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.
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. :)
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.
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.
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.
@jay
@Jay S. for a house I've used a personal line of credit to purchase the entire thing. For a large apt community I used a Master Lease with Option to purchase.
@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.
@jay
@Jay S. I just did an interview for my show with someone who has done 52 of them in the last 4 years - all multifamily properties. You should check that out
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.
Well said!
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 Romines Thanks for the break down very helpful.
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?
Jay, do some reading here of recent posts, say back to December of last year forward on the SAFE Act and Dodd Frank, pay attention to posts by Ken Rischel, Dion and myself. Also Ann B, Jeff, who are mortgage brokers doing hard money loans. We have a few mortgage originators here as well, most are new and still learning, so they may have good comments as how things are done at their institutions. These Acts were hot topics last year, many voiced opinions, there was speculation from everyone until we got final rulings and the Acts took effect this year.
Ken Rischel and his crew who also have posted are probably the most up to date on compliance as they specialize in it daily, but Ken's expertise is to mobile homes which is different than RE, but very close, he will also qualify his statements.
You also need to learn who you can listen to in forums on certain subjects and who you better not take advice from, especially in finance. There are a few who speak like experts who could empty coins out of a boot in the instructions were printed upside down on the heel.
These federal laws have sections specifically addressing installment sales and financing of owner occupied residential properties. Financing to a homebuyer is a consumer loan. Any agreement made, lease-options, contract fro deeds, rent-to-own, notes, or anything else that provides credits of any kind that benefit a homebuyer is a covered financing arrangement.
Also covered were any strategy, system or method devised that facilitated any sale to a consumer that is structured with the intent to circumvent the Act. That means attempting to use any exemption or limitations allowed, such as three sales per year being excluded could not be used by the primary beneficiary or person who effected sales by using trusts, LLCs, their brother-in-law, partners, or some other entity they were behind the door of.
For example, there is an attorney who promotes a series of sales by other entities that you are the owner or beneficiary of, selling 3 homes as yourself, then 3 more as XYZ LLC, then three more under your wife's name, then 3 more under ABC LLC. In these arrangements you have yourself as a direct seller, then you own XYZ which is the same as you since you stand behind that door, you benefit, then you have marital interests in those sold by your wife as well as her entities.
In other words, any system devised that you use to effect a financed sale of covered properties will be deemed to be a sale by you as you are using the system to circumvent the intent of the Act.
The same will hold true in the origination of any financing agreement on a property that is owner occupied, that includes loan modifications for note holders.
What are not as much of an issue are commercial loans, financing agreements made to non-owner occupied properties to be used in a commercial endeavor, like financing to another real estate investor. These commercial loans have much broader leeway as it is assumed that those in commercial transactions are more astute in their deals than a consumer. There are still rules, regulations and laws governing lender's conduct, interest charged and predatory practices.
These Act allowed states to adopt their version, but any state law adopted has to conform to the intent of the federal and in any cases where state law fails to address any matter, either by omission or specifically stated, HUD has final determination along with Consumer Financial Protection Board, now Bureau, (CFPB). This new consumer agency has very broad jurisdiction, from credit card operations, student loans, any asset financing arrangement including home financing and they have been given sharp teeth.
The mind set of those of yesteryear like Lonnie Scruggs have had the rug pulled out from under them. Lonnie devised mobile home financing arrangements where values were difficult to access by a buyer, had predatory prices, financed the deal, then took the property back, rinse and repeat, today you get involved with this type of transaction with a homebuyer and you will be the criminal and you'll be dealt with.
Now, like I mentioned, there are exemptions, such as 3 transactions, but not in all states, a person who sells their primary residence which they personally used are exempt with annual limitations, exemptions are available for inheritance-trust situations and they vary from state to state, those dealing in real estate may be exempt fro 1 to 3 deals, note buyers or the ones holding financing contracts also have servicing requirements, exemptions for the size of the portfolio held are made.
Collecting you payments on a financed option won't hit the threshold for all servicing requirements as much of that is intended to conform banking and mortgage servicing issues, but you are still subject to the collection practices for consumer debt.
Foreclosure laws have been touched by federal legislation as well, time limits for notices and demands, restrictions on who can "assist" someone who is in foreclosure, credit counseling or those suggesting how to avoid or seek relief from foreclosures are required to have a license under HUD direction unless they are an attorney. So, if you hold that contract for deed on a homebuyer or on a commercial deal and file a deed in lieu of foreclosure, or you redo your contract modifying it, you can be subject to these changes.
I won't go into the selling of notes or financing contracts, but if the obligation created required the origination of a licensed originator, so will any modification of that obligation and if it was created illegally, it's not worth spit.
This is why I say people need to understand conventional financing arrangements before they get a flash of some idea to be creative.
Creative financing is not really using a contract for deed, that's very old stuff, it's not a lease-option, that strategy is 1,000 years old, it's not playing with interest rates or maturities so much as it is using these conventional arrangements with other assets to effect agreements to a transaction. Agreeing to take a boat or a bond of Apple Stock in lieu of part of the sale price is being creative. Financing an option price and securing that note with a car is getting creative. But, before you can venture off doing more creative things the better understanding of conventional methods of financing you will need to have.
Most beginners in RE think being creative will get them around the bank's rules, of devise buckets of cash to fall on them from some non-traditional source.....not true at all really. Using other peoples money is as old as China, the SEC has much to say about that. Sooner or later, unless you buy and hold for over a year, you'll meet bank financing rules, eventually your creative shell game will be required to be paid off, since most use balloon payments (which is also very limited for consumer lending now under Dodd Frank). Conventional lenders will underwrite that refinancing under other conditions not necessarily what was structured by some creative doer, if the accept it at all.
Example, I can accept a car toward the purchase price, but if my buyer needs to refinance, only the market value or less of that traded asset will be accepted as equity, if I allowed more, he will be short on the equity to refinance that contract.
If you don't know that doing your deal, you just put the buyer in a position where it may be impossible or difficult for them to perform as agreed....which leads to claims of predatory dealing and lending since you should have known. Your deal blows up, the lender tells the buyer why, the borrower says you devised this mess and tells his attorney and off you go, explain to the CFPB or HUD or your state finance department, might just be your local DA.
And, just because you have less resistance doing a commercial deal, might think about how ticked off another investor will be, especially if they are more aware regulations and how to snap your purse stings. It's lender and borrower beware?
Hopefully now folks might understand that you don't begin with "creative financing techniques". There are foundations of knowledge required in everything in in life, no one is exempt from having to learn, regardless of what the gurus or some out dated RE investor tell you. :)
@Joe Fairless Thanks for the reference & nice website also I will be tuned in to it more. Master Lease is very interesting the way he explained it. Nice podcast.
Thanks