Creative Financing--Seeking Advice/Stories

17 Replies

Hello BP community,

I am looking to complete my first deal within the next 3 months in the Saint Paul, MN area. I have found a few properties I would like to purchase to buy-and-hold. I have my eyes on two duplexes and three SFH. To start, I want to pick just one. The low-end price of my wishlist is $240K and the high end will be $310K

My problem is, I work a base + commission job, where I don't have a long enough commission history and my base (guaranteed) salary isn't high enough for a conventional or FHA loan. What are my options to follow through with a deal, even though I cannot get a mortgage? I hear about "creative financing" options but don't know where to start.

I am open to hearing advice or success stories on how people secured financing from similar siutations. Looking forward to hearing replies!

@Kalvin Seidl you can get a co-signer, but this is best if you buy a SFR because the down payment requirements skyrocket on multifamily with a co-signer. If you want to get really creative you can look for lease to own or contract for deed sellers but you severely limit your property options and limit your leverage so the first may be the best.

You have a long time to invest so don't jump in if your income and situation is not stable.  I'm a huge fan of investing but not if you're not ready.

You could try a private money loan or hard money loan. Once you get into the property and fix it up or do whatever to it that you were going to, then you can refinance out of the original loan and pay off the private or hard money lender. Now you have a conventional loan.

Co-signer is also an opportunity, but then you would either have to pay the co-signer a fee, or give them a portion of the equity. But 50% of something is better than 100% of nothing.

You could also try owner financing. That will completely bypass all the banks and allow you and the seller to create your own terms for the deal. The seller would become the bank essentially, and you would get to decide on terms like interest rate, amortization period, fixed-rate or adjustable-rate, down payment, etc.

You could also take over the existing sellers mortgage with a subject-to contract. Then you don't have to find a mortgage, they already have one, and you can pay the seller a down payment at closing if they wish. 

Try to figure out the root reason that they are wanting to sell, and then solve both of your problems by getting creative. Bring on a partner if you have to in order to help with the creative thinking. 

I'm sure there's a ton of other creative ways I didn't mention, but hopefully this is a good stepping stone for discussion with sellers. 

 @Kalvin Seidl @Joshua Ferrari 's advice is best for those where the down payment is the issue. In your case, if you got a hard money loan but still do not qualify for the new loan you also have a foreclosure. Do not get a private or hard money loan without an exit plan that works for your situation.

Find a private lender that holds a lot of cash and is not interested in the risk of the stock market but is getting zero returns in CDs or money markets. They need to understand the protection that a first lien mortgage will give them. You can offer then 10X the return they will currently get on a CD and still come in at or near what a bank's commercial rate would be. Also, private lender may be willing to finance100% so you can avoid a down payment. We have done this on a few midsize apartments and it has been a win-win all circumstances.

@Joshua Ferrari 

"You could try a private money loan or hard money loan. Once you get into the property and fix it up or do whatever to it that you were going to, then you can refinance out of the original loan and pay off the private or hard money lender. Now you have a conventional loan."

But once you get a hard loan and fix up the property, wouldn't he still face the issue of getting a conventional loan because of his work history? What would happen at that point if he can't take a conventional loan, meaning what are his options?

@Kalvin Seidl I just got a $285k property under contract taking over the property Subject-To the existing mortgage. The property was purchased about 18 months ago on a FHA loan, so there was almost no equity in the property for the seller. My out of pocket costs will be the title transfer costs, and I have built in enough time before I close on the deal to place a tenant. There are plenty of people needing to get out of their property, just takes a little time to connect with the right ones.

@Kalvin Seidl congrats. You are apart of 90% of americans that do not qualify for a traditional mortgage. ;)

Seriously though, many ways to purchase. I just worked with a client their on a sub-to deal. I love the area and some serious Gems in St. Paul.

Conventional wisdom would tell you “partner up” bit I would advise in this market to do quicker transactions etc. vs buy-hold that you are wanting to do rn....

We still haven’t seen the financial effects of CV.

But to yr point... you don’t need a partner or a bank ;) Plenty of ways to buy a home. It all starts with a motivated seller.

