The Real Reason Creative Financing (Almost) Never Works in Real Estate

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This premise might surprise you, especially coming from me. But to the question, “Does creative financing work?” I have to answer very, very seldom, almost never. Notice, I did not say never, since having seldom put my money into any of my deals, I am poster boy for creative finance. But telling you that this is the ultimate solution to all of your investment needs is simply disingenuous.

Let’s break this down a bit.

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What Is Creative Finance?

Creative finance is any technique, method, or approach that enables ownership of investment real property without the need for cash (or at least your own cash). Simply put, creative finance exists to compensate for the reality that you are a broke bastard, much as I was when I started.

Now, and ability to write a check certainly doesn’t indicate intellectual prowess of any kind as it relates to investing. However, when it comes to buying stuff, which includes buying real estate, cash in the bank is certainly useful.

Understand, real estate is a cash-intensive sport. After all, unless you barter for the privilege of owning property, you will have to trade some currency. All that creative finance describes is the notion that this currency doesn’t necessarily have to be yours. Indeed, other people’s money is plentiful and stands at the ready to plug the gap that is your bank account.

So, Why Do I Say Creative Finance Almost Never Works?

Understand, creative finance is a set of mechanics that facilitate transactions. But just because you can do something doesn’t mean that you should! Creative finance is an enabler, but as is often the case in real estate, it can enable bad decisions as easily good ones.

Related: When the Bank Cut Me Off, I Had to Get Creative With Financing: Here’s What I Learned

Creative finance is a mode of acquisition of property, but while it can create additional value, it can do so only if there is value already underpinning your deal. In other words, creative finance cannot transform a bad deal into a good deal. If you are buying a “pig” and you are doing so while financing it creatively, you in the end still own a pig. And the question is, why bother?

Additional Perspective: Owner Financing

I think the most important question in real estate is “why?” We must ask ourselves this question at every step of our decision-making process.

Relative to creative finance, most people draw a parallel to owner-financing. It is generally thought of as the nirvana of creative finance. However, have you asked why? Why is the owner willing to finance the deal to you? Why are they willing to take payments in lieu of a lump sum of money?

This is especially a potent question in today’s hot market. Seriously, it seems like everything that moves in today’s market sells! Except, that, is for the piece of crap that you are buying on owner-financing.


The answer seems so very logical. The owner couldn’t sell to a ready and willing buyer with cash to spend, at least not for the amount he wanted. The only way to sell was to attach financing to the deal!

Wrapping Up

There are no absolutes in life, and naturally once in a while you’ll come across something that is worth owning that you can buy with owner-financing attached. However, the litmus test for owner-financed deals should be stringent indeed!

Related: The Book on Investing in Real Estate with No (and Low) Money Down

Important to understand is the reality that it is the validity of the deal that drives our thinking, not the financing, which is to say that first we determine if the deal is worth buying, and then, only if it’s worth buying, worry about how to finance it.

Now, something that possesses desirable attributes making it worth owning is highly unlikely to have owner-financing attached to it, which means that creative finance is about 1% owner-financing and 99% about other forms of OPM.

Investors: What are your thoughts when it comes to creative finance? Has it worked for you?

Leave all your comments below!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Brian Gibbons

    Oh Ben, so provacative!

    Here are my Rules of The Road – Residential

    Rules of the road in REI

    (Cash – no repairs needed)- no more than 80% of good comps or FHA appraisal (think like a car dealer reselling car)

    (Cash – repairs needed) – 65% ARV – repairs

    (Terms – no repairs – sub2)- no more than 90% ARV, great rate, fixed note

    (Terms – needs work – seller has equity) – sub 2 – plus note, no payments on note, single payment due at maturity

    (Terms – pretty house, no equity) – most of the time, lease with option to buy then assign for fee

    (Financing – Private Lenders) – Use IRA loans, use custodians such as pensco, entrust, etc

    (Financing – larger deals, residential) JV partners – their cash, their credit, 1 LLC, split profits

    (Financing – free and clear, dated house, mild rehab) Partner with seller, give equity in a note, JV agreement, resell, use private lender money for rehab, 3 notes: 1st seller, 2nd priv lender, 3rd REI 10% JV fee.

