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How to Close More Deals with Creative Financing
Tired of your low, all-cash offers being rejected by sellers? We get it, rejection is never easy, but as a real estate investor, it’s something you must be prepared for. But what do you do when a seller balks at your offer, (or worse…gets offended or angry with you)? This article will go over common deal structures used in creative financing and by the end of it, you will understand:
Why Creative Financing?
Creative financing is a great option when purchasing real estate if traditional means are not possible.
Typically, there are two types of transactions that take place within traditional financing:
Securing a mortgage through a traditional financial institution
Let’s take a look at the most common type of traditional real estate deal:
Sounds simple, right?
The thing that complicates matters a bit more is the requirements a traditional lender has in place in order to qualify for financing.
Banks take all kinds of things about the individual applying for a mortgage into consideration:
Not only that, but generally, deals done through traditional financing contain what’s called a financing contingency.
This basically means that if you are not able to secure the funds for some reason, (like if the home doesn’t pass a lender’s inspection, for example,) you are able to back out of the contract without any repercussions.
You can see how these stringent requirements can not only make it difficult to qualify, but with so many hoops you must jump through in order to secure a loan, it takes much longer to close a deal.
On the other end of the spectrum of traditional financing are all-cash offers.
This means that the buyer has the funds readily available (or liquid,) and can pay the seller in full without a financing contingency.
This makes all-cash offers really attractive to sellers because it means that not only is the deal more likely to go through, but it will close quickly.
One thing that is crucial to understand when it comes to all-cash offers:
The money doesn’t have to come from you.
It can come from hard or private money lenders who specialize in lending money to investors to finance the purchase of properties.
Generally, they have much more flexible and fewer requirements than traditional lenders because they focus more on the deal than the individual; if it’s a good deal, they’ll give you the money to purchase it.
One key difference to understand between traditional and creative financing is the interest rates.
Most traditional bank loans are going to have an interest rate of around 4 – 5% while private and hard money lenders tend to charge closer to 10 – 12%.
This means that when using hard money, you need to factor into the deal the cost of borrowing money to determine whether or not the deal is profitable.
Sometimes at a first glance, a deal may not look profitable, (or not profitable enough).
Many investors will pass on the deal and in doing so, leave tons of money on the table.
This is where the magic of creative financing comes in…
With a little critical thinking and innovative problem solving, creative financing allows you to find the hidden profits in deals you might otherwise have missed out on.
So now that we understand why you might want to consider using creative financing, let’s take a closer look at what it is, exactly.
What is Creative Financing?
Creative financing refers to uncommon, unconventional, and unique ways to finance the purchase of assets like real estate, land, or businesses.
Why are these options necessary?
Typically, all-cash offers are well below the asking price in order to ensure the highest profits possible for you, the investor.
What’s going to determine whether or not a seller is willing to take a low, all-cash offer is their motivation and urgency of their pain points.
If the seller is in a hurry to get rid of their house (like in the case of inheriting an unwanted property,) or if they’re in a bind financially and need quick cash, chances are they’ll be willing to sell to you for less than their asking price, (providing you can close quickly).
But what if they’re not in a hurry to sell the property and they don’t need the cash right away?
Enter creative financing options…
Creative financing allows you to offer the seller their full-asking price (and sometimes even exceed it,) if they’re willing to wait for some of their money.
See, in creative financing, there are two levers you can manipulate in order to create a deal;
Price and terms.
In the case of an all-cash offer where you close quickly, the cash represents the price, and the “close quickly” represents the terms.
As long as you’re able to control either the price OR the terms, you will always be able to create a deal.
Creative financing opens up a whole world of opportunities for you to structure deals in a unique way that creates a win-win situation for both you and the seller.
And the cherry on top?
When you’re able to present offers to sellers through creative financing that are so attractive they can’t resist them, you will dramatically increase the number of offers accepted and close on more deals from the leads you’re already generating.
Now let’s take a closer look at common types of deal structures (on the acquisition side) within creative financing.
Common Types of Creative Financing Deal Structures (Acquisition)
Now, you might be asking yourself;
“Does an all-cash offer belong in an article about creative financing?”
The short answer is yes, (and we’ll talk about why this is in a minute).
