On this podcast episode, I talk about creative finance methods that are working in today’s market and how you can employ these methods to make you a better real estate investor.
The biggest issue in today’s market is that there is a gap between sellers’ expectations and what they think their house is worth, relative to what a cash investor is willing to pay.
The reason for this is that prices went up so much for so long that sellers became accustomed to getting close to market value (or close to the Zillow estimate).
When there is a gap between what a seller is willing to accept and what the cash investor is willing to pay, then often turning to creative financing methods will help bridge that gap.
One strategy that helps sellers get closer to retail is the Novations Strategy, which we discussed with our guest Eric Brewer in a previous podcast episode. This works well if the seller wants a price that is close to retail and will not come down to the price you are willing to pay for a cash offer.
Another strategy that you want to be able to employ is buying “subject to the seller’s existing mortgage” which essentially means taking over their mortgage payments. To do this right, I suggest you do it with an attorney and have the attorney handle the closing for you.
Another strategy that is very useful is seller financing where the seller is financing your mortgage. This works well if the seller is older and is okay with receiving his payments over time. This allows you to give the seller his price as long as you get good terms (a low interest rate and a long term mortgage).
The key thing to understand is the position of the homeowner relative to their equity. Do they have positive equity, no equity, or negative equity?
If the seller’s equity is close to what they owe the bank, then their goal is to simply walk away from the house and pay off the mortgage. In a situation like this, it would benefit you to know how much the mortgage payment is, whether that payment includes taxes and insurance, and how long is left on that mortgage. This strategy is especially useful if the property could rent for a lot more than the mortgage payment.
If the seller is negative equity, then the only thing you can do is a short sale. I suggest you hire a short sale negotiator and pay them a fee instead of trying to learn how to put a short sale package together yourself.
If the seller has a lot of equity, or if they own the house free and clear, then you should be looking to see if they would be willing to do seller financing where the seller will finance the mortgage for you.
You can do this by offering to pay them a fixed amount for a certain number of months, or by simply creating a fixed mortgage with an amortization schedule. The easiest way to do this is by using an online mortgage calculator to calculate the payment schedule.
With so many leads currently being foreclosures and pre-foreclosures, it’s a good idea for you to make sure that you understand how foreclosures work in your State.
Many homeowners in foreclosure are emotionally “done” with the property and simply want to “walk away” (if they can). As a real estate investor, you need to figure out if there is a way for you to buy their property, pay off the bank and let them walk away from the emotional headache that comes with being in foreclosure.
You must know how to use creative finance methods when you are negotiating with sellers. You never know if a seller will be negative equity, breakeven equity, in foreclosure or whether they own a property free and clear. As an investor, you should have a solution for every one of these situations.
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