Google searching “creative financing” pulls up about a dozen articles on different methods of creative finance. However, as investors ourselves, we understand that most of those methods are unpractical or at least difficult to accomplish.
So instead, we’ve written this article on the top 3 methods used by many investors to easily acquire a property using creative means — with little or no money down.
What is creative finance?
Creative financing in real estate is the act of acquiring a property means untraditional ways, typically not using a traditional bank loan, and usually involves little or no money down directly from the “pockets” of one of the purchasers.
Getting started in creative finance.
Creative finance is all the rage today. And although it may seem like a “mythical unicorn” that is rarely done… it is in fact done numerous times by investors. It can help you purchase a cash-flowing property to buy-and-hold… or for your first investment deal… or flip or wholetail… or even if you’re wholesaling property.
It also enables you to eliminate the obstacle of needing a large sum of money and the obstacle of traditional financing.
Why not use traditional financing?
Traditional financing, AKA getting an FHA or conventional loan, is only one way (of MANY) to acquire property, and it has its own limitations.
One is that you must WAIT for lending approval. This can take weeks. And if you have a good deal in your hands, or even if you’re virtually wholesaling real estate, you don’t have the option to wait for lending approval. You have to act now in buying/acquiring the property or the deal is lost.
Also, traditional lending requires a large down payment (if this is for an investment property, you’ll need to come up with 20% or more down). That could be money you don’t have, and buying it creatively is an option over this obstacle.
Also, traditional lending doesn’t give you any options later. For example, if you buy with owner financing (which we’ll explain later), or sub-to, or with a partner… you can re-negotiate, sell/trade some interest in the property, and bring others into the deal. With traditional financing, you’re limited to negotiating with the lender which means little wiggle room and few options later if you need them (we’ll talk more about this later).
Where to find creative finance deals
Probably the best way to find deals that you can purchase real estate creatively is by going off-market, directly to seller.
This means you’re not going through a real estate agent or finding these deals on the MLS
However, it DOESN’T mean that creative deals can’t be made through an agent or on the MLS. It’s just a lot more difficult because you have to negotiate through an agent and most agents don’t have any idea about these methods we’re about to discuss or rather discourage it (because they lack understanding and/or they won’t get paid their commission).
So the best way to find these deals is by directly negotiating with sellers.
Ways to go off the market
Reaching sellers off-market requires some marketing strategy.
Here’s a short list of ways to reach sellers directly:
- Direct mail marketing (A company like Ballpoint Marketing can supply you with direct marketing handwritten mail to reach thousands of potential sellers at once).
- Cold calling (pulling a list via Propstream (there’s our affiliate link where we may get paid a commission), and then cold calling that list means directly getting into communication with a potential seller).
- Door knocking (going door to door is the best way to get in front of people. However, it takes a LOT of doors to knock to actually find a seller. To help you scale you can add also place door hangers at the door).
- Networking (Earlier I said that going through agents wasn’t an ideal way to find creative deals, however finding agents who send you “problem” properties is a great way to find these deals, especially if there are property liens or title problems you know how to solve and you’re the “go-to-expert” people send deals to).
Here’s a video on some real estate investing lead-generation tips:
3 Practical Creative Finance Strategies
This is one of the easiest and most common methods of creative financing.
This is where instead of making payments to a lender, you make payments to the owner.
- You can negotiate any terms you’d like
- You can negotiate lower interest rates than market rates
- You can negotiate a 0% interest rate
- You can negotiate lower monthly payments
- You can negotiate lower or zero money down
- You can re-negotiate later if you need (to bring down payments or rates)
- You can “walk the mortgage” (if you refinance the property or sell, instead of paying back the previous owner, you use that to fund another deal — as long as the previous owner agrees).
- Owners need to have the property free-and-clear (however you can do a “seller carry” or “partial seller finance” which we over later)
- You need to explain the method to some sellers (Since seller finance isn’t all that well known, you might have to explain the method)
- Most sellers might not agree with it (if they don’t understand, or are confused or, or skeptical because they haven’t heard of it, then they might be less willing to agree)
As you can see, the benefits of Seller finance far outweigh the cons.
In fact, the cons are all in the realm of trying to convince sellers this is a good deal for them — later we’ll go over some scripts in introducing this to a seller).
If they don’t own the property free-and-clear
In order to fully do owner finance, the owner must have no loan on the property. However, if the owner does still have a loan, you can do a partial seller finance, or seller-carry the equity. For example, if the house is worth $100,000 and the owner still owes $20,000 to a lender, you can pay off the rest of the loan (or via some other creative finance means we’ll talk about below), then “seller carry” the rest of the $80,000 to the seller, making payments to him.