This strategy involves, (you guessed it,) an all-cash transaction with the seller. The offer is typically well below market value and it’s important to note it does not need to involve your own cash. Utilizing private and hard money lenders is a great way to make these transactions happen.
By including a low, all-cash offer in your multi-option Letter of Intent (LOI), (***anchor link to multi option LOI**more on that later), it functions as a powerful little psychological trick to make your terms offers look even more attractive.
What’s more, you may be surprised how many more of your cash offers are accepted because you presented them in an LOI where the seller was able to decide if that low-ball, all-cash option is the one that works best for them after all.
This strategy involves the seller holding an amortized note for you for an agreed-upon loan amount, interest rate, and term. You provide the seller with a series of equal monthly payments containing both interest and principal.
It’s important to understand that you can amortize a note for a longer period of time (i.e. 30 yr term) while promising to pay off the loan in a shorter amount of time (full balance due in 5 years). This is known as a balloon payment.
A balloon payment is a great way to go if you plan to sell or refinance the property within that short timeframe as you will have much lower monthly payments.
In this strategy, the traditional bank lender is basically replaced by the seller carrying the amortized note.
This strategy involves the seller holding the note for you for an agreed-upon loan amount, interest rate, and term. The monthly payments you make to the seller will be interest-only payments and the underlying principle won’t change over the term of the loan. In other words, the principal never decreases.
It’s a great strategy for short-term deals you plan to flip or wholetail however it’s not recommended for long-term holds unless you are going to refinance the loan with the seller.
In an equal payments deal, the seller holds a 0% interest note for you for an agreed-upon loan amount and term. You will make equal monthly payments to the seller and every amount you pay them comes off the bottom line of the principal.
This is a great creative financing approach for any exit strategy as it tends to work in your favor across the board. It’s also a great strategy for full asking price (or slightly more, even) since you won’t be paying interest.
This also works great when the seller has an existing mortgage in place. You can take over their mortgage payments, and pay them a flat monthly payment each month on top of that if you need to sweeten the deal for the seller.
This is also a way to purchase a property subject to the existing mortgage without having to bring cash for a down payment.
In this strategy, your purchase is subject to the existing financing that’s already in place on the home, (meaning it only works with sellers who currently have a mortgage). You inherit the seller’s mortgage and it tends to work really well with low-equity sellers.
The calculation in its simplest form is:
purchase price – the amount left on mortgage = your down payment
This strategy is great for long-term holds and has many advantages for investors. One example is that at the time of writing this article, interest rates have been historically low for years, which means you’ll likely inherit a mortgage with an interest rate much lower than what you could get purchasing it as an investment property through traditional means.
What’s more, lenders limit the maximum number of loans you can hold, and when you inherit a loan, it won’t add to your overall loan total, (which gives you greater flexibility for any future loans you may want to secure) and allows you to purchase properties without your own credit being taken into consideration or affected.
WHOLESALING LEASE OPTIONS
Wholesaling lease option deals are where you bring the buyer and seller together, take a fee for your efforts then exit the deal entirely.
Your main goal in this type of deal is to get the seller the highest price and monthly payments possible. This makes the deal more attractive to sellers who don’t need a big payday upfront.
In an appreciating market, you can generally increase the purchase price over fair market value because the buyer won’t purchase the home for 12-18 months. The monthly lease payment to the seller should be equal to the current fair market value or what the buyer’s mortgage payment will be once they purchase (and you should generally choose the higher of the two).
Your fee is typically going to be 3.5 – 5% of the purchase price and the buyer should be required to bring at least that much for the down payment.
(Note: There’s a great workshop on this strategy available inside of REI BlackBook’s Accelerator plan.)
In this strategy, you control the property, but you never actually own it. The process looks like this:
It’s common for a seller to be uneasy about this type of deal, to begin with, but the big numbers they’ll see in your multi-option LOI****(anchor link) will make it a very attractive option.
This strategy involves an agreement to split a portion of the equity in the home with the seller after YOU sell it.
Typically, it involves a rehab where you’re forcing a lot of appreciation on a property within a short amount of time. In doing this, you can avoid using your own capital to control the deal. The difference between the purchase price and the price when you sell the property after the rehab represents the equity that will be split.
