Welcome to Creative real estate investing
Creative real estate investing is a term used to describe
non-traditional methods of buying and selling real estate.
Typically, a buyer will secure financing from a lending institution
and pay for the full amount of the purchase price with a combination
of the borrowed funds and his own funds (or his "down payment").
One way to buy a home is to pay cash. But the typical American
family is not in a position to do this, and thus must arrange to
finance its home purchase. Most families can afford only a modest
down payment and are forced to secure the remainder of the purchase
price by mortgage from some lending institution. The larger the down
payment, the smaller the total interest payment over the term of the
mortgage. Buyers, however, should not use all of their savings for
the down payment, thus depriving themselves of any reserve to fall
back on if extraordinary expenses arise or income falls in the
future.
Bird-Dogging
"Bird dogs" get paid a referral fee for finding good deals for other
investors. This is often where people begin their investing career
as there is only time at stake. They are typically paid when the
deal closes. Some birddogs will structure companies and partnership
arrangements as they're frequently not real estate agents and may
not be able to collect a "referral fee" for their services.
Seller financing can refer to one of two things:
The seller can act as a bank and rather than receiving all or a
portion of their equity at close, they can "lend" it to the buyer
and receive a regular payment as agreed. They may receive no
payments, interest only payments, principal only payments, or a
combination. It could be an interest only loan, or an amortized
loan. Additionally it could carry either a fixed rate interest
payment or a variable rate. These will vary depending on the agreed
upon terms of the contract between the buyer and the seller.
The seller can allow the buyer to "take over" the loan that he or
she has in place. This can be done in two ways. The first way is
called an "assumption", wherein the lender formally allows the buyer
to assume the loan. This entails approval of the buyer's credit, and
often a modification of existing loan terms. The other method is
called a "subject to" where the lender is not contacted, and the
buyer purchases the property "subject to" the existing financing.
This can be financially risky in many ways, since many loans have
acceleration clauses which permit the lender to call the loan due if
the property is transferred. However, more often than not the lender
will not exercise the "due on sale clause" if the payments are being
made on the underlying mortgage(s). In the rare event that a lender
does call the loan due then an investor could quickly sell the
property or pay off the loan using any one of the various financing
options available, some of which are described below.
Options
An option is defined as the right to buy a property for a specified
price (strike price) during a specified period of time. An owner of
a property may sell an option for someone to buy it on or before a
future date at a predetermined price. The buyer of the option hopes
the value of the property will either go up or is already low. The
seller receives a premium called "option consideration". The buyer
may then either exercise the option by buying the property or sell
the option to someone else to exercise (or sell). This is often done
to obtain control over a property without much cash. Option premiums
are typically non-refundable. The option represents an equitable
interest in the property and may be recorded at the county recorders
office.
Lease option
This is made up of two parts: A lease, or rental agreement, and an
option. They may be written together as one contract or as two. The
Lease is simply a rental agreement between the owner and the
potential lessee (tenant). Often these leases will be "triple net
lease" leases (NNN) in which the lessee is responsible for paying
for the taxes, insurance, maintenance, and upkeep of the property.
The lease payment is typically 5-15% higher than rent might be for
the same property. This type of lease can be structured so that the
lessee can take the tax benefits as if he were the home owner.
Wholesaling
Wholesalers typically make smaller profits but buy and sell
properties in large quantities. They may buy 50 homes at a time from
a bank and then sell them for a small markup to move them quickly
and do it again.
A more common wholesale approach among creative real estate
investors is to secure properties with no money down and do a "quick
flip". Typically the property, or owner must be distressed in some
way for the deal to make sense.
Hard money lenders
These are often used to finance projects that are unconventional,
great deals, or where money is needed quickly. Typically hard money
lenders will lend 50-70% of the value of the property regardless of
the sales price (unlike banks). They will typically close loans in
2-7 days.
Credit scores and income are often overlooked by hard
money lenders, however they may ask to see a business plan or exit
strategy for the project. They may get paid via points (e.g. 1 point
equals one percent of the total amount borrowed), interest rate
(10-20% per year is common), and an equitable interest. These will
vary based on the size of the project and the agreed upon contract.
Hard money lenders are collateral based and typically require first
position on the property.
Paper/notes/mortgage investing
This also is less of a "creative real estate investing" technique as
typically described. Mortgages are often sold by lenders to other
lending institutions. Investors can broker transactions by arranging
buyers and sellers of notes to meet or by buying them and
immediately selling them for a profit.
|
