1) Hard Money Loan (private investors) - "hey, I don't have money, let me use yours"
Let's say you want to buy a home for $500,000 and the bank will give you a loan for 90%. So now you have a down payment of $50,000 (the other 10%). You can get a private money loan (as a junior loan, or second mortgage) that covers the $50,000 so that no money comes out of your pocket. How do you do this? You can talk to family and friends and offer them a higher percentage rate than they could make in other investments, or you can find businesses that specialize in giving out these loans. There are person-to-person loan businesses that are safe and secure, however, the interest rates may be pretty high. Once your investors see that you pay back your loan you begin to build a relationship and in the future you may be able to finance an entire property with private money.
This method is great if you are planning to buy, fix up, and sell (i.e. "flip a house").
WARNING: if you have 100% of your property financed then you will have very large monthly payments. Make sure to meet with a financial accountant pursuing this option.
2) Subject-to and Seller Financing - "I take your house, you keep the risk and mortgage"
A "subject to" loan is also called "seller financing or owner financing". In this method you use the seller's previous mortgage instead of looking for a new loan. When you buy the property from the seller he/she gives you ownership of the home (the deed), but still holds the original mortgage on the house. The mortgage is the debt loan that you pay off, and the deed shows who holds ownership -it doesn't have to be the same person. You pay the seller monthly payments and the seller pays off the original mortgage. This is risky for the seller because he/she is still responsible for the mortgage and if the buyer stops paying then the house can foreclose on the seller's credit record.
This method is great in times of high interest rates when the seller has locked in a lower rate, but it is also great in buyer markets like the one we are in now. Sellers are trying to get rid of homes but can't sell! If you have some creativity you can negotiate taking over the original mortgage from the seller. This way you don't need any money for a down payment and are able to get a loan without involving the bank.
BE CAREFUL: most loans have an alienation clause that states, "when ownership is transferred the loan is called" - i.e. you have to pay back the entire amount of the loan if ownership of the property changes. Most of the time banks will look past this clause, especially in this type of market because they have too many foreclosures to deal with, but it is something to keep in mind when using this method. ALSO, make sure you get a lawyer to look over the contract because the owner does not have to abide by the same loan requirements that banks do.
3) Lease-Option-to-Buy - "Maybe I wanna buy it, maybe I don't... I'm in charge"
This is my favorite. This is where you write a contract with the owner that states you will be renting the property from the owner for a certain period of time, but there is a clause that allows you to buy the property, whenever you want, for a specific price, anytime before the stated expiration time. For example: Tom will rent the property from Joe for $1,000 for one year. Tom has the option to buy the property for $500,000 anytime before the lease ends. This is a fantastic method to use when the market is on the rise because you lock in a price and choose whether or not you want to buy the property. The price may rise to $550,000 in nine months and you could buy it and sell it right away and make $50,000. Good job player!
Kyle Nau
Born: La Jolla, CA
Resides: San Diego, CA
Office Manager of:
- Nau Builders, Inc: specializing in custom home and multi-family development in San Diego.
Owner of:
- Break the Ceiling Consulting: start-up and small-business management consulting in San Diego.
- Nau Real Estate: real estate brokerage specializing in investments for young adults.
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