    Its all in the negotiation with the seller… 🙂

    I guess I am an anomoly. 🙂

    • I am not sure where this “hot” market you refer to is, but it is not hot here. It is transitioning into a normal market, but loans are still difficult to come by, especially for first time buyers.
      Here are some sellers that might be interested in owner financing:
      1) Empty nesters that don’t have a good use for their cash. The banks literally pay .01%interest today. Offering a first mortgage and 5% interest can look mighty good to these folks. On a slightly different twist, I borrowed money from my brother’s IRA that was earning next to nothing. I gave him a first mortgage on a rental property. His biggest fear is that I PAY HIM BACK!!! He will have to risk the stock market or get next to no interest.

      2) Condo/Townhouse owners. It is still VERY difficult to get FHA financing on many condo complexes. Imagine you bought your condo as a twentysomething in 2005. You want to get married and move to another state. You don’t want the hassle of being a landlord. Giving the owner a first mortgage and a decent equity position might persuade them to hold the paper.

      3) Estates. These properties are typically dated and tired. The “Hot” properties are all fully rehabbed to the nines. The heirs live out of state and don’t know how or don’t want to make repairs. Give the owner a good interest rate on a 12 to 18 term. Fix it up real nice and sell it to an end buyer.

      I agree seller financing is difficult. It is not as easy as the gurus say it is. I have bought about 90 houses and used it about 10 times. But it can work if you present your offer as the seller’s best option.

  2. Chad Carson

    I agree that often the best seller financing comes from a property that is not perfect. I also agree that the deal itself must be good, not just the terms. But I don’t agree with the implication that the only reason a seller would finance a property is that it’s a pig and they need to magically cover that up with great terms.

    Particularly with higher price properties and more particularly with a retiring landlord who is tired of the equity game, a move from equity to carrying back the paper can make a lot of sense. Even in a hot market.

    What will the seller do with that big pile of cash? 2% dividend-roller-coaster stocks? .5% CD’s? US Treasuries? Sounds exciting to me.

    No, someone who has enough money, who already likes equity, but just doesn’t want the hassle of rentals will likely be happier and sleep better at night receiving steady, passive installment payments collateralized by a property he or she knows very well. Beyond that, estate planning comes to mind because the seller can live off of that income and ride it until death, at which time his heirs can also receive a steady income and eventually get cashed out at a stepped up basis.

    The reason seller financing doesn’t happen more often for investors, in my opinion, is a product of bad negotiation on the buyer’s part and not a bad concept. Everyone plays the standard game, hide behind your broker, make offers by email, negotiate back and forth with a phantom opponent, etc. Why would a seller finance to a phantom?

    Getting face-to-face, talking numbers, and most importantly building credibility, can lead to a high success rate with seller financing offers. This isn’t as easy as pressing send on an email, but seems worth it to me.

    • Ben Leybovich

      Chad – if you are talking about a sophisticated player, whose exit strategy is paper due to sophisticated reasons – yes. This happens. I’ve bought this way. However, these are not the majority of the owner-financed sellers. Most do so because they cannot without…

      Thanks so much for jumping in!

        • Ben Leybovich

          There are a lot of deals that can potentially be financed by the owner – I don’t dispute this, Chad. However, very few of them are worth owning, and financing has nothing to do with it. And this is the point of the article 🙂

  3. David Krulac

    Dog … Pig… mixed metaphor!