Let’s say the equity to be split is $100,000 and you agreed to pay the seller 30% of the equity, the seller will get an additional $30,000 on top of what you already paid them to buy the home. Your share would be $70,000.
This strategy is not generally used for long-term holds, and it’s a great way to avoid hard money loans. It also tends to come with a lower down payment and interest rate because the seller gets their big payday on the back end of the deal.
How To Introduce Creative Financing to a Seller and Make Offers That Get Accepted
In order to understand how to get your creative financing offers accepted, it’s important to step into the seller’s shoes for a moment.
As is the case in all transactions, the seller will be asking themself, “What’s in it for me?”
Let’s dive into the psychology of what happens when a distressed seller is considering selling their home to an investor… What is the one thing they are most concerned with in that transaction?
Getting their asking price.
Not only are there obvious financial implications, but there’s a level of pride and dignity tied up in that number for a seller. They don’t want to feel like they’re being ripped off. They don’t want the neighbors to think they just gave their house away.
Because of this, many sellers won’t even entertain your low-ball, all-cash offer, they may even get offended or downright angry.
This is precisely why leading with the low, all-cash offer is the perfect way to introduce the idea of creative financing deal structures.
Think about it…
A seller’s number 1 goal is to get their asking price for their house.
The low, all-cash offer becomes the reference point to make your other creative financing offers more attractive because they get closer to, at (or even above,) their asking price.
So what does introducing creative financing to a seller actually look like in practice? The conversation may go a little something like this;
“I’m sorry, Mr. Seller, the market won’t allow me to give you that much right now, however, if you’re willing to wait a little longer, it may allow me to give you more. How much do you need right now?”
(This talk track is recommended by Epic Real Estate Investing’s Matt Theriault, who is an expert in structuring creative financing deals. Watch the clip below to hear him break it down from 7:40 – 9:50)
Not only does this build rapport with the seller because you are demonstrating to them that you’re willing to take their specific needs into consideration and work to find a solution that works just as well for them as it does for you, but it also opens up the conversation to introduce creative financing options perfectly.
And the tool you’ll use for this is called a multi-option letter of intent (LOI).
What Is A Multi-Option Letter Of Intent?
It’s a letter (or email) you present to the seller that spells out all of the different ways in which you can purchase their house. It creates a simple to understand, side-by-side comparison of their options including final purchase price, monthly payments, interest rates, and term (length of time) of the deal.
This is a fantastic tool for building rapport and getting more of your offers accepted because it presents the seller with options in black and white and allows them to choose the one they feel is best for them. This builds their confidence and makes them feel like they’re more in control of the transaction process.
Below is an example of what the 3 offer LOI might look like:
But what if you’re newer to creative financing and aren’t sure how to go about structuring deals that are profitable?
Wouldn’t it be great if there was an “easy button” you could push to simplify the entire process?
Good news, we’ve got one.
It’s called the Multi-Offer Generator.
The Multi-Offer Generator is a tool available inside of REI BlackBook that will simplify and streamline your process when it comes to making profitable, creative financing offers.
So, how does the Multi-Offer Generator work, exactly?
Simply add a deal, choose your different financing and disposition strategies, automatically generate your offer letter, and watch your closing percentage increase overnight.
The MOG can also help you to identify your best exit strategy on a property. Run the numbers to see if your deal will work best as a wholesale deal, fix and flip, lease option, or rental. Plug in your rehab estimates, rental comps, etc. Build in your refinancing assumptions and generate your multi-offer LOI with the click of a button.
“The Multi-Offer Generator is a next-level tool! Not only does it give your sellers different options to help you close more deals, but it also equips you with the metrics you need to help you make informed investment decisions. Amazing tool!”
Camino Real Estate Group
So How Do You Put This Knowledge to Work in Your Business Today?
There are a couple of different options you can choose from:
Option 1: Download our free Multi Offer LOI template***** and use this next time you make an offer.
Option 2: Start your free trial of the MOG so you can use our advanced deal analyzer and forecasting tool so you can analyze and structure creative deals in minutes and automatically generate your multi-offer LOI. Then, simply send it to the seller with the click of a button.
Ready to get started with the Multi-Offer Generator today? Click here to add it to your REI BlackBook account.******
(Not a current member of REI BlackBook yet? *****Click here to activate your free trial.)