Post an example of your creative financing deal you've done

55 Replies

I would like to read an example of some of you guy's creative financing deal structuring you've put together with no &/or little of your own money down. 

I'm posting this forum to get a better understanding of how this is possible & ideas I can potentially use to structure my first & for learning purposes on future deals.

How many partners used?

Bank, private, or hard money or all 3?

What was your stake in the deal after using others money?

SFR or MFR?

Long term or for the short term?

Percentages divided?

Who was in 1st & who was in 2nd position?

Thanks in advance.

My most recent purchase was from a wholesaler for $79k.  

Borrowed $40k in two $20k chunks and secured each chunk against other properties I own (which were already financed at 65-75% LTV and I wanted to keep total liens at 90% LTV or below). 12 months interest only payable monthly at 8%, no up front fees. Lender is my first cousin. Two notes and two Deeds of Trust. Both second liens - firsts are conventional mortgages.

I also borrowed $35k from my father-in-law. 8% flat interest payable with principal in up to 12 months (his idea - I was planning to pay monthly). This one is on an unsecured Note (he wasn't going to require the Note, but agreed it was probably a good idea).

I had previously borrowed $30k from a friend (whom I had once loaned $30k to buy an investment property) a few months earlier and had already refinanced it out of another property for which I had paid cash but used this borrowed money for the rehab.  This one was secured against another property also. 12 months at 10% interest only payable monthly.

I put $8k into new flooring, paint, new AC, siding and trim repair, some electrical work, new fixtures etc.  Closing costs were ~$1k. So I have $88k in the deal. It should appraise for $100k and I will finance out ~$72k  (75% minus closing costs) - in progress (Delayed Financing Exception). 

This means I have zero of my own money in the deal and $17k remaining of the borrowed funds.  Once I complete the refinance, I will have $90 to go pay cash for another property without touching my savings or cash reserves (except for any rehab needed).  I figure I can rinse and repeat 2-3 more times before the oldest loan is due and probably do 1-2 more deals before the last two are due.

Some will say I am paying too much interest and I probably am, but there are no fees and I am making it worth their while to invest with me while greatly accelerating my portfolio of SFR.

@Doug McLeod Wow, I had to read that a few times to wrap my head around the details of how you use OPM.

So tell me this, when you say "secured against another property" this means that if the loan  is not paid back, you would have to sell/refi the property that is being used to secure the loan to return the funds borrowed & agreed to be paid back by a certain period.

Also, could you help me understand this "12 months at 10% interest only payable monthly"(I get that part) but what is the terms for the remainder of the loan? How is it satisfied, what is the time frame of when it must be paid back to lender?

Thanks Doug for your time & help!

Second lien holders can foreclose if the loan is not repaid, but that is more to protect the lender in the event of my death if my wife or kids would need to sell.  ((Less of a concern for father in law). 

I will do all I can to ensure that I can repay. If an unexpected financial setback prevents this, my first approach would be to discuss extending the terms or refinancing/converting to a payment plan that includes lower interest and repayment of principal. 

These loans have a balloon payoff after 12 months.  Since I'm refinancing most of the cash out of each purchase, I will simply pay back the loans after my last refi as the loans come due. 

@Doug McLeod   Oh okay, makes sense & thanks again for posting.

Do you attend any of the local REIA's in the Houston/Cypress area?

Not currently. I'm a member of Lifestyles Unlimited and I had been to the Realty Investment Club of Houston (RICH) a few years back. 

@Doug McLeod   That's amazing! 

I am fairly new to the creative financing game so I have to ask how to go about securing second position liens against properties? Are they actually giving you the 20K cash for each lien or are they just taking the lien as a substitute for actually using cash?

I currently have two properties that were purchased with cash, but do not meet the delayed financing guidelines, so moving forward I want to purchase more units using the cash properties but I am not sure how to do so.

Any guidance or referral to other articles posted here on BP would be greatly appreciated.

Thank you in advance and awesome job on the creativity!

One of my favorite deals: bought a home from a couple who owned theirs outright (inherited $ from parents and paid off home and bought a new one).  The house needed work and they were not capable of doing it.  I suggested they carry the contract.  We paid $150k interest only for 3 years.  At closing we paid our half of title/escrow, fronted their half plus excise tax which we took back in discounted payments.  3 years later the market stunk so we extended for 5 years principle and interest.   1 year into the extension they split up and wanted to get cashed out.  We found a lender that would gIve us $120k at 3.75%, 30 years.  Sellers were willing to apply our interest payments toward principle so,we closed and cashed them out.  

We took rental income of $900/mo and renovated the daylight basement into an unofficial unit.  Now it brings in $1600/rent minus Piti mortgage of $730, utilities of $200, net cash flow of $670/mo!

@Doug McLeod Thank you for sharing this experience. I wished I had learned about the delayed financing last year. I probably could have gotten better deals paying with cash then do the delay financing.

Originally posted by @Doug McLeod:
I put $8k into new flooring, paint, new AC, siding and trim repair, some electrical work, new fixtures etc.

