Time to Re-Sharpen The Ax: Creative Financing Solutions

from Creative Financing Offers Solutions for Buyers and Sellers Alike

Now is a great time to be a home buyer in the Tallahassee Real Estate Market! You have choices, with inventory at an all-time high. You have motivated home sellers. You have historically low interest rates. So what is holding you back?

Some of our Tallahassee Home Buyers come to us with problems related to financing the purchase of a home. I like to tell my Sales Associates that anyone who really wants to buy a home in Tallahassee can do it. The market conditions are perfect. The key is to understand all of the options that a home buyer has.

One of the questions that seems to arise with a credit-challenged buyer, or a buyer with little cash, is "What is Creative Financing, and how do I use it to buy a home in Tallahassee?"

Creative Financing is just a term used in the real estate industry to describe methods that allow a home buyer to obtain a property without being constrained to conventional lending standards. If a buyer has perfect credit and has 20% of the purchase price to use as a down-payment, then creative financing is not really something they might need to consider. On the other hand, if cash is scarce, or if the credit is shaky, there are some techniques that we employ to assist the buyer in purchasing a home.

The four most-common ways of using creativity in buying a home are:

Lease-Purchase (Leasing the property with the right to purchase it at a later date)

The Buyer offers to purchase the home, but sets the date for closing in the future. This can be negotiated to any time frame acceptable to both parties, and I have seen these go for 6 months, a year, two years, and even longer in some cases. The contract is contingent upon Buyer and Seller executing a lease agreement, allowing the Buyer to occupy the home and pay rent until the closing date.

The benefit to the Buyer is that they get in the home they want now, and close on it when they are capable. The amount of money to get in is typically no more than the amount of money required to get in any new lease agreement on a similar property.

The benefit to the Seller is that they get out of the home they are trying to sell and can move on with their plans. They might be limited in what they can do on their next purchase, but it does solve their problem of selling a home in Tallahassee!

Purchase Money Mortgage (Having the Seller lend some of his/her equity in the property to assist in the down payment for the Buyer)

The Buyer offers to purchase the home for a contracted amount, with the Seller "lending" the Buyer part or all of the Seller's equity. This could be any amount, from $1 to 100% of the purchase amount. Typically, we see the seller hold-back 20% to assist a cash-poor borrower in obtaining a conventional loan. But there are a myriad of ways to use this technique. Most often, the Seller's Purchase Money Mortgage has a balloon payment, where the entire balance is paid-off in three to five years.

The benefit to the Buyer is that they get in the home they want now, and are able to obtain the best loan rates in the market.

The benefit to the Seller is that they sell the home, maybe pay-off their existing liens, and move on with their plans. They can then hold the note, receive payments, and most likely be repaid the entire balance when the property is refinanced. Or, the Seller can sell the note in the mortgage market and receive a good percentage of the note amount.

Investor 2nd Mortgage (Borrowing money from a friend or family member to assist in the down payment for the Buyer)

Often times, buyers have friends or relatives who have cash that is sitting in poorly performing investments. These people could lend money to the Buyer, secured as a first or second mortgage on the house, and receive a much better rate of return than they are getting in their other investments. If the amount lent is only to assist in the down payment, then this technique is only useful in conjunction with loan programs that will allow it.

The benefit to the Buyer is that they get in the home they want now, and are able to obtain the financing required to close on the purchase.

The benefit to the Seller is that they sell the home and do not have to participate in the creative financing at all. It makes no difference to the Seller if the money comes from a bank or a friend, or both, so long as the money is there at closing!

Additional Collateral Loans (Borrowing money against another asset to be used in buying a home)

This is a technique that is often overlooked by Buyers and real estate professionals alike. If a Buyer is short on cash, but has money is investments (even ones with penalties for early withdrawals), the Buyer can go to a local bank and borrow against that investment. Rather than cash-out a retirement plan, the Buyer can usually borrow an amount equal to a percentage of the investment value. For example, a retirement account that has $200,000 in it could be used to collateralize a loan for $150,000 that would be used to purchase a new home (or as the down payment for a new home). The bank could additionally make the loan a second mortgage on the house being purchased.

The benefit to the Buyer is that they get in the home they want now, and are able to obtain the best loan rates in the market.

The benefit to the Seller is that they sell the home and do not have to participate in the creative financing at all.

You might think that Seller's want no part in "Creative Financing," but things have changed. When we were in a hot Seller's market, all a home owner had to do to sell his/her property was to place it on the market with a good real estate company and start packing. There were more Buyers than Sellers, so properties moved very quickly. This is not the case now.

Some people who need to sell their home are finding that Buyers are not as bountiful as they had been for the past five years. The Prudent Home Seller has to look at creative financing as a way to differentiate their home against the homes of their competition.

Wikipedia has a good definition of creative financing and lists quite a bit of alternative methods and ideas for obtaining money for a home.

Subscribe to this Blog:

Joe Manausa, MBA, CRB, CRS | Broker / Owner | Century 21 First Realty

2365 Centerville Road | Tallahassee, Florida 32308 | 850-386-2001 | http://www.manausa.com/

Joe Manausa, MBA
Century 21 Manausa & Associates
www.manausa.com

 Sign up for a FREE subscription to the Tallahassee Life! Newsletter

Name:

 

Email:

 

 

 All About Tallahassee Life

 

Get The Free Real Estate Newsletter