The First Step You Should Take To Get A Creative Real Estate Deal Done

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WHAT IS THE FIRST STEP YOU SHOULD TAKE TO GET A CREATIVE REAL ESTATE DEAL DONE?

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Let’s define what a creative deal is.

There are all kinds of ways to get deals done “creatively”, but nearly 100% of the time when you hear the term “creative financing”, what we’re talking about are terms; what are the terms of the deal and how can we structure the terms so that we can build and offer and execute on those terms without creating tons of risk and expense, but also creating a win for everyone involved in the deal?

You have different forms of terms, but many of them involve some form of seller-financing. Full or partial seller carrybacks where your seller is financing the deal for you. They may fully finance your deal or finance a portion of your deal. In either case, many times your seller will want some skin in the game in the form of a down payment, right?

Do you think it matters to a seller where those funds come from?

It matters to a bank, but 99% of the time, a seller could care less where down payment money comes from. So do you think you could get creative with how you source the funds you need for that down payment?

Of course you can!

One of the most basic forms of down payment funding comes from private lenders. It’s an excellent alternative for people who have individual retirement accounts (IRAs) or 401ks that would like to either capture larger ROIs on their money or who are looking to get into real estate; or maybe both.

This is a perfect model for these folks because it allows them to get into real estate with relatively smaller amounts of cash and they are usually going to see greater returns through real estate vs. paper stocks or whatever they may be invested in at the moment. Then you have one of my favorite ways of getting funds for down payments... equity sharing.

Debt financing would be a loan where you have a promissory note and a mortgage. With equity financing, you’re giving your lender a larger piece of the pie and much more protection in the deal because your lender actually OWNS part of the asset. Offering equity in a deal in exchange for down payment money is usually going to cost you more in the long run because you are giving up a portion of ownership in the deal. So let’s say that you offer 25% equity ownership in a deal in exchange for, say $25,000 in down payment money from your lender. Your lender is going to share in any and all profits (Net cashflow, Net profit on the sale or refi).

I love this model because it really incentivizes lenders because their investment is back by NOT just the asset, but actual ownership in the asset. We also incentivize them with the guarantee that once they fund one of our deals, we’ll never ask them for another cash infusion, so it’s our job to make sure that our exit is sound and rock-solid.

The examples I just gave only scratch the surface of what is possible if we just start thinking and taking creative approaches to getting deals done. I have built my entire business over the past 7-8 years around these concepts.

So, what does creative financing really mean? The answer to that question is probably better addressed by explaining what it is not.

It is NOT going to a bank, applying for a loan, qualifying for that loan, providing years and years of personal financial information, collateralizing other assets, risking your personal credit history, giving a blood sample, urine and stool sample. You have to go through this process on every single property you want to buy.

There are loan products out there like DSCR (debt service coverage ratio) loans that will lend, NOT based upon your particular financial situation, but upon the income that is generated from the asset. A lot of these DSCR products cover a wide range of asset classes from SFR’s to Apartment complexes and other commercial properties. There are even DSCR products for buying businesses. But guess what? 99% of these loan products are still based off of your personal credit history AND you still have to go through the rigmarole of applying and qualifying for these loans for every single deal you do. There are tons of people who are willing to go through this process but there is one major hurdle…

Money loves speed.

Most of you know that in this business, we have to move fast. This is a very competitive business. If you have to apply for a loan for every deal, well you’re just going to miss out on A LOT of good deals.

Now, you could use hard money or transactional funding to take these deals down. I recommend that this is the ONLY scenario you use hard money for, but it’s going to cost you. It’s going to be an expense that, many times, is totally unnecessary IF you can wrap your mind around creative financing concepts.

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