4 Types of Creative Financing in Real Estate

Creative financing can provide a way to purchase a property even if your credit is bad. In some cases, individuals have to turn to creative financing in order to close a real estate transaction when other methods have failed. Here are some of the most popular types of creative financing available in the real estate world.

1. Subject-to Transactions

One type of creative financing is known as a subject-to transaction. With this type of financing, the buyer of a piece of real estate will take over the existing mortgage on the property. This is not done as an assumption because the lender will not actually be contacted. With this type of transaction, the buyer takes the risk that the lender may not want him as a borrower. He goes ahead and purchases real estate and starts making payments on the loan. In some cases, the lender could demand that the entire amount of the loan be repaid immediately.

2. Short Sales

Another type of creative financing is a short sale. A short sale occurs when an individual is close to foreclosure on a property. Instead of allowing the property to go into foreclosure, the individual goes to the bank and asks if she can sell the property for less than what is owed against it. The buyer of the property can submit an offer that is lower than what the value of the property is. At that point, the offer will be taken to the bank, and the bank will make a decision as to whether to accept it or not. If the offer is accepted, the bank will take less money than what is owed, and the current owner of the house will move out.

3. Options

Another type of creative financing is an option purchase. With this type of transaction, an individual will put option money down on a piece of property. This gives him the option to buy the property at a certain date in the future, but he is not obligated to do so; he can choose not to. With this type of transaction, the buyer of the property can essentially reserve the property until he is able to secure the money to buy it. In order to make an option purchase, you have to have enough money to pay for the option out of your own pocket. The option price will be completely negotiable with the seller of the property.

4. Seller Financing

Seller financing is another option that you could potentially pursue. Many property sellers utilize seller financing as a way to increase the amount of potential buyers for a property. With this type of transaction, the seller will act as the lender in the deal. The buyer of the property will pay the seller a certain amount of cash as a down payment and will then make regular monthly payments to her over the life of the loan.

blog comments powered by Disqus