Did you do some work yourself or were they all done by contractors? I put $10k and $15k on two houses for similar repairs, but did some work myself (+ friends and family) and hiring some cheap handymen.

@Kyle Kelley What  are those guidelines that prevented you from using delayed financing? Thank you.

Originally posted by @Kyle Kelley:
I currently have two properties that were purchased with cash, but do not meet the delayed financing guidelines

@John T. 

They were purchased for less than 30K and thats the lowest amount my lender has said they will go on refi/financing on a property.

Unless there is a way to combine two properties in the process? Combined cash amount for the two properties is about 45K. 

Otherwise I have to wait the 6 months and then use the 75% of the assessed value, right?

@Jay S. I'm new to creative financing but my last deal was made possible with the info I learned here on BP! Net price of $21,500. Opened a personal LOC with my credit union to pay cash. All in of ~$32K with closing and rehab. Then went to my other credit union and got a secured business loan. They financed 80% LTV (no seasoning, appraisal required). Loan of ~$32K, with closing I'm only ~$3K out of pocket. Positive cash flow is $250 a month. I manage the property myself.

Already posted about doing a development using a non-profit, having the Housing Authority kiss the seller financed note on 850K who also donated cash to the project to pay me getting a tax benefit and setting up the note through a charitable remainder trust on a partitioned note providing multiple beneficiaries of the estate with income and of course the payments didn't begin until after completion and sales/rents hit a level to sustain 6 months payments, so I won't go into that one again. But it was zero dollars from me.

Won't go into financing beyond the scope of this site, selling tax` credits, bond financing, participations or discounting bonds or annuities....... 

Another was selling to a card dealer, we had a bit of a gap in the price and offer, he had less in a late model Pathfinder on his lot, so I took the SUV, I got some cash and a free vehicle.

Used boats the same way.

Used notes to trade for equity.

Took livestock after I had a buyer and the buyer pick up the livestock, I never saw them.

Another "system" was guaranteeing seller financed paper and leases, any default I step in and pick up the note/lease and I'm then buying the property or as an equipment lease, flipping it to an equipment buyer/lessor.

With that said, folks, you can't start thinking outside the box until you know what's inside the box.

You are really asking how can I buy without any money, many options are available but understand that not just anyone can start in what is truly innovative or creative without knowing how to buy with money, where you get it is a different matter.

Creative financing isn't getting an installment contract at 100% or even more without skills.

Land, labor, capital and entrepreneurship are the functions of economics, any three of land, labor or capital can be substituted to build a transaction but entrepreneurship is always applied. Less capital, more labor, less land, more labor, more capital less land or labor, no capital means more labor, land and management.

How do you do that, with an education, knowledge is power, what most here think is that knowledge can come in some 12 step program.....NOT!

Before you can be creative in financing you must first know conventional financing, there are rules and laws, you can't just dump out a box of ideas or agreements and expect something to work, you build the financing transactions just like you prepare a meal, one ingredient at a time ensuring each is added at the right time, just enough to provide the intended results while keeping within a legal and ethical framework.

You're never going to paint a master piece with a paint by numbers set. :)   

HELOC $50,000 @4.5%, 401k loan $50,000 @4.5% and cash. Heloc can be interest only but the retirement loan is a 5 year note so about $900 a month. I plan to find a house and do a delayed financing cash out refi. Or wait a year to do a full cash out refi. If you borrow like this, make sure your income can cover the repayments in case you can't get it refinanced!

@Curtis Bidwell Thanks for posting & I like your creative setup.

@Ursula B.   Thanks for posting. Is that your first time doing something like that?

@Bill Gulley   Thanks for posting & I read a lot of your post (some a bit long but well worth the read lol) I'm very much into the law side of things & do a lot of reading & researching with my Black's Law Dictionary. I like the way you bring in other ways to create a deal trucks, boats, etc.

@Mike Landry   Thanks for posting, I will have to some more research on delayed financing & good luck with your plan. Yea plan B income is always a plus.

@Joe Fairless Thanks for stopping in & posting. I've heard of the Master Lease's I need to dig deeper on them to gain more detailed information about how they work in the big commercial deals.

I essentially buy all my houses for 1.00 out of my pocket.........I know, I know, everybody is saying no way, but yes its true. I market for a motivated seller that will agree to sell to me on a subject 2 deal. I sit down with them and explain that I'm an investor and that I plan to resell the home via a lease option to my end buyer. I also tell them that I wont close on the transaction until I get my end buyer. They are okay with that or we wont go forward. So we sign the purchase agreement with typically 45-90 days to close. I also negotiate a reasonable down payment to them, along with a reasonable payment and total purchase price. Once all that is done, I just market for my end buyer asking for a larger option fee than my down to the seller, asking for 100-250 a month spread on the lease payment versus my mortgage payment, and last but not least (where most of the money is made) I want a larger purchase price than the price I'm paying for the home. The typical deal nets me about 30K over a 3 year period. I also get the depreciation write offs, and I have the repairs covered in the option as much as I can anyway.