    If I’m the seller, here’s my pecking order (birds peck another mixed metaphor)

    1. All cash, or mortgage and down payment equal to all cash.
    2. Seller help with closing costs
    3. Seller 2nd mortgage, bank first mortgage
    4. Seller 1st mortgage

    For me seller first mortgage is a last resort. And with the Dodd Frank rules of being “qualified” and working through a licensed mortgage broker, if the buyer meets those Federal regulations, then they can get an institutional mortgage. If they can’t meet those requirements then I can’t offer financing by law unless the property meets the exceptions like commercial, more than 4 units, non-owner occupied. Since most of my sales a re SFH and almost all buyers are owner occupants, they don’t fall into the exceptions.

    I’m not recommending bank CDs, but I’d rather have my funds in a 2% CD at a bank that to have it in a non-performing seller financed mortgage, where I’m getting zero interest and zero payments, and have to spend $5,000 just to recover my principle, which may be damaged at that point.

    • Chad Carson

      David, that’s a good pecking order for you and for many sellers. But there are still plenty of sellers who would reverse that order for tax and long-term planning reasons. At this point in my life (mid 30’s) I’d have the same list as you, but later in life I may reverse it.

      And at any point I’d rather have the seller financed note than the CD once I’ve covered my cash reserve requirements. If my basis in the note is low enough (60-65%) I’ll be fine even if it’s non performing. The goal is maximize return, and low basis notes are not that risky. In fact, the most conservative banks love to own them.

      • David Krulac


        In the real world, most of the owner financing is risky. How to get from highly leveraged to a low risk loan requires either a long term of on time payments or a chunk of cash infusion. Many times the borrower are border line or worse.

        The tax benefit of seller holding financing, first of all does not apply to dealers sellers, and secondly just spreads out the taxation. A better tax tool is an IRS Section 1031 Tax Free Exchange. Another alternative to seller financing is for the seller to retain the property and get a 80% LTV. The 20% equity position could be less than the tax in some circumstances and the 80% LTV mortgage is 100% tax free. In many cases I’d rather have an 80% mortgage on the property and the 80% in cash, than have an 80% seller financed mortgage from a borrower. The refi is 100% certain, the borrower is not.

        • Chad Carson

          Not sure I understand how owner financing is inherently risky. Risk has to do with terms, the property, and the borrower – not the tool itself.
          You (as seller) can get a big down payment just like a bank does. You can screen borrowers just like a bank does. Not all owner financing borrowers try to leverage 100%.

          And I would assume most long-term sellers of income property are not dealers. And the specific sellers I’m speaking of are landlords who are tired of being in property. They don’t want to do 1031 exchanges. They’d prefer simplicity, security, and income.

          Good idea on the 80% loan for tax savings, but what will you do with the cash? You’re paying interest on that so you’ve lost net income. Back to the low return on cash problem.

        • David Krulac


          My point is that if the borrower is DF qualified as required by Federal law, then I’m prefer that they get a bank mortgage. And if they do get a bank mortgage, then the risk of default is transferred from me to the bank. If the borrower defaults then, it does not effect me.

          And if the borrower wants to put a sizable amount down like say 20%, great, that would help them get a bank first mortgage. In the last 2 weeks, three 100% financed deals have come across my desk, so they are not very rare if I’m getting more than 1 a week!

          I’ve done over 900 deals personally plus many more for clients, and I’d rather see less deals asking for seller financing. For myself, I can do a lot better than the 4% or 5% that most of these buyers are offering today. Sure 5% is better than 2% bank CDs, but I’m not buying those either. If I can’t find better than 5% deals, then maybe I should be looking for another profession, I heard dermatologist make good money.

        • Chad Carson

          I like buyers who get bank loans too. I think we can agree that a lot depends upon the seller’s goals, the time in their career, alternative investments, etc.

          But 5% is not your return on a discounted note you create as the seller. For simple math, if you own the note at 50% of it’s value, that 5% face value is 10% for you.

          Even a dermatologist (no offense to the real ones) would know that a 10% unleveraged yield on a low loan-to value, well-secured, passive cash flow deal is not something easy to replicate with other investments.

