There are times when conventional financing is not possible or is not as desirable for a transaction. Here are some reasons for both a Buyer or Seller to consider “Creative Financing” for closing a transaction.
POSSIBLE REASONS FOR USING CREATING FINANCING
- EXPECTING MONEY OR ARE ABLE TO REFINANCE SHORTLY AFTER PURCHASE – A buyer may have a bonus on the way from work, or possibly a settlement, or may be expecting help from family down the road. They may also be able to refinance the property within a reasonable time acceptable for all involved to pay off the creative financing. If the funds are certain through any of the above sources, a seller carry or investor 2nd may be a viable option. It is better not to consider such financing if the exit strategy is not certain.
- NOT ENOUGH DOWN PAYMENT – Some lenders allow seller carrybacks to create a safer loan to value (LTV) for the investor. Not all lenders and banks accept such transactions, so best to be approved by a lender for such a transaction before looking or writing an offer. As we work with private lenders, we may be able to help such buyers, if approved by our investors.
- DON’T WANT LOAN TO AFFECT CREDIT – Some investors purchase property with private investors, as most do not report credit agencies. There are many advantages created by using private investors and seller financing, if there is a strong exit strategy for paying off the loan. You will not want to consider this option without long term seller financing, or a strong exit strategy.
- BUYER HAS POOR CREDIT – Whether from a recession, business venture that didn’t work out, health reasons, or family a problem, credit issues can arise in our lives. Sometimes, when there are credit problems, sellers and private lenders work with buyers with potential for paying back loans. In these situations the investor or seller may want a larger down payment to protect themselves. Some parties find it easier to lend to people who are doing well after a recent bankruptcy, as they usually can’t file again for 7-10 years.
- LEGAL REASONS – Most lenders, whether private lender or seller carry back will not loan when there are legal reasons, without a reasonable explanation, such a recent bankruptcy.
- PROPERTY REASONS – The property may not qualify for conventional financing, or is type of property with low or no interest from lenders. Some reasons properties are difficult to finance are, possibly a condo within a association with a low owner occupancy, a commercial property where there are high vacancy rates, a property that is in a high risk zone, etc. Some areas, regardless of price range, can be difficult to finance. Some of the most expensive homes in the world, though not insurable or financeable, sell because buyers can afford to pay cash or sellers are willing to carry.
- TAX REASONS – Since real estate is considered to be the most viable hedge against inflation, some sellers chose to sell through installment sale for tax purposes. One of the benefits is that rather than paying a lump sum, they only pay taxes on the funds as they received. Either for tax shelter, or in times of uncertainty, some sellers feel safer with their investment in a property they are familiar with, rather than in a bank or the stock market.