Mortgages & Creative Financing

Creative Financing: 4 Ways to Pull More Profits Out of Terms Deals

Expertise: Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Personal Development
44 Articles Written
Street of residential houses

There are several types of creative financing that real estate investors can use to structure their deals. At my company, we buy and sell five to 10 homes monthly around the country, typically creating three paydays per deal.

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The best part about buying this way? It’s possible to pull even more paydays out.

We buy all our homes lease purchase, owner financing, or subject to existing financing, and we exit almost all of our homes via a rent-to-own buyer. In doing that, this is where the three paydays come in. The first is the nonrefundable down payment from the buyer. The second is the difference between what we collect from the buyer for their lease and what we’re paying the mortgage company or owner. The third is the cash out, which is made up from the increase in the purchase price to the selling price, as well as the principal paydown over the term.

4 Ways to Pull More Profits Out of Terms Deals

So, how can you pull even more money from these deals? Having done 100s of these ourselves and with our associates, more and more ideas surface quite regularly. Simple evidence: our average payday No. 1 has grown from approximately $10,200 to over $28,000 and payday No. 3 has grown from approximately $20,000 to over $35,000.

Here are four ways to achieve higher paydays: 

  1. Extend the maturity date on the owner financing deal with your seller.
  2. Offer an equity enhancement option.
  3. Start your payments to your seller or to the sellers’ mortgage company 30 days or more after occupancy starts.
  4. Offer a discount if cashing out early.

Related: How We Found an Extra $400K on Two Properties

Let’s explore these one by one.

1. Extend the maturity date on the owner financing deal with your seller.

To create another payday, one of the many things we do each year around the holidays is call our sellers who are collecting monthly principal payments from us and have one or more years remaining. We offer them the option of receiving some cash now instead of waiting for all of it at the end of their term. Essentially, we’re asking for them to extend the maturity date. We’ve found that many sellers love extra cash during the holidays. (However, you can offer this option at any time.)

In our case, we offered to pay $6,000 against principal two years in a row with a particular seller (just a prepay on what we owe anyway at the end of the term) if they’ll extend it 12 months. Keep in mind 12 more months of principal paydown with this extension also! You may get away with just asking for an extension, and based on your relationship, you might get it. In our case, this worked well, as we had funds coming from other deals with at year end, which we were able to use.

If the buyer in the home was one who was diligently pursuing their financing, this clearly wouldn’t work, as they would cash the home out too quickly. But in a recent instance, we had a family of five working individuals. They had never missed a payment and were not breaking any speed records getting cashed out. In fact, one lost a job and was out of work for almost a year. So, when I called to say we can extend their term, they were ecstatic and very thankful.

Related: When Buying on Terms Pays Off Big Time (Almost $200K!)

2. Offer an equity enhancement option.

Equity enhancement is another option to consider. It’s not increasing profits but rather increasing monthly cash flow and locking them in further to the home with more cash in the deal (more down payment). You can play with these percentages but we offer our buyers a chance to put more cash down monthly in increments of $100 (and no more than $500). When they do so, we’ll credit their down payment for the $100 they put down and then at the cash out (payday No. 3), we’ll lower their price by 50 percent of what they gave as a match. So here’s how it looks:

  • They put down $100, $200, $300, $400 or $500
  • We credit their deposit down exactly that amount
  • We give them a price adjustment of $50, $100, $300, $200, or $250

This increases our cash flow, increases them being more vested in the home, and also helps them qualify in most cases because they’re putting more down.

Young startups businessmen teamwork brainstorming meeting to discuss plan startup project.

3. Start your payments to your seller or to the sellers’ mortgage company 30 days or more after occupancy starts.

Starting your payments 30 days or later after occupancy is something we’ve also done for many years. This is simple. In our lease purchase agreements, it’s prewritten that our payments to the seller start 30 days after occupancy (sometimes later). You can do the same thing with an owner financing or subject to deal also.

In the first example, if the seller asks why, you simply explain that most mortgages are paid in arears. So, if we’re starting in August, you’ll pay your Aug. 1st mortgage payment (since that’s for July), and we’ll start paying it Sept. 1st for the month of August. In the case of owner financing or subject to, you use that to negotiate.

4. Offer a discount if cashing out early.

Offering a discount to pay off the seller early has happened to us many times. I’ll give you one example. We had a four-unit building that had a four-year term. Around the 32-month point, we had a buyer.

We called the owner and basically said, “Look, we have a buyer, and it’s possible that we could pay you off almost a year sooner; however, we’re about $12,800 off to make this happen.”

The bottom line was we were selling either way. Within minutes, he said, “Hmm, I can adjust $10,000 if you can get this done.”

We got it done.

Are you considering buying or selling on terms? What creative ways have you considering structuring your deals?

Share in a comment below.

Chris Prefontaine is the best-selling author of Real Estate On Your Terms. A real estate investor with over 27 years experience in the field, Chris is the founder of Smart Real Estate Coach and host of the Smart Real Estate Coach Podcast. He lives in Newport, Rhode Island with his wife Kim and their family. Chris is a big advocate of constant education. He and his family mentor, coach, consult, and actually partner with students around the country, teaching them to do exactly what their company does. Between their existing associates nationwide and their own deals, Chris and his family are still acquiring 5-10 properties every month and control between $20 to $30 million dollars worth of real estate deals, all done on terms without using their own cash, credit, or signing for loans.

    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 2 months ago
    Great read. I have used #4 before and as long as you approach it correctly and show the benefits to the note holder, it can be a win-win for everyone.
    Jess Kinzel
    Replied 2 months ago
    Vsry informative! Curious though, where did the OP go? Why are they no longer a member here?