Real Estate Investing: Creative Financing 101
This episode is going to be about creative financing everyone’s favorite subject, a good friend of mine Pace Morby is made subject to such a popular subject within real estate investing that I have to keep up with the Joneses and make sure you guys understand how to start getting some of these creative deals done. I even had my team today contract a subject to deal and actually sold it already today, where the homeowner is leaving his mortgage in place. He is done with the property he is over it, he basically just wants to avoid foreclosure. And we’re helping him with that. And we’ve already sold it to a user an end user, an investor who’s going to keep it as a rental until we actually wholesaled a subject to property now, Funny enough, my buddy pace would probably yell at me and say, Justin, why aren’t you keeping it? And quite frankly, because it’s in Kansas, and I don’t know Kansas very well. And I don’t necessarily want to random rental in Kansas. But what I want to talk about is some of the basics of creative financing here on this episode, things that you can try to just gather some information in first basic of creative financing is there’s no right or wrong answer. That’s why we call it creative financing.
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Now, like I mentioned subject to which as the find is you were buying a home subject to the existing loan that stays in place in the original homeowners name, you’re not inheriting the loan, you’re not assuming the loan, you’re simply leaving it in place and their original homeowners name stays on the loan, you then take deed to the property, and you now can pay the mortgage just like your original homeowner. And a lot of investors tend to keep them as good rentals and then rent it out, you know, subject to the existing loan. So the first part of creative financing is there’s just no right or wrong. Specifically, right? It is about you being creative enough to think of the ideas as my boy Matt terrio says it’s just a lack of ideas.
If you need to be creative enough to just put something together. So I’ll give you a good example of a deal that we did recently near the college, ASU. The homeowner basically had a $50,000 loan left on his mortgage, he bought his home for his daughter to go to college. Essentially, she’s graduated has moved on. He then put a renter in there after a couple years, I guess the renter left, and he’s kind of like what should I do here, he actually was called by us. Perfect timing. And essentially we had a conversation about what he wanted to do with his home. Now this person was not in dire straits. He was not going to lose his home to foreclosure. He could continue to pay his mortgage, he could continue to rent it out. But he thought, hey, if I could get a number that I like, I might be willing to sell well, his number was way more than a cash offer wholesale offer would be right it was um, I think like 300,000 for the property. And my cash offer I think was in the low twos. So not even close, right? But the home rented just like a normal long term rent At $3,000 a month. So the 1% rent ratio really worked there if I bought it for 300,000. But I knew the home needed some work and other things. And then the other thing that he brought to light is his daughter actually subletted, some of the rooms as a four bedroom home in Tempe, his daughter subletted, some of the rooms. And so he said, rent could get all the way up to 40 $500 a month, if you actually have a master lease with some sub lended rooms. And so that really intrigued me, I said, well, shoot, if I can get close to 40 $500 a month, I could pay way more than 300. So I said, Listen, let me, let me see if I can get to 300. But I would need something in return. And that is for you to be willing to be creative, I’ll give you the 300. But I need to structure it in a very creative way. And so what I did is we structured a subject to with a wrap, essentially. So his loan stayed in place, he also gave me another $250,000 loan on paper, right, he became the bank.
And we structured a mortgage payment, that was principal only, meaning the money that I paid him every month, which I think was just under 300. It was like, let’s call it 2500, if I remember correctly, that went to him. And whatever his mortgage payment was, which I forgot at this point, but I think it was something like he was paying five or $600 a month on his mortgage, maybe a little bit more, he would take from his 2500 and pay his own mortgage, and then he would pocket the rest. And it worked for everybody, he got a much higher price, and I would be willing to pay for the home wasn’t in very good condition. It wasn’t in the greatest Tempe area.And so he got the number he wanted, I got creativity. And ultimately, again, I would probably be yelled at by my buddy pace, but I wholesaled it off to someone who just wanted that rental and it made sense to them.