@Jason Larson @Ward Conville @Joshua Ferrari Thank you all for your suggestions and ideas. I have a few questions after reading so far:

1) How do you find these motivated sellers when you do not have access to the MLS in the area you are trying to invest in? Do you connect with an agent? And even then, do they just work with you on finding deals out of goodwill to you?

2) How can one become a private money lender? I have been researching my options and think that I could be a PML for a down payment for an investor.

3) Finding a partner isn't as easy as just going online and adding them to your team. That too has been a challenge for me. If you all have worked with partners in the past, how did you find that partner?

Thanks guys for sharing!

@Nina Granberry

1) You could have an agent send you the report since they are usually calling on the same list to help sell. I buy the list, there are several websites that provide owners name, phone number, mailing address.

2) A good way to start as a private money lender is learning to analyze deals and understanding what you can bring to the deal. If you have the cash to bring into a deal you can partner up with a deal finder that is handling the marketing and up front work.

3) I pay for coaching and a mastermind that focuses solely on creative financing with SFR. There are a lot of free content with books and podcasts/youtube.

Good afternoon,

Here are some thoughts;

1) Finding motivated sellers in an area where you do not have access to MLS and are trying to invest in. Good question. I would not typically start with a commercial realtor that you do not have any connection with. They will usually pass their good deals to larger buyer that they have experience with and know can close. In my market, which is smaller, (150K MSA) I have found that occasionally a mom and pop owner who has a complex between 12-60 units will often go to a local residential realtor that they associate as one who "specializes in investment property" to list the complex. Often times these are these are the local realtors who do Fannie Mae or FHA foreclosure listings. I have found that often a realtor who does not specialize in commercial listing will run very basic calculations to come up with a listing price. Even if they are famaliar with cap rates and roughly how to calculate NOI, they do not exclude or put below the line capital expenditures and other non regular expenses. This can result in the property being listed at a much lower price than a commercial realtor would list it. Also, I have found that they are also often not as up to speed on current cap rates and may be using number that are year or two old. If I were looking in an area I did not live in I would go to, the Fannie Mae REO site and look at the listing in the area. I suspect that a handful of realtors, maybe only one has all of the listings. I would reach out to them and advise you are interested whenever they get a multifamily listing and they can add you to their email list.

2) There are always investors who need money. Becoming a lender is easy, the tough part is determining who to lend to, the terms, and to make sure there is enough equity to make sure you are protected. I would either attend a local REI Meeting in your area and network. It is easy to put the word out. Other option is to find out what attorney office or title company does most investor closings in your area and contact them. I do a small amount short term private lending from time to time. Yesterday a property I lent money on closed. I went by the title company to pick up my check and the attorney in the office told me if I wanted to she has 4 or 5 people with deals looking for money and would be glad to put me in touch with any or all of them.

3)Finding partners.  Agree with your thoughts. One other thought is that a private money arrangement can build some bit of trust that could lead to a partnership if all goes well.  My only thoughts are to make sure the agreement amount partners is clearly spelled out in legal documents, and everyone knows, understands and agrees as to who has what responsibilities. 

@Kalvin Seidl Subject to/seller financing is the most creative I was thinking of. @Nina Granberry , you can find those properties through Propstream, it consolidates MLS data. About becoming a private lender, there are many investors you can find from your local REIA, but I'd advise you first figure out what types of projects you'd like to lend to, what type of ROI you are looking for etc. I'm not a lender but these are the questions I've compiled to ask Private lenders.

1. On what types of projects do you typically lend?

2. How do you evaluate deals? What specific deal information do you need?

3. What are the typical terms? Points? What is the Annual Percentage Rate for interest?

4. Do I close with your attorney/title company or with mine? 

5. What percentage of the purchase price will you loan and will you loan 100% of the rehab costs?

6. What percentage of ARV will you loan?

7. If I need to extend the note, can it be at the same terms?

8. Will you allow someone to be in 2nd position?

9. Will you give me a POF or pre-qualification letter to submit with my offers?

10. How do you handle draw requests? Is there a few for every draw?

About partners, well it depends on what you mean by partner, is it a project partner? Equity partner? Relationships and networking are key...don't commit too much until you understand who they are when they are sad, mad and glad. Fell free to PM if you need clarity.