Posted over 10 years ago

Creative Financing In a Nutshell Part one

Creative Financing
In a Nutshell
Part One of ?
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There are No Rules as to how you can or cannot structure your creative financing deals, other than what is legal, moral, ethical and using the guidelines found here
Creative real estate financing is not business as usual. You will be met with skepticism from critics who practice traditional financing usually real estate agents, attorneys, your friends family and the like. Mostly those that have never even purchased real estate. I can hear them now. You can't do that! It’s illegal it's risky.
Risk Taking. A while back I overheard an interview with Pulitzer prize author Jane Smiley talking about her book Horse Heaven. Jane related that our whole economy is based on a willingness to take risks. She's absolutely correct. There's risk in any business transaction. Creative financing has risk, most notably the due on sale clause, which is the core of these lessons. We will spend considerable time showing you how to beat, minimize and shift the risk of the due on clause.
Legal? There's nothing illegal in any of the methods employed here. These blogs is written for the state of California if you don’t at least have a basic understanding of the real estate principals and real estate financing applicable to your state, I suggest you go to your public library, book store, amazon.com, whatever and get a copy of the real estate principals, financing and laws that apply to your state. Although real estate laws go back to the feudal times in England and are fairly consistent there can be and are subtle and major differences from state to state.
Do I need a college education to buy real estate without cash or credit? If your able to read and understand these postings your in.

Can you still buy with No Money down? The definitive answer. Yes and No. It depends. The no money or nothing down deals are out there, they're just harder to find and have to be approached differently. (When this latest bubble bursts and it will...Creative financing will come into its own again.)
No Money Down?
Think of buying with no money down as 100% financing. In other words you're going to borrow all or most of the money needed to purchase the property.

Here's what I mean. You find a suitable property for let's say $100,000 the seller owes the bank $75,000 how to we purchase the property? You offer to take the property "subject to" the existing bank loan, and ask the seller to loan you some of his $25,000 equity by holding a note for $12,500 called a wrap or an AITD all inclusive trust deed.

Then you borrow another $12,500 from a third party who you would give a note secured by a second mortgage on the property as security for the down payment money.

Congratulations you just purchased a property for 100% financing or no money down.
I should mention here that most of you will have different reasons for needing the information found in these postings. Maybe you have good credit but no money. Or you have the money for a down payment but no credit.

Buyers verses sellers will want to use different approaches Whatever your particular need these blogs will address all of the techniques available to you to purchase and sell real estate creatively without cash credit or banks.
Use the information found here to assist you in filling the missing need in making your real estate purchase

The example used above is just one of the many ways the purchase could have been accomplished. However, by using other no money down or creative financing techniques such as a land contract, a lease option or equity sharing may be advantageous for you as a buyer or seller. We will explore all of these techniques in detail and more in subsequent postings.

But no mater what technique you're going to use you want to make sure it's a win win for the both of you, however the one with the better knowledge of creative financing will ultimately come out on top. So it's very important that you have an understanding of your creative financing options so that you as the buyer or seller and not the other party can use the correct or best way to structure the deal.
My lessons favors the buyer and will first point out their best approach and secondly the sellers approach. You as buyer or seller will have to determine the technique that works best for your situation. With that said let's get to it....Next time
If you need any help structuring any type of deal give me a shout

Call anytime 562-344-5047

Bill

Comments (5)

Hi Bill,
This is very interesting. I have a couple questions. If the buyer gets his own insurance and the seller cancels his, won't the bank be tipped off?
You wrote: The seller is protected For the sellers protection a re conveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer

With the new DF regulations, aren't you required to wait 120 days to send a NOD? Also it sounds like what you are describing is a pre-signed DIL. Judging by this thread it doesn't seem like a good/enforceable idea: http://www.biggerpockets.com/forums/49/topics/7287...
What if the buyer has 1 payment left and defaults? With a pre-signed DIL he would be giving up all his equity. What do you think? Thanks!
PS: When is part 2 coming out? :-)

Bryce Y., almost 10 years ago
Hi Kris, Thank you...You got several ways to go...You can do a vendor vendee assignment of your contract with the seller... your buyer steps into your shoes for a price...That's the cleanest way out especially if you need to sell quickly The performance deed mentioned above for the 20% or so will give you protection from most judgments, you would simply foreclose on the property. You would also have a cause for civil action against the seller...Make sure all documents are held in an escrow...Just a note here...Most lenders allow a junior lien holder who forecloses or takes a deed in lieu of foreclose to assume the underlying loan..Check the law in your state it may require the lender to cooperate..Check with an attorney Happy New Year Bill

Bill Jones, over 10 years ago
Hey Bill, cool article. We do sub to's all the time. I understand your technique and it's viable. I'm curious about the seller racking up personal judgements that will show up when/if we go to sell the house down the line. What do you do about them? The end buyer that's buying from me may want to see the deed going from my seller to my buyer. Perhaps the POA we have on file would let us sign but what do we do about those judgements. We've always got the deed because we're so worried about seller's poor actions after the deal closes...

