One of the most important trends in the current real estate market is creative financing. Creative financing involves borrowing money from sources other than institutional lenders and banks. Buyers have used it in past market downturns when bank financing became less desirable. The most common form of creative financing is seller financing, in which the seller lends some or all of the money to the buyer. And then because most home sellers don't want to be lenders, they sell the loan to an investor who does want to lend money and actually receive payments.
Here's how it might work...
Joe is selling a home for $500,000, but isn't finding many buyers. Mike is interested in Joe's home, but doesn't have the 20% down he needs for a down payment, which he's required to have because his job doesn't give him pay stubs or W-2s to verify his income. So Joe tells Mike, I'll loan you 15% and then you only have to come up with 5% down. So Mike goes ahead with a loan from a bank for 80% of the purchase price ($400,000), gets a loan from Joe for 15% ($75,000), and puts down $25,000 of his own money. Joe sells his house and Mike becomes a home owner.
But now Joe has this agreement in his hands to be paid a certain amount over the next 10 years, and has $75,000 less in his pocket than he wanted to after the sale of his house. So what does he do? He can sell the loan agreement, called the "note", to another investor who would buy it at a discount, maybe $65,000. The investor then receives the payments and pays Joe the $65,000. So Joe is left with $490,000 instead of $500,000, but he got his home sold.
It may not seem very appealing for the seller to lose $10,000, but it's better than most of the alternatives. In this market, some homes are on the market for over a year without selling. Others have price reductions of 30% because of a lack of interest or getting "stale" from too many days on market. Finding a buyer is the bottom line in this market.
If you're a buyer without a large down payment, but can make a sizable monthly payment, look for the phrase "Owner will carry" or "seller will carry" in home listings. This indicates that the seller is willing to discuss some sort of arrangement like the one discussed above.
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