Creative Financing

by Enrique (Henry) Saldana  (June 2012)

As the old saying goes, there are many ways to skin a cat, or in our particular real estate world, to sell a property.

While being in an economic cycle where money supply is tight and lending standards are getting much tougher, there are those relatively new to the real estate industry who see this as new and different, while those of us who have been around a while will tell you that we are just dusting off old skills and techniques that we haven't had to use since the 1990s. It is time to re-establish all of the networks and processes that we used to help people buy a home without conventional or traditional financing.

It is easier to get into a property through creating financing than what you may think.

While many real estate professionals do not like or understand creative financing, I actually enjoy the transactions that require a little mental agility to complete. Sure, easy "deals" are fun too, but being able to help a buyer, whom nobody else knows how to, brings a lot of satisfaction to those real estate agents who, like me, know creative home financing buying techniques.

Creative financing techniques are actually critical to home sellers too. If a real estate professional can use his knowledge to increase the pool of potential buyers for a home, then the real estate agent is adding value to the home. Less than 10% of homes sold in a normal real estate market in Mexico are done through conventional financing, so the soft costs of buying a home are just as important as the tangible aspects of the home.

The following list of creative techniques is by no means all inclusive, but it represents the minimal set of "tools" at which real estate professionals must be proficient in order to best help home buyers and home sellers today:

Lease Purchase Agreements: This is the simplest way to get somebody into a home (today) when they cannot get a traditional bank loan. Buyer and Seller enter into a contract and set the closing date in the future, and then execute a separate lease agreement that dictates the terms of the Buyer's use of the property prior to closing.

The Lease Purchase Agreement concept in Mexico is similar to the concept utilized in North America. While this technique can be very beneficial to both the home seller and the home buyer, each party should consider getting professional advice before pursuing this type of financing as a solution.

Purchase Money Mortgages: This is a creative financing technique often misunderstood by homeowners, and that needs to change. A Purchase Money Mortgage (also called "Seller Financing," or "Seller Seconds") is a technique used with home buyers who do not have enough cash to fulfill the obligations by the first mortgage holder.

Basically, the buyer obtains a new first mortgage on the property and the seller acts as a second mortgage lender by helping the buyer with some, or all, of the down payment requirement. Rather than receive cash at closing, the seller walks away with a note secured by the property. The seller then has to wait for the period of the note to receive the total equity in the property.

Most sellers would rather have cash, but many sellers would rather have cash plus a note rather than not sell the home. And since homeowners who have failed to sell their homes is at approximately 79% at the present time, this is a viable option to allow a homeowner to move his property.

Private Money Loans: These loans come from local investors who want to get a strong yield on their investment, while knowing that their money is safe. They work with people like us, mortgage brokers, to find them properties to lend against. Notice I say "properties" to lend against as opposed to "people" to whom they can lend. These investors represent an opportunities for many good borrowers who do not currently qualify for conventional/traditional bank loans.

These investors are local in nature, such as doctors, lawyers, business owners, and retirees. They utilize a safe formula that allows them to continually reap safe returns on their money in the double digits. They make the cost of money higher than traditional lenders, but they make it available to a larger group of people.

Hard Money Loans are similar to private money loans, but these come from larger groups of investors and work in a manner that is a hybrid between private money lenders and traditional bankers. The loan application process is more formal than with private money lenders, but much faster and easier than it is with traditional banks.

Hard money loans, like private money loans, bring more opportunity to the market. Higher interest rates make them a poor solution for somebody with perfect credit, but a great solution for those who cannot obtain a conventional/traditional bank loan.

Multiple Collateral Loans (Wraparound Mortgages and Blanket Mortgages): They can be used when the buyer does not have enough cash for the down payment of the loan. By securing the loan with more assets, the lender's risk is reduced. Typically these types of loans require an existing relationship with the bank, or are used in conjunction with private money loans or hard money loans.

Here is an example: A buyer wanting to purchase a $300,000 home obtains a money investor who is willing to lend $220,000 on the transaction. The buyer needed another $90,000 to cover the down payment and closing costs. $62,000 of this was cash the buyer had in the bank, the other $28,000 was covered by the private money investor with a note secured against a large boat that the buyer owned free and clear. The boat was the "additional collateral" that encouraged the private money lender to do the deal.

These are just a few examples of creative financing options.

Understanding that money flow is constant and that we just need to know the current real estate market cycle we are in to get money is also important. And every transaction possible can be accomplished. However, if money were actually available and easily accessible, then creative financing solutions most likely would not be that important. But when money flow is restricted, creative financing is a "must-know" for real estate professionals everywhere in the world.

If you are currently trying to sell your home, you must make sure that the real estate company and/or professional that you choose to hire for the sale of your home knows how to increase your buyer pool with creative financing options, for there are many ways to skin (sell) a cat (sell a property than the conventionally known ways.

Remember:
•    The boom real estate years of 2003, 2004, 2005, and even 2006 are not coming back in the foreseeable future.
•    Selling real estate in this decade—and beyond—will require new techniques, different knowledge and new approaches.

This means buyers, sellers and real estate agents will need to adjust to the times in order to succeed. Therefore, they will need to learn how to apply creative selling techniques to their selling practices.

When we speak of creative financing, we're talking about creative financing option opportunities.

Creative financing is a very wide concept and a non-conventional way of financing a property that requires a very specific analysis based on the parties' abilities and needs to enter into the transaction. Therefore it must be analyzed on a one-on-one personal and property needs basis. There is no preset formula for reaching the final outcome. You must consult with a creative financing expert who may be able to identify and present you with the options and/or opportunities to help you accomplish your goal, whether this would be acquiring a property with no money down, or to sell your property under any possible creative financing option that better fits your needs.

Finally, let me tell you about our recent access to foreclosure and pre-foreclosure properties in Mexico,  whether it be Mexico's resort areas, such as Cancun, Playa del Carmen, Vallarta, Los Cabos, etc., or anywhere in the country of Mexico.

We are now working with a couple of banks that are trying to unload their foreclosed and pre-foreclosed properties inventory.

We are promoting pre-foreclosed deals such as a 1.2 million USD property in Isla Dorada. Owner owes approx. $750,000 US. We may be able to negotiate a 10–20% discount from the bank on the mortgage. The seller may be willing to take a loss and settle for a small cash amount. Therefore you may acquire this property at more than a 41% value discount.

This is just another way of using creative financing to obtain a good deal in the real estate industry.

Purchasing a home with no money down is possible. Selling your home in a buyer's market and/or tight economy is possible. We can help you accomplish both.

So, if you are interested in using creative financing in your real estate transactions, contact us.

Our experience and expertise in both the real estate and mortgage markets in the USA and Mexico, for the past 24+ years, give us the basis to provide you with valuable expertise in the selling or acquisition of your home under creative financing terms and conditions.

You may contact us at www.mexicorealtysolutions.com; www.mexicomlsnetwork.com; or send us an e-mail to moneylendingbus@hotmail.com.

And Good Luck, Buena Suerte, Bonne Chance in your real estate investment ventures.