Creative Non-Conventional Financing for Home Buying
The Zoom call for Nov 8 was presented by ActiveRain member, Sham Reddy. He's been in real estate since 1992 and his early deals were as an investor and also helping others with their real estate transactions.
In his career he has been active as a member of his local Real Estate Investors Association as well as local community organizations.
As his activities as an investor, he has worked with a number of people that have allowed him to appreciate creative ways to finance properties as an investor. Some he has used himself as well as picked up from his fellow investor associates.
When attempting to get the seller to sell the property, especially one that has been on market for a while, it can be done without closing out the mortgage assuming the seller is in agreement. There are several ways the contract can be written, as noted in the image, but with each example, it is imperative that the insurance remain in the name of the seller.
With a Land contract, the payments must be made to the original mortgage company. With the negotiated sales price, the seller will then continue to make full payments and the buyer will then occupy the property in order to make necessary improvements before finalizing a lease/purchase in order to refinance.
Purchasing Without an Underlying Morgage.
If the seller does not have a mortgage and does not need the balance immediately, they can do the financing and as the buyers may have problems getting financing with an institution, the seller can charge an interest rate higher than conventional and will appreciate a gain significantly larger than having the money sit in the bank or taking risky stock investments.
Additionally, the seller does not have to pay tax on the capital gains and can stay in this position for at least 3 to 4 years if they intend to try and claim the Federal Capital Gains exemption.
If the write up the contract as a note, then they can turn around and transfer the note to another lender or person. The note is still connected to the buyer of the house
Buying Packages of Non Performing loans
For someone with more liquidity, they can buy non-performing notes from an institution at a discount buy as much as 30-40% and hold the notes while still retaining the servicing companies that the original note holder used.
In a down market with lenders seeing a large number of non-performing loans, institutional buyers will purchase bundles of notes at as much as 50-60% discount, while still using the servicing companies.
These investors may then create smaller bundles to sell at a reduced rate yet still larger than their original purchase so as to make a quick 20-25% return. While it may sound and have a feeling of non-conformity, it is very much a legal transaction.
Loan Assumptions: FHA & VA
It is possible for a private individual to assume an existing loan but there are certain criteria that must be met for it to happen. The home may not have to be placed on market, but these notes can be assumed.
Private Lenders or Family
This is getting popular with real estate investors as most lenders require a minimum of 25% down for an investor to make a purchase and if they are looking to remodel to flip, they may not have the funds. This would send them to private lenders. Also, banks would require an investor to have ay a minimum of 6 months reserve to make payments as well as taxes.
It is also getting to be a requirement that an investor show a 2-year timeframe of activity in real estate before a bank would lend them money. This is essentially similar to a self-employed person.
These requirements would send an investor to a private money lender.
A private lender can charge higher interest rates as well as points. It doesn't matter whether it is short- or long-term financing.
These notes can be interest only loans presuming the investor is going to carry the note for a short term. Conventional government rules do not apply as the government would not be involved.
Hard Money Lending
People will resort to hard money lending when they cannot get conventional lending.
Most hard money lending is done for short term work such as fix, and flip and interest rates would be higher in the range of 10-12% with 5-6 points.
Transactional Funding
This is most common when the funds are going to be used for a single transaction such as a flip and purchase.
Funds will be carried from one closing to be used in a second closing and cost could be 5-10% of value being used.
Self-Directed IRA Funds for buying/Lending
A person has the ability to convert retirement funds into a self-directed IRA and have an institution hold the money for them to be drawn when needed.
Fo example, a person wants to purchase and rehab a property that has a value of $200,000 and may require an additional $100,000 to rehab. They draw the funds from their traditional IRA and make the purchase. Once the project is completed and they sell that property for $450,000, that money must go back into the trust with no tax penalty. It then grows tax free.
The money can be lent to others but no straight-line family. Interest rates would be higher than conventional funding and as the property is a note with the property used as collateral, they have minimum risk. If the investor defaults, they get title to the property and can turn around and sell it at a profit.
Lender Financing on REO's and Short Sales
Many times the bank holding the REO or even a short sale may be open to taking a short term note on the property in order to get it liquidated.
As the homes may be vacant, they are more willing to allow for a quicker transaction to prevent vandalism to a property.
Sham was very accommodating with questions and also offered to answer questions at a late time from someone that would want better clarification to any of his points.
Creative Non-Conventional Financing for Home Buying
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