The seller has $80,000 in equity.
You agree to make payments of $429 per month…. for 30 years…. at 5% interest.
How to figure out the payment
This is tricky if you don’t have the 10biii financial calculator or some sort of simple mortgage calculator. Once you go through escrow when closing a deal like this, they can give you an amortization schedule that lays out all the payments for the duration of the loan.
But the easiest way to figure out payment… is just to negotiate a 0% interest rate (yes this can and is done).
How do you ask for seller finance?
Depending on who you’re asking, most sellers won’t know the real estate terminology: “seller/owner finance” (although you’ll be surprised these days).
But the best way to ask is by using a form of one of these scripts:
I can get you your full asking price if I can make payments to you of $xxxxx amount instead of the full lump payment with x% interest rate… would this be something you’re interested in?
Would selling your property in monthly payments at a x% interest rate be something you’d consider? You’d never have to worry about tenants, or maintance.
Benefit to seller
- They can spread their huge capital gains tax over xx amount of years (many landlords don’t want to sell their property because they have to pay 15%+ in taxes. By receiving payment instead, they only pay taxes on what they receive, so they’re spreading their tax cost over a long stretch; aka: giving the government inflated money).
- They can receive interest (a lot of sellers don’t know what do to with their lump sum if they sold. And receiving interest might be preferable to putting it at risk in the stock market).
- They can continue receiving income every month without dealing with tenants or maintenance (many landlords are tired of dealing with tenants. They still want to receive monthly income but without the headaches of managing tenats. Seller finance gives them both).
- Give a monthly income without the temptation to spend all their proceeds (There are some sellers that are in a lower income bracket that like the idea of receiving an extra $1,000+ every month without the hassle of owning a property).
Here’s a video on how to structure seller finance:
Another creative finance method is via buying an option to buy.
An option in real estate is a contractual agreement/provision between a seller and a buyer where the buyer has first rights to purchase the property in a given amount of time.
Think of this as you’re “buying” time.
… Where you find an investment opportunity but you need time for finding funding, and/or you’re sure about buying it just yet.
It secures your first position in buying it.
Reasons to use Lease Options:
- You can start making cash flow from day one (if the agreement allows for Master Leasing, you can place a tenant inside, manage that tenant, and collect a cash flow)
- You can SELL the option (there are lots of investors that will buy an option from you. Joe McCall, a long-time investor, teaches ways to make money from lease options, see the video below)
- You’re unsure of the location/deal (but you want to secure your position in buying it. So you purchase the option, and place a tenant inside)
- You need time to fund it (Did this opportunity come fast and you’re not sure that you can find funding? Buy an option and start looking for the cash)
- To wholesale it (a lease option is another way to wholesale property and collect on an assignment fee. Think of it as a different type of wholesaling contract.
How to perform a lease option
There is no “standard” lease option. You can literally negotiate whatever you want.
Typically you do pay for an option up front (but you don’t have to), and you’ll still have to pay rent (Not always, but you can still do your own rental arbitrage to make money or break even).
Buying real estate with “no money” is a myth.
You ALWAYS need something when acquiring real estate; resources, or other people’s money.
Very rarely do people get real estate for free.
… Although if you subscribe to the investor, Ryan Dossey below, he’ll send you a free book on the mistakes he made “buying” a FREE house:
We’ve talked about how TRADITIONAL financing isn’t ideal for buying your investment property.
However, you can use UNTRADIONAL financing to acquire real estate.
Here are a few examples (ranked from easy to hard):
- Hard money loan (HML)
As long as you have a good deal, you can find a hard money lender to fund the deal. Typically they do require “skin in the game” (or a big money down payment anywhere from 10% – 50% depending on the lender). Depending on the market you MIGHT be able to find someone who funds 100% but that is rare and hard to come by.
CONS: It’s expensive in terms of interest and points you pay out. You most likely will require some money out of pocket.
PROS: It’s a fast and easy way to fund a deal when you need it
- 401k/IRA loan/dissolve
If you have a 401k or an IRA where you can pull out a loan then this can be a great way to fund a deal. Another way to do it, is just to completely pull out the money in your account to buy real estate. Of course, you’d have to pay big penalties, BUT you’ll never have to “pay it back”. I know of several investors that have done this because their mindset is that if they are buying rentals for a cash-flowing portfolio then they don’t need a “retirement account”; their rentals are their “retirement”.
