Financing (Part 8) - How to Think Like a Creative Financier

Today, I’m continuing my multipart series on how to finance properties, but I want to take a bit of a different approach in this post. Let's take a step away from specific technique for a moment (in my next blog post, you'll clearly see why), and look at the backdrop of what makes creative financing possible.

During the heyday of low interest, everyone-qualifies for a mortgage conventional financing, nearly anyone who had a desire to buy a second home or investment could. But, times are different now, and the sub-prime mortgage game is over, probably dead and buried.

As I noted in the last postings, it’s difficult for even the best-qualified investor to get decent investor financing for a purchase right now, and when they can, they probably don't want it because of the terms. Just recently, I came across a supposedly "liberal" lender...a well known outfit in the forclosure financing game...who wanted 6 months of reserve for each owned property in order to finance through them!

And, sooner or later, no matter how qualified you are, you will run into a ceiling on what you can borrow conventionally. So, if you want to continue investing past your own qualification ceiling, you need to find additional ways than just banks and mortgages companies to finance your deal.

So, the successful national (or local) investor needs a repertoire of tools at their disposal for the financing of property purchases. These are the kinds of tools I've been discussing, and will continue to provide to you.

So, with this different approach for this blog entry, I want to begin today by introducing you to two concepts that I think are absolutely critical to your understanding of creative financing…and to investing in general.

Creative Thinking
Part of the process of financing properties is creative thinking – thinking outside of the box in terms of how you craft a deal.

The Don’t Wanter
If you’ve been around real estate investing for any time, you’ve no doubt heard about dealing with motivated sellers. In fact, the bottom line on buying a good investment is generally not in the property, but in the situation.

During the go-go buying frenzy in which people were literally tripping over each other to buy something, it was not uncommon for a property to sell within hours…no sign, no MLS listing, and for far more than it was worth. In fact, I was just reading in Kiplingers today that speculative buying in Bakersfield, CA caused the average price of a property to go from $99,000 in 2002 to over $280,000 in 2005. That, of course, was not sustainable, and you simply can’t win the investment game that way. And, as we know, many, many wanna-be investors have gone belly up after chasing those kinds of deals.

Instead, you need to listen to the age-old sage of investment buying, which is to make your money going into the deal. Or, to put it another way, an investor buys with the expectation that what they are buying will go up in value.

That kind of buying right inevitably involves working with a seller who is in need of selling, and helping them to solve their property-related problems.

Now, this is where I depart from the myriad of investors, who in my opinion, are more of the vulture mindset. So often investors are labeled disparingely because they have no qualms in taking advantage of people who are down on their luck. I’d go so far to say that vulture mentality among investors is more the norm than the exception…and quite frankly I don’t want listeners and students of mine going down that path.

But, you can build yourself a profit while helping other people --- it’s the age-old win-win. In fact, I believe that you will find your highest and best long-term profit within the solution to the problem that the seller needs.

Case in Point
A seller has moved out of state and is saddled with 2 house payments. It’s been 5 months with the property on the market, and no bites. The seller is facing another $950 house payment, their savings are depleted, and they don’t know what to do. As an investor, perhaps the best choice you could offer them is to rent their property for enough to cover their mortgage (combined with absolutely no rent hassles) as long as they allow you to sublet to your own tenant.

If this was a newer property, it’s a far better solution than trying to discount the price --- because they probably have no equity, and discounting is not a viable option. Most people could not sell at a loss and write a check to sell their property, particularly if a 6 or 7% real estate commission was involved. Under a rent/sublet arrangement, you get the property under immediate control, can make some monthly cash flow - - and they are immediately relieved of the burden of the house payments. Combine this with an option to buy (which I'll discuss in a later blog post) and you could have the benefit of control and cash-flow now and equity later. It's truly win-win!