page does not exist)" class="new" href="http://en.wikipedia.org/w/index.php?title=Real_estate_investors&amp;action=edit&amp;redlink=1">real estate investors</a> to refer to non-traditional means of <a title="Real estate" href="http://en.wikipedia.org/wiki/Real_estate">real estate</a> financing, or financing techniques not commonly used. The goal of creative financing is generally to <a class="mw-redirect" title="Purchase" href="http://en.wikipedia.org/wiki/Purchase">purchase</a>, or <a title="Finance" href="http://en.wikipedia.org/wiki/Finance">finance</a> a <a title="Property" href="http://en.wikipedia.org/wiki/Property">property</a>, with the buyer/<a title="Investor" href="http://en.wikipedia.org/wiki/Investor">investor</a> using as little of his own money as possible, otherwise known as <a title="Leverage (finance)" href="http://en.wikipedia.org/wiki/Leverage_%28finance%29">leveraging</a>, <a title="OPM" href="http://en.wikipedia.org/wiki/OPM">OPM</a> (Other People&#39;s Money). Using these techniques an investor may be able to purchase multiple properties using little, or none, of his &quot;own money&quot;. </p> <table summary="Contents" class="toc" id="toc"> <tbody> <tr> <td> <div id="toctitle"> <h2> Contents </h2><span class="toctoggle">[<a id="togglelink" class="internal" href="javascript:toggleToc()" name="togglelink">hide</a>]</span> </div> <ul> <li class="toclevel-1"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Kinds_of_Creative_Financing"><span class="tocnumber">1</span> <span class="toctext">Kinds of Creative Financing</span></a> <ul> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Hard_money_loans"><span class="tocnumber">1.1</span> <span class="toctext">Hard money loans</span></a> </li> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Private_mortgages"><span class="tocnumber">1.2</span> <span class="toctext">Private mortgages</span></a> </li> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Simultaneous_Closings"><span class="tocnumber">1.3</span> <span class="toctext">Simultaneous Closings</span></a> </li> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Subject-to"><span class="tocnumber">1.4</span> <span class="toctext">Subject-to</span></a> </li> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Land_trust"><span class="tocnumber">1.5</span> <span class="toctext">Land trust</span></a> </li> <li class="toclevel-2"> <a href="http://en.wikipedia.org/wiki/Creative_financing#Short_sale"><span class="tocnumber">1.6</span> <span class="toctext">Short sale</span></a> </li> </ul> </li> <li class="toclevel-1"> <a href="http://en.wikipedia.org/wiki/Creative_financing#References"><span class="tocnumber">2</span> <span class="toctext">References</span></a> </li> <li class="toclevel-1"> <a href="http://en.wikipedia.org/wiki/Creative_financing#External_links"><span class="tocnumber">3</span> <span class="toctext">External links</span></a> </li> </ul> </td> </tr> </tbody> </table><script type="text/javascript"> //<![CDATA[ if (window.showTocToggle) { var tocShowText = "show"; var tocHideText = "hide"; showTocToggle(); } //]]> </script> <p> <a id="Kinds_of_Creative_Financing" name="Kinds_of_Creative_Financing"></a> </p> <h2> <span class="editsection">[<a title="Edit section: Kinds of Creative Financing" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=1">edit</a>]</span> <span class="mw-headline">Kinds of Creative Financing</span> </h2> <p> <a id="Hard_money_loans" name="Hard_money_loans"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Hard money loans" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=2">edit</a>]</span> <span class="mw-headline">Hard money loans</span> </h3> <p> <a title="Hard money loan" href="http://en.wikipedia.org/wiki/Hard_money_loan">Hard money loans</a> (abbreviated as HML) are similar to <a title="Private mortgage (page does not exist)" class="new" href="http://en.wikipedia.org/w/index.php?title=Private_mortgage&amp;action=edit&amp;redlink=1">private mortgages</a> except that they are made through a <a title="Hard money lender" href="http://en.wikipedia.org/wiki/Hard_money_lender">hard money lender</a>. A hard money lender may get his financing either from his own contacts with <a class="mw-redirect" title="Private lender" href="http://en.wikipedia.org/wiki/Private_lender">private lenders</a>, or <a class="mw-redirect" title="Financial institutions" href="http://en.wikipedia.org/wiki/Financial_institutions">financial institutions</a> with whom he has established his own lines of <a title="Credit" href="http://en.wikipedia.org/wiki/Credit">credit</a>. </p> <p> Hard money loans are made to real estate investors for the purpose of investing in and <a class="mw-redirect" title="Renovating" href="http://en.wikipedia.org/wiki/Renovating">rehabbing</a> real estate. <a title="Rates" href="http://en.wikipedia.org/wiki/Rates">Rates</a> are a little higher than borrowing directly from a <a class="mw-redirect" title="Private lender" href="http://en.wikipedia.org/wiki/Private_lender">private