CONS: You risk your retirement account. You still have to “pay the loan back” with interest every month if you take out a loan. Takes a while to process this loan if you need the money very quickly.
PROS: You can fund deals without any outside lenders — you’re in complete control.
- Partnerships/JV( Joint Venture)
This can be a GREAT way to get started if you’re a beginner in real estate. There are 100 ways to partner with someone and this deserves its own article one day, however, to give some context here are a few ways related to “creative finance” (They ALL have to do with finding someone to upfront 100% of the money to buy the deal. But where it differs from “private lending” is that the relationship is a bit more complicated than just someone upfronting money to you):
- Offering appreciation upside — Some investors will upfront money to have a larger hold on appreciation than normal. So if the strategy is to hold on to the property and sell later on an upswing of the market, the investor might want a large chunk of the appreciation while you want the cash flow mainly
- 50/50 split — Some investors will give you their guidance along with the deal but they’ll require a larger split in profit; sometimes in the realm of 50/50. Know that knowledge does have a price, and when you’re getting started you have to pay for that price; don’t be greedy about this — can be done for LONG TERM relationships too, where you find someone who’s great at managing rehab and money while you take care of the acquisition side.
- Offering larger cash flow — Maybe this investor prefers cash flow (and other incentives like tax shelter), over appreciation. You can offer him a large stake in the cash flow while you get a larger stake in appreciation when you sell.
CONS: Can be expensive to offer a 50/50 split for private lending. Partnerships can get messy if things are “hashed” out from the beginning. You might have to do ALL the property management yourself if it’s a buy-and-hold partnership deal.
PROS: Easier to have someone up front all the money if they have a large stake in the deal than bringing in a private lender when you have little experience (as opposed to private lending where they have to trust your experience). Can be lucrative as you can close any good deal as long as you can find someone to upfront the money.
- Subject-to/assumption-of-loan deals
This is far from “traditional” lending. This is where you leverage the EXISTING loan that’s in place. If you come across a good deal that has a loan in place, and it’s a good loan as well (lower interest rates and payments much lower than market rents), you can perform a “Subject-to” transaction where you make payments on behalf of the seller. This is a “staple” of “creative finance” methods and is talked about quite a bit by different people, and can easily be learned by beginner investors. Right now, with interest rates being high (it’s 2022 at this writing), you can pull a list of mortgages with the old lower rates, and market to them.How to present Sub-to
You don’t ever want to tell a seller: “How about a subject-to-agreement?”. They won’t have any clue what you’re talking about. This is not done in the “normal” world (but done FREQUENTLY by investors). So you’ll confuse sellers and scare them. So, with that, this type of deal is best done with sellers who are motivated or the property is distressed, and can see value in you making payments to them. Instead, you want to present in a form like this:
If I can buy your property at that price while bringing your credit back up to a good level, would this be something you’d consider?
And then you can go on explaining how you can make their payments in full every month on time and how doing this will quickly cure their credit score.
Here’s a video on some sub-to and seller finance:
*Assumption of loan. This is where the name on the loan transfers to you. The difference between an “assumption” and a “subject-to” is that the sellers name stays on the loan and you don’t say ANYTHING to the lender about this agreement. An “assumption” is where you contact the lender and express that you’d like to assume the loan on this property. MANY lenders don’t allow this, and will probably “call the loan due”. You need to research for yourself which types of loans are “assumable” before you attempt it.
CONS: A bit more complicated. You have to have confidence and good explanation and be able to handle all the questions, when offering it to sellers
PROS: Quick and profitable way to buy a property with no to little money down. It makes for a GREAT deal (as long as you did due diligence and accurately estimated the after-repair value and ran accurate property comps) if you want to bring partners in or sell the deal.
- Hard money loan (HML)
- Private Lending
Typically cheaper than an HML, you can find private individuals that will be happy to loan you money for an APR of 8%-12% for a good deal. Typically these individuals will require 1st lien position. To know the exact way to work with private lenders and make them feel safe with you… check out this investor’s eBook “Private Lending” below:
CONS: You have to have some experience and a proven track record before private lenders dish out money to you
PROS: It’s one of the most inexpensive forms of lending
Don’t make it hard on yourself.
There’s 100’s of ways to creative finance, and having a long checklist of every way can be mind-boggling. Instead, pick ONE and dive deeper into; offer it, try it, get out there and take action.
For now, if you need a contract on seller finance and wholesaling…
Check out the contracts that Investor, Ryan Dossey uses in his real estate company: