In real estate, creative financing is non-traditional or uncommon means of buying land or property. The goal of creative financing is generally to

purchase Purchasing is the procurement process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary g ...

, or

finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

, with the buyer/

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

using as little of his own money as possible, otherwise known as leveraging. Using these techniques an investor may be able to purchase multiple properties using little, or none, of his "own money".

Types

Hard money loans

Hard money loans (abbreviated as HML) are similar to private mortgages except that they are made through a hard money lender. A hard money lender may get his financing either from his own contacts with private lenders, or

financial institutions A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

with whom he has established his own lines of

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

. Hard money loans are made to real estate investors for the purpose of investing in and rehabbing real estate.

Rates Rate or rates may refer to: Finance * Rate (company), an American residential mortgage company formerly known as Guaranteed Rate * Rates (tax), a type of taxation system in the United Kingdom used to fund local government * Exchange rate, rate ...

are a little higher than borrowing directly from a private lender, as the hard money lender may also be collecting yield spread. The hard money lender will also charge points of 3% to 6% or more. These points are often paid up front, but a few lenders may roll these into the loan. Hard money loans are high-

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

s available from private investors. Desperate

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of thi ...

s with poor credit scores,

bankruptcies Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

, no verifiable income, or too much

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

often take out hard money loans when they are unable to qualify for traditional mortgages. Hard money becomes a last resort when borrowers cannot meet the lending standards set by banks or government sponsored enterprises such as

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...

and

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

is a

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

secured by real estate that is made by a private lender, instead of a traditional lender,

financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

, or government institution. These loans are most commonly short term and last anywhere from 6 months to three years. These are asset based loans made for the purchase and rehabilitation of real estate. Because the loans are asset based, the decision to loan is based on the criteria of the property and not usually the qualifications, or

of the borrower. Interest rates on these loans are considerably higher than traditional loans and may range from 12% to 18%, with points sometimes being required as well. Loans are made on an LTV ( loan to value) of 65% to 70%, to preserve sufficient equity in the property for the private lender in the event of default.

Simultaneous closings

A simultaneous closing allows a home seller to offer owner financing on a property without having to hold any

. On closing day, the property title is transferred to the buyer and the newly created (owner-financed) mortgage is sold to a note investor for cash, simultaneously.

Subject-to

A subject-to transaction is a creative finance technique where a buyer is able to take title to property without obtaining a loan in the traditional manner. The transaction usually involves the seller of the property leaving his or her existing financing in place. This process is similar to assuming a loan, but differs because it usually takes place without the knowledge of the original lending institution and operates outside the original terms of the loan. This technique is useful because it affords the buyer the ability to obtain financing without the need for transaction costs and does not tie up capital to obtain a new loan. The technique also allows the buyer to purchase property quickly without going through the arduous loan origination process. At the same time, it offers a creative solution for sellers with minimal equity in the home who would not be able to sell on market.

Land trust

land trust Land trusts are nonprofit organizations which own and manage land, and sometimes waters. There are three common types of land trust, distinguished from one another by the ways in which they are legally structured and by the purposes for which th ...

is an agreement whereby one party (the

trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, refers to anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility for the ...

) agrees to hold ownership of a piece of real property for the benefit of another party (the

beneficiary A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person who receives the payment of the amount of ...

). Land trusts are used by

nonprofit A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, not-for-profit organization, or simply a nonprofit, is a non-governmental (private) legal entity organized and operated for a collective, public, or so ...

organizations to hold conservation easements, by

corporations A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

and investment groups to compile large tracts of land, and by individuals to keep their real estate ownership private, avoid

probate In common law jurisdictions, probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased; or whereby, in the absence of a legal will, the e ...

and provide several other benefits. In the application of creative financing, a land trust can be used to take control of a property while keeping the name of the owner private. While this does not prevent the lending institution from invoking the due on sale clause, it will make it harder for the lending institution to detect that the property has been sold using creative financing.

Short sale

In a short sale, the seller owes more than the home is worth, as they are often several

payment A payment is the tender of something of value, such as money or its equivalent, by one party (such as a person or company) to another in exchange for goods or services provided by them, or to fulfill a legal obligation or philanthropy desir ...

s behind and may even be close to

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...

. As a result, the lending bank may agree to a sale of the property for less than is owed on it. In order for a bank to agree to take less than the homeowner owes on his mortgage, the seller must often show significant hardships that have led them to being unable to continue making

payments A payment is the tender of something of value, such as money or its equivalent, by one party (such as a person or company) to another in exchange for goods or services provided by them, or to fulfill a legal obligation or philanthropy desire. ...

on this

. The seller will give the short sale investor a

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

the property, a

deed A deed is a legal document that is signed and delivered, especially concerning the ownership of property or legal rights. Specifically, in common law, a deed is any legal instrument in writing which passes, affirms or confirms an interest, right ...

that will probably be placed in

escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transact ...

power of attorney A power of attorney (POA) or letter of attorney is a written authorization to represent or act on another's behalf in private affairs (which may be financial or regarding health and welfare), business, or some other legal matter. The person auth ...

and a number of other documents that will give them full control of the property. The investor will then present a case to the

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

holding the

, that the seller is no longer able to make payments, is having to relinquish control of the property and that the loan on the property must be reduced in order for the investor to purchase the property. The term "short sale" is a

misnomer A misnomer is a name that is incorrectly or unsuitably applied. Misnomers often arise because something was named long before its correct nature was known, or because an earlier form of something has been replaced by a later form to which the nam ...

because it has nothing to do with shorting anything in the

financial Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

sense. These transactions can also take a significant amount of time so it is not called a "short sale" for that reason either. However, the process is shorter than the traditional process of going through foreclosure and sale by auction, which is still likely to take much longer. This is a method to sell your house quickly, because effectively you pass over control of your property to the short sale investor immediately upon signing of the documents. From that time on, it is up to the investor to complete the transaction. Should a bank refuse to accept the investor's offer on a short sale, there is no guarantee that the house will not go to foreclosure anyway, but this does provide the seller a "possibility to avoid foreclosure", when all else has failed. This technique may also be used to stop

long enough to allow another purchase, or something else to be done with the property.

References

External links

"Creative financing might help sell your home"
'' Bankrate.com''.
ABC News story on Creative Financing.Property Buyers for Landlords
{{DEFAULTSORT:Creative Financing Mortgage industry of the United States Real estate Banking Credit