lender</a>, as the hard money lender may also be collecting <a title="Yield spread" href="http://en.wikipedia.org/wiki/Yield_spread">yield spread</a>. The hard money lender will also charge <a title="Point (mortgage)" href="http://en.wikipedia.org/wiki/Point_%28mortgage%29">points</a> of 3% to 6% or more. These points are often paid up front, but a few lenders may roll these into the loan. </p> <p> Hard money loans are high-<a title="Interest" href="http://en.wikipedia.org/wiki/Interest">interest</a> <a title="Mortgage" href="http://en.wikipedia.org/wiki/Mortgage">mortgages</a> available from private investors. Desperate <a title="Borrower" href="http://en.wikipedia.org/wiki/Borrower">borrowers</a> with poor credit scores, <a title="Bankruptcy" href="http://en.wikipedia.org/wiki/Bankruptcy">bankruptcies</a>, no verifiable income, or too much <a title="Debt" href="http://en.wikipedia.org/wiki/Debt">debt</a> often take out hard money loans when they are unable to qualify for traditional mortgages. Hard money becomes a last resort when borrowers cannot meet the lending standards set by banks or government sponsored enterprises such as <a title="Fannie Mae" href="http://en.wikipedia.org/wiki/Fannie_Mae">Fannie Mae</a> and <a title="Freddie Mac" href="http://en.wikipedia.org/wiki/Freddie_Mac">Freddie Mac</a>. </p> <p> <a id="Private_mortgages" name="Private_mortgages"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Private mortgages" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=3">edit</a>]</span> <span class="mw-headline">Private mortgages</span> </h3> <p> A private <a title="Mortgage" href="http://en.wikipedia.org/wiki/Mortgage">mortgage</a> is a <a title="Loan" href="http://en.wikipedia.org/wiki/Loan">loan</a> secured by <a title="Real estate" href="http://en.wikipedia.org/wiki/Real_estate">real estate</a> that is made by a <a class="mw-redirect" title="Private lender" href="http://en.wikipedia.org/wiki/Private_lender">private lender</a>, instead of a traditional lender, <a title="Financial institution" href="http://en.wikipedia.org/wiki/Financial_institution">financial institution</a>, or government institution. These loans are most commonly short term and last anywhere from 6 months to three years. These are asset based loans made for the purchase and rehabilitation of real estate. Because the loans are asset based, the decision to loan is based on the criteria of the property and not usually the qualifications, or <a title="Credit rating" href="http://en.wikipedia.org/wiki/Credit_rating">credit</a> of the borrower. </p> <p> Interest rates on these loans are considerably higher than traditional loans and may range from 12% to 18%, with points sometimes being required as well. Loans are made on an LTV (<a title="Loan to value" href="http://en.wikipedia.org/wiki/Loan_to_value">loan to value</a>) of 65% to 70%, to preserve sufficient <a title="Ownership equity" href="http://en.wikipedia.org/wiki/Ownership_equity">equity</a> in the property for the private lender in the event of default. </p> <p> <a id="Simultaneous_Closings" name="Simultaneous_Closings"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Simultaneous Closings" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=4">edit</a>]</span> <span class="mw-headline">Simultaneous Closings</span> </h3> <p> A <a title="Simultaneous closing" href="http://en.wikipedia.org/wiki/Simultaneous_closing">Simultaneous closing</a> allows a home seller to offer <a title="Owner finance (page does not exist)" class="new" href="http://en.wikipedia.org/w/index.php?title=Owner_finance&amp;action=edit&amp;redlink=1">owner financing</a> on a property without having to hold any <a title="Mortgage" href="http://en.wikipedia.org/wiki/Mortgage">mortgage</a>. On closing day, the property title is transferred to the buyer and the newly created (owner-financed) <a title="Mortgage" href="http://en.wikipedia.org/wiki/Mortgage">mortgage</a> is sold to a note investor for cash, simultaneously. </p> <p> <a id="Subject-to" name="Subject-to"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Subject-to" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=5">edit</a>]</span> <span class="mw-headline">Subject-to</span> </h3> <p> A subject-to transaction is a creative finance technique where a buyer is able to take title to property without procuring a note of his or her own. The transaction usually involves the seller of the property leaving his or her existing financing in place so that the buyer does not need to pay transaction costs associated with obtaining a traditional loan. This process is similar to assuming a loan, but differs because it usually takes place without the consent of the original lending institution and violates the terms of the loan. This technique is useful because it affords the buyer the ability to obtain financing without the need for transaction costs and does not tie up capital to procure a new note. The technique also allows the buyer to purchase