          My main point is that seller financing can be an attractive tool for some sellers (of course not all) and shouldn’t be discounted as a rare anomaly like this article tries to.

  4. Doug Morton

    I focus on and buy owner-financing for several reasons. I’m not broke, but I definitely don’t have bigger pockets quite yet. I’d much prefer OPM just to use my cash in other deals or for the rainy day. However, no deal is a no-cash purchase either anymore (prior to the 2007 crash they were all over the place) – there are always costs to consider – closing costs, earnest money, inspections, etc… As Brian mentions above, an SFR needing repairs may be a good deal at 65% ARV along with the owner-financing that may save significant time in acquiring the property over a traditional mortgage (two weeks to close instead of two months). 5%-10% down instead of 20%. Also, you may not get a traditional mortgage on a house that needs deep repairs. This doesn’t make it a pig. It might make it a good deal with a lot of potential.

  5. Erik Nowacki

    I buy and rehab distressed multifamily properties. I’ve managed to do OK with the last couple of owner financed deals. I am actually looking for the dogs for the specific purpose of turning them around. With multifamily, they have to be stabilized (i.e. 90% occupied) for a bank to consider financing. This gives the seller two options, either sell for a low ball cash offer, or carry a note. I realize this is probably a little outside the norm and not exactly what you meant with your article, but I thought I should point out what I believe to be an exception from your rule.

    I see it as a win for me, as I can acquire a property while preserving most of my cash for the following rehab; and it’s a win for the seller as he/she gets a much higher price than they could with an all cash deal.

    Happy investing!


  6. This is really good.
    The deals that I did with owner financing weren’t even my idea and yes they needed money from the pocket to grease the wheels. It wasn’t my idea and it was through a realtor who for a fee was happy to be the best teacher of mutual benefit ever.
    It couldn’t qualify.
    Neither could I.
    It had value that we all saw.
    Wasn’t the best deal ,CLOSED IN A WEEK. Made profit from the start.
    I really appreciate the input that gets going on these posts
    PLEASE do some on the danger zone,(money for money) hard money.

  7. Cory Binsfield

    My best deals are owner financed. From ugly ducklings to beautiful cash flowing swans. Unfortunately, they are extremely hard to find and it would be impossible (in my humble opinion) to scale a business based upon seller financed deals.

    I always give the seller two options when I purchase their property. A lower price for all cash (since I have to go to the bank and grab some financing) or the full price with terms if the property warrants a full price offer.

    As far as I’m concerned, it’s a”win-win.” I can buy below market with a cash offer or market price with terms with less money out of pocket.

    As long as the property cash flows with the given terms, it’s always better to obtain seller financing.

    For the seller, it offers a guaranteed return with the security of their property as collateral. Add in the benefits of a higher interest rate than a 30 year government bond plus being able to defer the capital gain and they end up with a monthly check that’s typically higher than they could get from an annuity, balanced mutual fund portfolio or a bond fund.

  8. Dirk Jackson

    Hi. Im new to BiggerPockets and I really enjoy the OP and others posts. I live in Ohio so i apologize for the numbers in advance lol. So last year i purchased a 4 br 1 ba 1352 sq ft on a .42 acre lot for $3,200 at sheriff auction. I put about $1,500 in rehab into the building. My original intention was to rent the home, but I sold the property instead last year. So I sold the property for $22,500. I am seller financing a 8 year note at 7%. They put about 4% down so like $900. They payments are $297.22/ mo. I probably could have rented for about $400-500/mo. So thats about $7,000 in interest over the life of the note. This was my first home i ever sold and my first home that I seller financed. I like the fact that I get the monthly income but don’t have the overhead of taxes, insurance, repairs etc. True there is a risk of foreclosure but there is risk in everything we do. The payments have been steady and I would like to do more deals like this in the future. So what would you have done? Hope this helps more than it hurts. Happy Investing!

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