And sothe first rule of thumb is there’s no just right answer. This technically was a subject to but we did a rap, he created a loan on top of that, and we had one payment, and his bank got paid and he got paid out of that one payment. And so that’s the first thing I get questions all the time from my students, right all the time, my students are like, Well, how do I structure this? And what should I say to the seller? And the first questions you need to ask is, what does the seller want become a value to the seller figure out a way to be a solution to them. And sometimes more often than not, is getting them out of a really difficult situation they might be in right, the home might go to foreclosure, they might be done. A lot of times it’s that but sometimes they just want more money, well, I’m willing to pay them more money As long as they can be creative in a good buy box for me. And so that’s really, you know, a big thing about creative financing is there’s just no right way to do it. Now, the second point I’ve mentioned a couple times, creative financing is good for all exit strategies, you can wholesale it and just assign your contract to an end user, you can buy well you can buy it and rehab it like you can literally buy it with the creative financing terms and remodel it and sell it off top dollar that a lot of times helps because you don’t have to go get a hard money loan. You can also keep it in your rental portfolio. As I just mentioned, the two deals that I was giving as examples. There were great rentals, I was willing to pay more, because I knew the rent would cover not only just the existing mortgage, but then the the rap mortgage that the seller was going to give me. And so the exit strategies really open up here. And that allows you as a marketer and a salesperson, to talk to the homeowner and negotiate and create the value that is needed so you can get the deal.
I was talking to one of my students, and he really wants to start doing more of these. And I said it’s going to open up your ability to get deals done. And we talked about how like every offer he’s going in every deal he’s doing right now is just a normal cash type of offer. But if he is now starting to look at it and being creative, when he might offer to 25 and the seller, one 300. Now he can actually put a different lens on and kind of look at it in a way that basically is saying, okay, I could actually get there because it rents for 30 $500 a month. And as long as I can get that rent, then it will cover the mortgage etc.
And so this is going to help you guys get more deals as long as you structure it correctly. For those of you that are my students, I’m excited to announce I’m having a super secret guest Come on next week, which will be really cool. talking all about creative financing and the paperwork that goes along with it, which is kind of the second part to what most people want to know is what paperwork Do I need to use. And the reality is it just depends on what’s needed in the deal. So the first answer I’ll give you is most title agencies escrow
Officers are closing lawyers will tell you exactly what will be needed. First, you need a purchase and sale agreement at the end of the day that starts absolutely everything. You also may need an addendum, stating the terms that are creative. Don’t overthink this, it quite literally could be a Word document says addendum. And then you could list out the terms such as existing loan to remain in place 5% interest mortgage payments, 12 $100 a month, etc, etc, etc. new loan to be you know, $250,000 0%, interest pinchable payments only of 15 $100 all these terms, as I’m just kind of rattling some some off to you would go on the agenda. Or it could just be another Doc, another piece of paper in your purchase agreement. Right. And that will be stated now when it comes to subject twos and getting like power of attorney and authorization on the loan. those documents a lot of times are needed. But again, that kind of stuff comes to light once you start to go down the path. So yes, would you need a power of attorney Do you need authorization to work with the bank, you’ll need both of those as well. And that is specific to a subject to if you are lucky enough to be one of my students, I’m going to have a creative financing wizard. Come on. She’s actually a transactional coordinator that only focuses on Creative tough deals. So she is going to be speaking to my students. If you have interest in being a student go to the science flipping.com fill out a quick form there. And we can talk about what that looks like. So I’m excited to have that happen. But ultimately, there’s three things here a are number one, not a but number one, there is no wrong way to do a creative financing deal. It’s literally created for a reason structured however you want that provides value to the seller to this will open up your opportunities to get deals done, because it can be all for exit strategies. You can wholesale it, you can wholesale it, you can rehab it, and you can keep it as a rental and it gives you negotiating power when you structure something creative. And lastly will be the paperwork you start everything with a purchase and sale agreement with terms of the creative portion on an addendum that’s the starting point. That’s what you can start in open up escrow with Now again, as I mentioned, some other documents may be needed, such as a power of attorney and authorization form for the bank.
But go open up escrow and let the escrow officer or my secret guests tell you exactly what what paperwork is needed to get the deal done. Credit Financing is the way to go. I do more than a handful two or three handfuls every year where we’re doing either a rap or subject to an agreement for sale. So this will open up your opportunity to get more deals done. If you’re not watching this video right now and do not see these two stellar athletes and this awesome lighting that I put in my home office. Make sure to go to youtube.com forward slash Justin Colby, subscribe turn on notification, make sure to check out all six videos. I’ll see you on the next podcast. Peace