property quickly without going through the arduous loan process. </p> <p> Once a property is acquired subject-to there are a number of exit strategies that the buyer can use to turn a profit if the deal is sound. The new note can often be used to produce a wraparound mortgage and finance individuals that have a hard time getting a loan through a traditional lending institution. Certain states allow the buyer to enter into a lease/option agreement using the existing financing. The house can also be sold to a retail buyer or wholesaled to another investor for profit. <sup class="reference" id="cite_ref-0"><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_note-0"><span>[</span>1<span>]</span></a></sup> </p> <p> <a id="Land_trust" name="Land_trust"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Land trust" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=6">edit</a>]</span> <span class="mw-headline">Land trust</span> </h3> <p> A <a title="Land trust" href="http://en.wikipedia.org/wiki/Land_trust">land trust</a> is an agreement whereby one party (the <a title="Trustee" href="http://en.wikipedia.org/wiki/Trustee">trustee</a>) agrees to hold ownership of a piece of real property for the benefit of another party (the <a title="Beneficiary" href="http://en.wikipedia.org/wiki/Beneficiary">beneficiary</a>). Land trusts are used by <a class="mw-redirect" title="Nonprofit" href="http://en.wikipedia.org/wiki/Nonprofit">nonprofit</a> organizations to hold <a class="mw-redirect" title="Conservation easements" href="http://en.wikipedia.org/wiki/Conservation_easements">conservation easements</a>, by <a class="mw-redirect" title="Corporations" href="http://en.wikipedia.org/wiki/Corporations">corporations</a> and investment groups to compile large tracts of land, and by individuals to keep their real estate ownership private, avoid <a title="Probate" href="http://en.wikipedia.org/wiki/Probate">probate</a> and provide several other benefits. </p> <p> In the application of creative financing, a land trust can be used to take control of a property while keeping the name of the owner private, which theoretically will avoid invoking the <a title="Due on sale (page does not exist)" class="new" href="http://en.wikipedia.org/w/index.php?title=Due_on_sale&amp;action=edit&amp;redlink=1">due on sale</a> clause of the current deed of trust. <sup class="reference" id="cite_ref-1"><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_note-1"><span>[</span>2<span>]</span></a></sup> </p> <p> <a id="Short_sale" name="Short_sale"></a> </p> <h3> <span class="editsection">[<a title="Edit section: Short sale" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=7">edit</a>]</span> <span class="mw-headline"><a title="Short sale" href="http://en.wikipedia.org/wiki/Short_sale">Short sale</a></span> </h3> <p> In this scenario, the seller is often several <a title="Payment" href="http://en.wikipedia.org/wiki/Payment">payments</a> behind and may even be close to <a title="Foreclosure" href="http://en.wikipedia.org/wiki/Foreclosure">foreclosure</a>, the seller can also show significant hardships that have led them to being unable to continue making <a class="mw-redirect" title="Payments" href="http://en.wikipedia.org/wiki/Payments">payments</a> on this <a title="Property" href="http://en.wikipedia.org/wiki/Property">property</a>. The seller will give the short sale investor a <a title="Contract" href="http://en.wikipedia.org/wiki/Contract">contract</a> to <a class="mw-redirect" title="Purchase" href="http://en.wikipedia.org/wiki/Purchase">purchase</a> the property, a <a title="Deed" href="http://en.wikipedia.org/wiki/Deed">deed</a> that will probably be placed in <a title="Escrow" href="http://en.wikipedia.org/wiki/Escrow">escrow</a>, <a title="Power of attorney" href="http://en.wikipedia.org/wiki/Power_of_attorney">power of attorney</a> and a number of other documents that will give them full <a title="Control (management)" href="http://en.wikipedia.org/wiki/Control_%28management%29">control</a> of the property. The investor will then present a case to the <a title="Bank" href="http://en.wikipedia.org/wiki/Bank">bank</a> holding the <a title="Mortgage" href="http://en.wikipedia.org/wiki/Mortgage">mortgage</a>, that the seller is no longer able to make payments, is having to relinquish control of the property and that the loan on the property must be reduced in order for the investor to purchase the property. </p> <p> A short sale is a <a title="Misnomer" href="http://en.wikipedia.org/wiki/Misnomer">misnomer</a> because the term &quot;short sale&quot; has nothing to do with <a class="mw-redirect" title="Shorting" href="http://en.wikipedia.org/wiki/Shorting">shorting</a> anything in the <a class="mw-redirect" title="Financial" href="http://en.wikipedia.org/wiki/Financial">financial</a> sense. These transactions can also take a significant amount of time so it is not called a &quot;short sale&quot; for that reason either. However, the process is shorter than