What is Creative Real Estate Investing?

22 Feb What is Creative Real Estate Investing?

Creative real estate investing broadly describes techniques to profit in real estate other than the traditional way of buying a property using cash or a purchase money mortgage.

Creative real estate investing includes:

• Subject-to transactions. An investor takes ownership of the property but does not pay off the seller’s mortgage loan, instead taking over the payments for a period of time. The investor can sell the property or conduct a cash-out refinance to pay off the seller’s loan. Check out our blog on subject-to transactions.
• Lease-purchase / lease with option to buy / rent-to-own. An investor doesn’t yet buy the property but takes control of it by signing a lease with the owner. Typically a portion of the rent payments count toward the purchase price, which is usually agreed upon in advance. It’s a low-risk form of obtaining owner financing. The investor could even engage in a lease purchase wrap, in which they enter into a lease purchase agreement with a tenant-buyer, typically collecting a higher monthly rent, a higher deposit, and a higher sale price.
• Wholesaling. An investor puts a property under contract to buy but has no intention of actually buying it. They find another party (typically an investor who can buy in cash) to take over the contract. The wholesaler collects an assignment fee for transferring their rights to the contract. It’s possible for a wholesaler to make a profit without spending any money (other than their time and travel to find and negotiate the deal). Many aspiring investors who have little money try their hand at wholesaling.
• Owner financing. There are several types of owner financing. A common transaction is one in which the seller deeds the property to the investor and simultaneously files a mortgage and note against the property. Instead of the investor using a bank to borrow the funds, the seller becomes the bank and collects the interest. This is a way for the seller to continue making money on the property even though they no longer own it.
• Installment contract / land contract. In this type of owner financing, the seller will only grant the deed to the investor after the remaining balance is paid off. The investor takes control of the property. The investor can improve the property and lease it or sell it. If the investor rents the property to someone, they could conduct a cash-out refinance and pay off the seller.
• Private lender. There are many people who have cash and want to invest it for the stable return that real estate offers. An investor can borrow money from a private party to buy and even renovate a property. The private lender may protect themselves with a mortgage and note, or they may become a silent partner on the deal.
• Trade or barter. An investor who owns a property could trade their property for one offered by a seller. Perhaps the investor owns a nice house and the seller owns a strip mall. If the numbers work, they could swap properties. The exchange could include other items, such as a car or percentage ownership in a business.
• Sale and leaseback. An investor buys a property from a seller using the property, and the seller leases back the property so the investor has immediate cash flow. The seller receives money right away and continues to enjoy use of the property. The investor does not have to deal with vacancy.
• Assumption of the mortgage. A seller and the investor apply to the seller’s mortgage lender for an assumption. If approved, the investor takes over the loan and ownership of the property. Imagine if the seller had a 3.5% mortgage yet the best interest rate the investor could obtain is 7.5%. It makes financial sense for the investor to assume the loan if the lender will allow it.
• Straw party transaction. In a straw party transaction, a straw man (a.k.a. nominee or agent) holds naked title for the benefit of a principal (a.k.a. beneficial owner). Let’s say a well-known developer seeks to buy four contiguous parcels from four different owners. The developer doesn’t want the four owners to know that the same buyer is going after each parcel, otherwise one or more of the owners may hold out for an exorbitant sum. Therefore, the developer has a straw party attempt to buy each parcel, perhaps even using a different party for each one. That way none of the sellers believes that the same person is trying to buy all the parcels. A straw party could be more simply used in a case where an investor needs financing and has a straw party obtain a loan and take title. You do have to be careful not to commit mortgage fraud, so a straw party can only be used in certain circumstances. Read this article for more on straw party transactions.
• Buying the entity that owns the real estate. If a property is owned in an entity like a Limited Liability Company (LLC), then an alternative to buying the property is actually buying the LLC. This is not always wise, because the investor would inherit any skeletons in the LLC’s closet such as a pending lawsuit. Some investors may buy the entity due to availability of certain financing or because they want to avoid paying realty transfer tax.
• Hard money. Hard money is a lot like private money, except in many cases hard money comes from institutions. Hard money typically comes with a higher interest rate, higher points and fees, and a short period to pay it off. However, many hard money lenders require less documentation and may not care as much about credit history or the property’s condition.

There are even other creative real estate techniques. Putting together creative real estate deals can be fun. Creative financing helps many investors use fewer resources to acquire more properties. That being said, sometimes investors can overcomplicate a transaction. Some creative deals involve a lot of risk that could’ve been eliminated with a boring, traditional purchase using a standard purchase money mortgage.

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Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai made colossal mistakes in investing (and learned some things along the way).  Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.