Selling Properties with Creative Financing Strategies
Selling Properties with Creative Financing Strategies
Choosing properties that will produce positive cash flow has become a constant battle for investors. Before the recession and banking crisis, investors frequently purchased run down houses and foreclosure properties for use in house flipping. Today, this practice is almost nonexistent.
Today, investors focus on properties that can produce cash flow through rental income or by offering seller carry back financing. While foreclosures have created havoc for banks, they have left a void in the market where investors can benefit.
When banks repossess houses, property owners aren't able to qualify for another home loan for at least a few years. Foreclosed homeowners require living quarters, so investors who offer rental homes can provide housing along with opportunity to buy a house while engaged in credit repair.
Offering owner will carry financing is a good option for obtaining long term tenants and generating income from investment properties. Seller financing can encompass lease purchase option agreements, Subject to, take over payments, and seller carry back trust deeds.
Lease option agreements let buyers live in the rental home while working toward the eventual purchase. Tenants pay monthly rent and a portion is contributed toward the purchase price. It is important to obtain legal counsel before offering lease options to ensure compliance with state laws.
In most situations, buyers pay 'options' money to property owners to secure the home. Owners are prohibited from listing the property for sale once under contract. Lease options can be structured to suit needs of all parties involved as long as terms comply with state law.
Lease option agreements usually last for a year or two while buyers work toward restoring credit to qualify for a bank loan. It is crucial for buyers to remit payments on time and in full to provide evidence to lenders that they are financial capable of paying mortgage payments.
Buyers are usually required to provide sufficient down payment to meet lenders terms, along with closing costs. Some states require buyers to purchase the home at the end of the lease option or forfeit all vested funds. Always obtain legal counsel before entering into lease option contracts.
Seller carry back trust deeds require property owners to act as mortgage financier for all or part of the purchase price. Most sellers do not offer full financing and instead require buyers to take out a loan for the bulk of the purchase price. A common practice is carrying back 10- to 30-percent of the financing.
Investors offering partial financing become the second lienholder and the bank carries the first mortgage. If sellers carry a mortgage against the property and buyers default on their bank loan, the property could be at risk for foreclosure. Therefore, careful consideration must be given to this financing strategy.
Subject to contracts assign property rights to buyers. As the name implies, property ownership is 'subject to' buyers fulfilling contract terms. Buyers take over loan payments until they are able to obtain bank financing in their own name.
Take over payments is similar to Subject to; however this strategy can lead to complications. The only way to take over loan payments without risk is when assumable mortgages are in place. This type of loan was common prior to 1990, but rarely used today. Most assumable loans were provided through the FHA and VA.
The majority of mortgages originating after 1990 include 'payable on sale' clauses which require homeowners to pay off loan balances when properties are sold or transferred. While some people elect to take over payments in lieu of the fact this practice is unacceptable, doing so can have harsh consequences. Use extreme caution when taking over payments, as there is potential to lose all vested funds.
Real estate investors who engage in creative financing strategies when selling properties should always have a lawyer execute contracts or lease options to ensure compliance with state laws and offer protection to all parties involved.
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