Creative Real Estate Financing and Acquisition 101

Creative real estate financing consists of just about any method of financing the purchase of real estate of which doesn’t involve a traditional bank or an “all cash” transaction. The more credit and money you have to invest, the less creative you’ll have to be in building your real estate portfolio.

Nonetheless, even the investor with the most pristine credit score will hit a limit to qualifying for bank financing, and using “all cash” to build your portfolio isn’t typically the wisest use of your cash if another option is available, but in the end… it all depends.

Real Estate Investing EducationIn any event, it’s in the best interest of your “return on investment” (ROI) to arm yourself with some creative real estate financing and acquisition education. I cover 12 different creative strategies in a detailed step-by-step format in the EpicProAcademy, but let’s begin with some basic creative real estate investing education.

So, we’ll begin by assuming that you want to invest in real estate with little to no money. However, you should not restrict yourself to any one strategy in any one situation. There are many variables constantly at play in real estate investing as every situation is unique, as well is every Seller. The list below is to be used merely as a reference tool to assist you in your thinking through possible solutions to Seller’s needs.

Creative Real Estate Financing and Acquisition Strategy #1
Equity Sharing

  • A/K/A: Joint Venture, Partnership, Membership, Syndication, Shareholding, among other terms.
  • Often Appropriate When: You have friends, family or organizations with capital available for investing in real estate and they don’t particularly want to dirty their hands with rehabbing or leasing.
  • When to Avoid: Avoid Equity Sharing with the Seller when dealing with the Seller’s personal residence. If you must share equity with the Seller in this situation, word it in your agreement as deferred interest as opposed to equity.

Creative Real Estate Financing and Acquisition Strategy #2
Option

  • Often Appropriate When: You may not want to take title to the property to avoid liability. For example, the market has fallen and you anticipate it to come back in the near future. Maybe you anticipate a zoning change or change in use. Perhaps there’s good value in the property but negative legal issues attached to it. Or, maybe you anticipate some environmental issues with the property.
  • When to Avoid: Avoid spending a large amount of money for the option premium since it’s almost always non-refundable.

Creative Real Estate Financing and Acquisition Strategy #3
Option with a Lease

  • A/K/A: Lease Option, Rent-to-Own
  • Often Appropriate When: Seller is motivated to act quickly. Seller wants to maintain the tax advantages that accompany the property. Seller wants to keep the property in his/her asset column.
  • When to Avoid: Avoid combining the Option and Lease into one Agreement. Avoid leasing back to the original “owner occupant” Seller.

Creative Real Estate Financing and Acquisition Strategy #4
Subject-To

  • A/K/A: Buying Subject to Existing Financing, among other terms.
  • Often Appropriate When: Seller must sell fast. Seller trusts you (and you are worthy of that trust). You have too many mortgage loans and you can get another. Seller has difficulty selling traditionally. Seller is in arrears on mortgage payments. Property is in disrepair. Property is “investment” property.
  • When to Avoid: Avoid selling or leasing back to the “owner occupant” Seller. Avoid this if there is a balloon payment or an interest rate adjustment coming soon. Avoid if the existing mortgage puts you, the Buyer, in an upside down cash flow or equity situation. Avoid if the lender strongly objects.

Creative Real Estate Financing and Acquisition Strategy #5
Agreement for Deed

  • A/K/A: Land Contract, Contract for Deed, Buying on Contract, Installment Sale, Seller Financed, among other terms.
  • Often Appropriate When: Seller is concerned about “due on sale” clause. Seller wants a specific market value price and will concede to below market interest. Seller is selling “investment” property. Seller is stable.
  • When to Avoid: Avoid if the Seller is in extreme financial trouble (i.e. facing bankruptcy or divorce).

Creative Real Estate Financing and Acquisition Strategy #6
Seller Carry-Back Mortgage

  • A/K/A: Private Mortgage, Seller Financed, Seller Carry Back Trust Deed, among other terms.
  • Often Appropriate When: Seller wants a specific market value price and will concede to below market interest. Seller has no better investment options and likes the idea of a fixed rate of return over a long period of time.
  • When to Avoid: Avoid unless the Seller provides a title insurance policy clearing all items to which you, the buyer, object.

Creative Real Estate Financing and Acquisition Strategy #7
Wrap Around Mortgage

  • A/K/A: Wrap, All Inclusive Wrap Around Mortgage, All Inclusive Wrap Around Trust Deed, AITD, Seller Carry-Back Wrap, among other terms.
  • Often Appropriate When: Seller has much equity and a low balance existing loan compared with the property value. The interest rate on the Seller’s loan is low. The existing loan has a lot of seasoning (the loan is many years old). Seller has no better investment options and likes the idea of a fixed rate of return over time.
  • When to Avoid: Avoid this if there is a balloon payment or an interest rate adjustment coming soon.

Creative Real Estate Financing and Acquisition Strategy #8
IRA Investing

  • A/K/A: Self-Directed Retirement Account Investing, HSA Investing, Self-Directed 401K Investing, among other terms.
  • Often Appropriate When: Seller will discount the price deeply for cash. Property needs a lot of repairs. Property has potentially great cashflow. Seller is willing to do any of the above strategies non-recourse.
  • When to Avoid: Avoid anything high risk or that will cash flow negatively.

Creative Real Estate Financing and Acquisition Strategy #9
Private Money Loan

  • A/K/A: Private Money, Hard Money Loan, Private Mortgage, Private Trust Deed, among other terms.
  • Often Appropriate When: Seller will discount the price deeply for cash. Property needs a lot of repairs. You have friends, family or organizations with capital available for investing in real estate and they don’t particularly want to dirty their hands with rehabbing or leasing.
  • When to Avoid: Avoid hard money situations wherein the entire profit margin goes to the Lender.

Above are 9 basic creative real estate financing and acquisition strategies. There are more, but anything else is essentially a variation of the strategies above. Contrary to popular belief, when it comes to investing in real estate, it’s not going to be your credit score or bank account balance that presents your biggest obstacle, it will be your creativity.

Click here to download these 9 strategies for future quick reference.

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Comments

  1. Antonio says:

    Thanx Matt for this little cheat sheet, as well as your prompt response to my question.

  2. Thank you for that leason Matt. You simplified the pros and cons, and helped me understand RE investing lingo, that I never knew before.

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