When we talk seller-financing, or “creative” financing, we are really talking about a very large number of ways to structure the deal. Each kind of deal is structured differently, has different documents, and has different risks involved. That’s why the first key to seller-financing is understanding all the different options and deciding which is the best route.
There are 4 major types of deal structures (and even these can be broken down). I categorize seller-financing the way I do based on a) who owns the property, b) what documents are needed and c) the risks involved.
Here are the 4 main seller-financing deal structures:
- Seller Partnering
- Traditional Seller-Financing, or Note & Deed Seller-Financing
- Lease Options
- Contract for Deed
One common element among all types of structures is the long-term arrangement with the seller of the property. In a typical purchase and sale, the seller sells the house outright at a closing and is never heard from again. But in these deals, you will have some “connection” with the seller that extends beyond the contract or closing—possible for decades. You need to understand that all of these deals are long-term partnerships with the seller. Understanding partnering in real estate is crucial.
The first structure, Seller Partnering, is any deal where the investor “partners” with the seller no differently than a partnership with another investor. This can take on any arrangement (other than the other 3). Normally, this will include a joint venture agreement with the seller. Here’s an example:
Investor signs a joint venture agreement with the owner of the house whereby the investor brings cash to spruce up the property and to increase its market value. The venture stipulates that the net gain in market value (after recoupment of the cash investment) will be split in some fashion between them.
The investor never actually buys the property so there are no closing costs. The underlying mortgage stays in place (without any due on sale issues!) so there is no need for hard money hold costs. The seller can even continue making the mortgage payment! By greatly reducing the transaction costs, this can turn an OK deal into a better deal. And if the investor wants, she can secure her funds with a note and deed on the property for extra security.
This way to involve the seller in a flip project can take just about any form you can create. That’s the great part about it. You can be flexible to meet the seller’s needs. And it provides yet another tool in your investing toolbelt that might lock down a deal.
In Parts 2 – 4 of this first key to seller-financing, I will cover the next three methods. Then I will cover the next two keys!
For more information, please see my website link below!
Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180