As lending criteria continues to tighten, obtaining financing for your real estate deals is becoming an ever- growing challenge. Add to that less than stellar credit and it can seem almost impossible. Savvy investors, however, know how to buy real estate with 20% or less down even if their credit is completely tanked.
The first thing that you need to realize is that traditional institutional lending is probably completely out of the question. That’s OK. In fact, I regularly advise my clients to look for alternative methods for financing deals that offer the speed, efficiency, and terms needed to be successful.
The second thing to realize is that if it isn’t a profitable deal don’t do it regardless of the financing. I have seen many investors buy a deal because they can rather than because it is truly a profitable deal. Take a moment to analyze the deal and make sure the numbers truly make sense.
Let’s begin the discussion with the types of financing that can be created right when negotiating the deal. Before you even make a purchase price offer to the seller, ascertain the right price to pay [I call this the Maximum Profitable Offer or MPO]. Compare this number their current loan(s) payoff on the property to determine their equity position. If it appears that they will get a substantial amount at closing in cash, you should immediately think about possible seller financing.
Start by asking in a conversational style what plans they have for the cash they’ll receive at closing. Often they’ll have a litany of bills that they want to pay off that total some small amount of the total available equity. Then ask what their plans are for the balance. Many sellers have no other plans and will simply place the money in a savings account or CD. This is your opportunity to set up some financing.
Let them know that you buy houses many different ways. The most costly method is all cash; however you want to be able to get them the most for their property which is what they want to, right? [Be sure to ask that question] Continue by saying something like:
“Would this work for you? How about if I provide you with $XX down at closing (the amount needed to pay their list of bills) and the balance in one lump sum 1 year from closing? That way I’ll be able to offer you the highest price for your home. Will that work?”
You’ll discover many sellers willing you accept, and when they do, you have already financed a portion of the purchase. Now let’s take care of the rest of the financing.
One of my favorite strategies is buying home subject to the existing mortgage. With this strategy title to the property is transferred to you the buyer, but the loan stays in the original borrower’s name. Using subject to financing you take over the existing financing without having to obtain a new loan.
You’re probably thinking: “Would anyone in their right mind accept this offer?” The answer is ABSOLUTELY! Remember that many of the sellers with whom you are dealing are extremely motivated to move on with their lives. This strategy allows them to get out from under the mortgage payments and to start over.
There are some disclosures that need to be made to the seller and you need to fully understand how to execute this strategy before attempting on your own, but it is rather simple. Just be sure to be trained by some one reputable first.
Finally, the absolute best way to finance properties is with private lenders. These are every day individuals who have their money in low yield investments who are willing to make real estate loans in exchange for the much higher interest rate with security.
These lenders do not advertise since they don’t even know about real estate loans. It is your discussion with them that demonstrates the opportunity available to them. The best way to find private lenders is to talk about it with everyone you meet. The best source of funds is in IRAs. Most people who have an IRA do not realize that the IRS provides them the opportunity to self-direct their funds…in other words, they are able to make real estate loans as long as they have a self-directed IRA which can easily be set up by rolling over their current IRA to a company that provides self-directed IRAs like Equity Trust out of Ohio.
Instead of earning 1-2% on their IRA, they’ll be earning 6-8% with your real estate. Isn’t an 8% simple interest loan with no bank qualifying and quick close a huge asset to you? Build up your private lender portfolio and you’ll be able to purchase more real estate than you ever thought possible.
Use all of these techniques together and create even more leverage. You’ll be able to buy real estate with nothing down, regardless of your credit, and you’ll even be able to finance your project costs. Don’t allow institutional lenders to dictate your purchase ability.