the traditional process of going through foreclosure and <a class="mw-redirect" title="Foreclosure sale" href="http://en.wikipedia.org/wiki/Foreclosure_sale#Foreclosure_auction">sale by auction</a>, which is still likely to take much longer. </p> <p> This is a method to sell your house quickly, because effectively you pass over control of your property to the short sale investor immediately upon signing of the documents. From that time on, it is up to the investor to complete the transaction. Should a bank refuse to accept the investors offer on a short sale, there is no guarantee that the house will not go to foreclosure anyway, but this does provide the seller a &quot;possibility to avoid foreclosure&quot;, when all else has failed. <sup class="reference" id="cite_ref-2"><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_note-2"><span>[</span>3<span>]</span></a></sup> </p> <p> This technique may also be use to stop <a title="Foreclosure" href="http://en.wikipedia.org/wiki/Foreclosure">foreclosure</a> long enough to allow another purchase, or something else to be done with the property. </p> <p> <a id="References" name="References"></a> </p> <h2> <span class="editsection">[<a title="Edit section: References" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=8">edit</a>]</span> <span class="mw-headline">References</span> </h2> <ol class="references"> <li id="cite_note-0"> <b><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_ref-0">^</a></b> <a rel="nofollow" title="http://www.housesfast.com/an/sell_your_house_subject-to.htm" class="external free" href="http://www.housesfast.com/an/sell_your_house_subject-to.htm">http://www.housesfast.com/an/sell_your_house_subject-to.htm</a> </li> <li id="cite_note-1"> <b><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_ref-1">^</a></b> <a rel="nofollow" title="http://www.houstonrealty.us/bb/index.php?showtopic=7473" class="external free" href="http://www.houstonrealty.us/bb/index.php?showtopic=7473">http://www.houstonrealty.us/bb/index.php?showtopic=7473</a> </li> <li id="cite_note-2"> <b><a title="" href="http://en.wikipedia.org/wiki/Creative_financing#cite_ref-2">^</a></b> <a rel="nofollow" title="http://www.housesfast.com/an/sell_your_house_short_sale.htm" class="external free" href="http://www.housesfast.com/an/sell_your_house_short_sale.htm">http://www.housesfast.com/an/sell_your_house_short_sale.htm</a> </li> </ol> <ul> <li> <a rel="nofollow" title="http://www.reiclub.com/articles/offer-private-mortgage" class="external text" href="http://www.reiclub.com/articles/offer-private-mortgage">Don Konipol.</a> </li> </ul> <p> <a id="External_links" name="External_links"></a> </p> <h2> <span class="editsection">[<a title="Edit section: External links" href="http://en.wikipedia.org/w/index.php?title=Creative_financing&amp;action=edit&amp;section=9">edit</a>]</span> <span class="mw-headline">External links</span> </h2> <ul> <li> <a rel="nofollow" title="http://www.bankrate.com/bos/news/mortgages/20080103_creative_financing_home_a1.asp" class="external text" href="http://www.bankrate.com/bos/news/mortgages/20080103_creative_financing_home_a1.asp">&quot;Creative financing might help sell your home&quot;</a>. <i><a class="mw-redirect" title="Bankrate.com" href="http://en.wikipedia.org/wiki/Bankrate.com">Bankrate.com</a></i>. </li> <li> <a rel="nofollow" title="http://abcnews.go.com/Business/SmallBiz/story?id=87288&amp;page=1" class="external text" href="http://abcnews.go.com/Business/SmallBiz/story?id=87288&amp;page=1">ABC News story on Creative Financing.</a> </li> <li> <a rel="nofollow" title="http://realtytimes.com/rtcpages/20001027_financing.htm" class="external text" href="http://realtytimes.com/rtcpages/20001027_financing.htm">Realty Times on, &quot;Too Much &#39;creative financing&#39;.&quot;</a> </li> </ul><!-- NewPP limit report Preprocessor node count: 401/1000000 Post-expand include size: 6797/2048000 bytes Template argument size: 2167/2048000 bytes Expensive parser function count: 1/500 --><!-- Saved in parser cache with key enwiki:pcache:idhash:9491757-0!1!0!default!!en!2 and timestamp 20090515115552 --> <div class="printfooter"> Retrieved from &quot;<a href="http://en.wikipedia.org/wiki/Creative_financing">http://en.wikipedia.org/wiki/Creative_financing</a>&quot; </div> <div id="mw-normal-catlinks"> <a title="Special:Categories" href="http://en.wikipedia.org/wiki/Special:Categories">Categories</a>: <span dir="ltr"><a title="Category:Mortgage industry of the United States" href="http://en.wikipedia.org/wiki/Category:Mortgage_industry_of_the_United_States">Mortgage industry of the United States</a></span> | <span dir="ltr"><a title="Category:Real estate" href="http://en.wikipedia.org/wiki/Category:Real_estate">Real estate</a></span> | <span dir="ltr"><a title="Category:Banking" href="http://en.wikipedia.org/wiki/Category:Banking">Banking</a></span> | <span dir="ltr"><a title="Category:Finance" href="http://en.wikipedia.org/wiki/Category:Finance">Finance</a></span> </div>