Discovering alternative real estate financing will give your business more opportunities than you could imagine. The best investors have utilized creative real estate financing for years, and – as a result – have realized success on every level. Traditional lender financing works well for specific borrowers on specific properties, but it doesn’t cover all types of borrowers. With increased lender guidelines, it has become more difficult, time consuming, and – in some cases – expensive to get a bank loan.
The alternative is to seek out private or hard money loans. These are short term loans that are secured by an individual or group of individuals made for investors. Despite increased interest rates and fees, access to alternative real estate financing can often times be the preferred method for acquiring property.
Creative Real Estate Financing: What Are Your Options?
All things equal between lender financing and private money, lender financing usually comes out on top. Qualifying for a loan is not nearly as easy as it once was, even for first-time homebuyers. In today’s lending environment, you need around a 700 credit score with ample down payment and cash reserves. You also need to be able to document your income while having a low level of debt. Many investors have trouble documenting all of the income they make. Since a stated income loan is almost impossible to find, you will not get approved. Private money lenders do not have the strict approval requirements that regular banks do. If you can’t get approved for a traditional loan, private money may be your only creative real estate financing option. Fortunately there are more private money lenders around today than ever before.
Alternative Financing Options
Even if qualifying for alternative real estate financing is not a concern for first-time homebuyers, there is still plenty of red tape associated with your average mortgage. On average, it will take anywhere from 30 to 60 days to close even a basic deal. This does not factor in if there are problems with the appraisal, title or issues with the loan documentation. With a typical private money loan, you can get your funds and close in as little as three days. The ability to close this quickly allows you to get many more deals accepted. Most sellers do not feel comfortable waiting months on a lender financed deal that may not end up closing. They will often take a little less on a cash offer that can close in a much shorter amount of time. Having the ability to close this quickly is a real asset that will lead to more deals. Instead of having your money tied up for months, you can turn more deals over throughout the course of the year. Being able to close quickly gives you this ability.
With traditional real estate financing, you need to provide the lender with multiple pieces of documentation; something they should teach you in real estate investing 101. Everything from pay stubs to two months of bank statements are required. This in itself is not necessarily a deal breaker, but collecting these things takes time. At that point, privacy becomes an issue as well. Every time your credit is pulled, your credit score runs the risk of dropping. Additionally, lenders require you to close any loans in your own name. This means that anyone can pick up the newspaper and see who bought the property on the transaction page. You may have issues in your life where you do not want your real estate business made public. You may be having accounting troubles and not want to close in your name. You could be in the middle of a divorce or a dispute with a business partner. Private money gives you the ability to conduct real estate business without making it public knowledge. For some, this is worth the increased rates and fees.
Other Creative Real Estate Financing Options
Most first-time homebuyer loans require anywhere from a 20 to 30 percent down payment. This is a good chunk of capital to have out there on one deal. With private money, otherwise known as alternative real estate financing, you may not need to come up with such a sizable down payment. There will still be some collateral needed, but this can come from other sources, included other real estate assets. Not having to outlay a large amount of capital allows you to use more of your own funds on other areas of your business. Additionally, any funds you come up with will not be subject to the same seasoning requirements that lenders ask for. On a bank financed loan, in addition to the down payment you may also need to come up with six months of reserves. This money has to be in an existing account for at least sixty days, and in some cases as long as six months. Simply having the funds available is not enough. It needs to be in an account for that time.
There is no question that lenders have lower interest rates and reduced loan fees. But like anything else you do in your real estate business, you need to measure the risk versus the reward. There will be times that using creative real estate financing gives you the opportunity to close a deal or two that you may not have been able to with lender financing. If you do this just a few times a year, it will more than make up for it. Alternative real estate financing should not be used for every deal, but for the right ones it makes all the sense in the world.