Here are the actual numbers on one of my deals;

Bought for 129K, sold for 148k

Down was only 1.00 as they owed close to market value and were leaving the state. I collected 2232.00 up front from the buyer and another 5000.00 in 1 year.

My monthly payment is (still in the deal 2 years later) 985.00 and I charge 1445.00 per month. So to date we have made 18,732.00 and we are still owed about 12,000 when we get cashed out with their loan. We did our contract as a contract for deed, so there was no closing costs until we get paid off with the buyers loan. Typically we would pay the closing costs and be put on title, but the IRS still considers a contract for deed as a regular contract and so you can get depreciation and other writes offs as normal.

Typically, we want an even larger down, so we can transfer title to us, and we also put a min. of 3 months in reserve in the event that our Lease and Option buyer fails to complete the contract. If so, we get them out as quickly and cheaply as we can, then we turn around and do it all over again, collecting a new non-refundable option fee. We seperate the lease from the option, we dont pay rent credits, rather we give them closing cost credits. We do that so they cant take us to court and get a determination that they have equitable interest in the property even though they defaulted and they then get the equity gain since the time they entered into contract.

There are a few moving parts to it, but you would be surprised how many of these deals that you may be able to find. This works especially well if they are motivated, cant make payments or dont want to, and owe somewhere close to market value. The just use your negotiating skills and their motivations to put it all together.

And here is a good example of little knowledge being dangerous.

When you devise any type of contract that provides an economic benefit or reduces an agreed sale price over time, you have a financing contract. Dodd-Frank kicks in, federal law requiring contracts be originated by licensed RMLO. You may have servicing requirements as well, even if you are exempt from servicing your operation needs to follow those servicing functions applicable as standard practice.

Selling significantly above market value just because you can sell someone on the idea is predatory dealing, any financing involved is predatory lending, it has a legal bite.

Contract For Deeds are out of the picture for some time now (years) as they have been found to circumvent foreclosure laws. Search posts under CFD issues, you need to use a Sub-2 transaction.

The rinse and repeat types were addressed in the SAFE Act, now incorporated under Dodd-Frank, predatory and a target of the CFPB bunch.

Any option given assigns an equitable interest to the optionee (buyer)  with consideration paid. An equitable interest is created by any lease greater than 3 years, based on federal law. The due on sale clause is tripped by such a lease because it's transferring an economic value through longer term leases.

If a real estate investor conducts activities that were popular 5 and ten years ago in blending installment contracts, most likely they are in violation of law. Real estate minds don't think in compliant financing terms, now you must have an understanding of financing under the new rules and to get that, you must understand mortgage underwriting and collateralization requirements.

Why is it important to comply? Besides it being the law of the land, you're putting your investment at risk when things go south. A buyer doesn't have to sue you, they will simply go make application for their take out loan to pay off the investor and the deal is then disclosed and uncovered by any lender. They may not credit illegal contract payments and your DA can take action, you contract won't hold water due to the illegal nature and the buyer will be indemnified (made whole) from your flim flam financing tactics, they may well get the property owing you nothing, sticking you with debt to convey it and hand you fines to boot.  There are a hundred ways to get caught doing illegal financing contracts, things happen in life, death, bankruptcy, medical issues, incapacitation, other law suits and just mentioning something to the wrong (right) person can blow these deals apart.

About the only buyers that really buy a house for one dollar are non-profits, you really buy for a dollar and transfer a higher economic or financial benefit like assuming payments, you might as well call the IRS and say you're cheating the tax code, you're also in violation of settlement accounting requirements.

Those thinking that installment contracts are creative financing solutions might think twice before posting on the internet about your creative applications, if you're financial compliance knowledge you're not going to be compliant, meaning you're likely breaking laws.

In another thread we talked about ethics, no need to again, but those thinking like Lonnie deals better wake up, rinse and repeat is getting to that no tolerance point; you're now identified as a scammer and dealing fraudulently.

Any monkey can buy a house off the MLS at market value and find some unsuspecting John Q to sell it to at 20% more with financing terms, that's isn't "investing" it is a criminal activity. Now, go buy a property at a distressed value (under market is the term used by gurus) and then turn it for a profit at market value, that is goal.

IMO, if you devise some financing arrangement to sell with and you think there is a great profit in the financing, chances are your deal is predatory and illegal.      :)

     

@Kevin R.  Thanks for the break down very helpful.

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I've done a seller financing deal in which I bought 3 properties from the seller with less than 10% down and the rest carried on an average of 6.25% 20-year amortization. Negotiated the deal so I'm cash flow neutral but I'm paying down the loan very fast with the 20-year amortization. The one mistake I made was having the loan in my name instead of my LLC, which shows up as a financed property against conventional loans. So now I'm in talks with the seller to roll those 3 loans into a free and clear home I have.

@Bill Gulley   Thanks for that information. Quick question doesn't these rules apply only when you are using these commercial terms in agreements, which puts it under the commercial rules/codes/ordinances/statues/laws? What if I just want to operate as a private property owner & not in the commercial arena when dealing with a home(s) you my own, which gives jurisdiction when commercial agreements are drawn up & signed instead of private agreements?

Does this make sense or not really?

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