Say you have a truck that you are super attached to and you want to sell it for $10,000 but you've checked the blue book value and it's only worth $5,000. However, you have tons of memories in this truck and it's made you a lot of money and you are emotionally tied to getting $10,000 for this truck.
So you put the truck for sale on Craigslist selling it for $10,000 and days go by and you get no hits on the truck. But you are really tied to that number and you're not willing to give up yet. Think about this, if you were to sell your truck on payments you can definitely achieve that amount or possibly more. Your seller will pay a down payment and pay you monthly until the truck is paid off!
So once you change the ad to show will take payments you get hundreds of inquiries of people who want to buy the truck and they gladly pay over the blue book value just for the fact you are willing to allow them to pay on payments!
So this is an example to help us explain creative financing. Now creative financing consists of a few different methods. Subject to, seller financing and hybrid.
Seller financing is a loan provided by the seller of a property or business to the purchaser. When used in the context of residential real estate, it is also called "bond-for-title" or "owner financing."
In seller financing, the seller takes on the role of the lender. Instead of giving cash to the buyer, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment. The buyer and seller sign a promissory note (which contains the terms of the loan).
You, the buyer, sign both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if you fail to pay). In return, the seller signs a deed transferring title to you. Because you hold the title, you can sell the house or refinance.
Another benefit of seller financing to an owner is, after the sale of the home, s/he would be receiving a steady monthly income. In some cases, owners can avoid or spread out paying capital gains tax on the sale of their property by delaying the ultimate sale of their property.
Seller or owner financing provides a solution for buyers who ordinarily wouldn't be able to obtain conventional financing. However, in some situations seller financing makes the seller a lender. When this happens, it is not prohibited under the Dodd-Frank Act.
Subject To-Buying a property "subject-to" means a buyer essentially takes over the seller's remaining mortgage balance, without making it official with the lender. It's a popular strategy among real estate investors.
To a borrower, the advantage is that the rate will remain constant, and the monthly payment will remain the same throughout the life of the loan.
The lender is taking the risk that interest rates will rise and that it will carry a loan at below-market interest rates for some or part of the 30 years.
Subject to real estate can provide an instant solution to an urgent problem.
Also, because the buyer is responsible for making mortgage payments on time, this can improve the seller's credit score. In addition, they will not have to pay closing costs, fees, or make repairs.
A combination of subject to and seller finance. Reminder subject to there is a mortgage in place and we’re taking it over subject to.
Seller finance, they own the property free and clear and I structure a payment program to pay them off. There is no debt in place so a debt is created. A promissory note or deed of trust.
We create an instrument or document that says Buyer owes me this much, he put this much money down and he still owes me this much money for this amount of time.
What if we have a deal with a mortgage in place for $100k but they want to sell the house for $200k which means they have $100k in equity and $100k in debt.
For this we would create 2 documents. First one for payment to the bank and second one for the payment to the seller.
So we’re doing a hybrid. We’re doing subject to on the existing mortgage and seller finance on the debt or equity that the seller is going to carry for us.
Creative Financing is a solution for everyone and if used in the right way can benefit buyers and sellers.
Contact one of our Specialist today!