Kris Haskins, over 10 years ago
Hi Anthony, It's a piece of cake really...It's the only way I purchase real estate... It also depends in which state your doing your transaction here's a quick run down: The Dreaded Due on Sale Clause.. First what the heck is it? It's a clause in a mortgage, which provides that at the option of the lender, the entire unpaid balance of the loan is due and payable immediately upon failure to make required payments or upon sale of the property. Also know as an acceleration clause. A little history lesson… In the old days when banks loaned money and took back a 30-year mortgage that's exactly what you got. It didn’t matter if you sold the property to someone else that loan stuck with the property for 30 years and could be taken over and paid by anyone. Well, in the early 70's banks, lenders, state governments and other interested parties were so upset that they were getting stuck with low interest rates, missing out on taxes, assumption and other sale fees, that lenders started adding due on sale acceleration clause to their contracts. As you can imagine, a lot of borrowers thought this was unfair and brought suit against banks and lenders. Unfortunately around 1979 the United States Supreme Court found in favor of the banks, and today the due on sale -acceleration clause (usually paragraph 17) if found in most if not all conventional mortgages. For years now buyers and sellers have been trying various ways to get around the problem. The leading real state books and educators teach the following basic approaches to buy real estate creatively. Some good and some not so good. Later I'll discuss the pros and cons of the beast creative financing methods so you can determine which to use for your particular situation Land Contracts Options, Leases, Options to purchase AITD's (All inclusive trust deeds or wraps) Seller carry back deeds of trusts/mortgages Taking subject to the existing financing Not recording the deed, which is dangerous if not properly protected Recording a memorandum of agreement Trusts: Transfer the property to the sellers trust, get the bank to approve the transfer and then have the beneficiary of the sellers trust changed to the buyer. Just transferring title into the buyers name hoping the lender won't call the loan. Equity share Any of these will trigger the due on sale clause and as a buyer or seller if yo haven't put safeguards in place, you are unprotected against claims against the title from showing up and or the lender calling the loan due. Are you prepared to take the chance that the seller may further encumber the property or resell to someone else? That the loan and taxes are being paid? Or the bank might find out about the transfer and call the loan due in 30 days and you lose your money and investment? It's happened. Unless you've got the credit to get a new loan or the cash in the bank I wouldn’t take the chance What about the money? Probably one of the most important issues that is never addresses in creative financing books is how the money is handled… Money needs to be handled properly right from the inception of the deal. A buyer wants to make sure his hard earned monthly payments go to pay the loan. Sellers want to make sure the loan(s) and taxes are paid. Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet Here it is in a Nutshell. (This is what I use in California) The concept is to keep the fact that the property has been transferred private. The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement. The transaction is maintained in the records of a settlement /escrow management company Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property Recording a deed or contract is not required in most states to make a valid transfer Not disclosing the new sale to the underlying lender is not illegal in most states Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated OK sounds good, just how do we do it? Let's put it all together Seller signs a deed giving buyer ownership The seller would agree to execute a grant deed (warranty deed, whatever its called in your state) in favor of the buyer The deed is held unrecorded by the escrow management company until the loans in the seller's name have been paid or assumed.(If the seller doesn't like until paid try this. Buyer agrees to use best efforts to pay off existing loans that are in sellers name within five years of close of escrow.) Protection for the seller Buyer will execute a quitclaim deed back to the seller, which is held in escrow unrecorded How to protect the buyer in the chain of title and potential future creditors of the seller. For the buyers protection a lien of some percentage (I like to see at least 20%) of the purchase price in favor of the buyer executed by the seller will be recorded a "Sellers Performance Deed of Trust" The buyer will appear to be a juniors lender for public record purposes. The seller is protected For the sellers protection a re conveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer This would allow the management company to unilaterally remove buyers cloud on the title by using the pre-signed re conveyance if the default was not cured as outlined.

Bill Jones, over 10 years ago
How do you get around the "due on sale" clause with the Sub2 piece of the deal?

Anthony P., over 10 years ago