{"id":75702,"date":"2015-11-17T13:40:38","date_gmt":"2015-11-17T20:40:38","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=75702"},"modified":"2024-02-13T15:47:31","modified_gmt":"2024-02-13T22:47:31","slug":"2015-11-17-creative-financing-work","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2015-11-17-creative-financing-work","title":{"rendered":"The Real Reason Creative Financing (Almost) Never Works in Real Estate"},"content":{"rendered":"

This premise\u00a0might surprise you, especially coming from me. But to the question, “Does creative financing work?” I have to answer very, very seldom, almost never<\/em>. 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.<\/p>\n

Let\u2019s break this down a bit.<\/p>\n

What Is Creative Finance?<\/h2>\n

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.<\/p>\n

Now, and ability to write a check certainly doesn\u2019t 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.<\/p>\n

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\u2019t necessarily have to be yours. Indeed, other people\u2019s money is plentiful and stands at the ready to plug the gap that is your bank account.<\/p>\n

So, Why Do I Say Creative Finance Almost Never Works?<\/h2>\n

Understand, creative finance is a set of mechanics that\u00a0facilitate transactions. But just because you can do something doesn\u2019t 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.<\/p>\n

Related:<\/strong> When the Bank Cut Me Off, I Had to Get Creative With Financing: Here\u2019s What I Learned<\/a><\/em><\/p>\n

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?<\/p>\n

Additional Perspective: Owner Financing<\/h2>\n

I think the most important question in real estate is \u201cwhy?\u201d We must ask ourselves this question at every step of our decision-making process.<\/p>\n

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?\u00a0Why 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?<\/p>\n

This is especially a potent question in today\u2019s hot market. Seriously, it seems like everything that moves in today\u2019s market sells! Except, that, is for the piece of crap that you are buying on owner-financing.<\/p>\n

Why?<\/p>\n

The answer seems so very logical. The owner couldn\u2019t 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!<\/p>\n

Wrapping Up<\/h2>\n

There are no absolutes in life, and naturally once in a while you\u2019ll come across something that is worth owning that\u00a0you can buy with owner-financing attached. However, the litmus test for owner-financed deals should be stringent indeed!<\/p>\n

Related: <\/strong>The Book on Investing in Real Estate with No (and Low) Money Down<\/a><\/em><\/p>\n

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\u2019s worth buying, worry about how to finance it.<\/p>\n

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.<\/p>\n

Investors: What are your thoughts when it comes to creative finance? Has it worked for you?<\/em><\/p>\n

Leave all your comments below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

This premise\u00a0might 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 […]<\/p>\n","protected":false},"author":810,"featured_media":75730,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7406],"tags":[],"class_list":["post-75702","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-creative-financing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/75702","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/810"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=75702"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/75702\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/75730"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=75702"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=75702"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=75702"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}