Four Creative Financing Options For Real Estate Buyers
August 13, 2018
Financing a home is one of the most critical factors for buyers looking to purchase real estate. In fact, for individuals with bad credit, financing can be a big issue. However, bad credit does not have to prevent you from purchasing real estate.
1. Seller or Owner Financing
In 2017, there were 89,779 owner-financed notes, which totaled $17.3 billion dollars according to Note Investor. Seller financing is a loan that is provided from the current homeowner who is selling their property to the buyer. It eliminates the need to obtain financing through a lending institution.
Homeowners who have a difficult time selling their home are most likely to provide seller financing. They would then offer to sell the home to buyer, and have the buyer sign a promissory note. This note includes a few essential terms such as what will happen in case of a default, the applicable interest rate, and the repayment schedule of the loan.
2. Lease Option
A lease option is where the buyer pays the seller money in order to have the right to purchase the property at a later date. The amount payable can be as little as $1.
The parties can agree on a price at the time of the lease option agreement or they can agree that the buyer will pay the fair market value of the property when the buyer is prepared to purchase the property.
This option prevents the seller from selling the property to a third party. However, if the buyer does not purchase the property by the end of the specified time, then the seller is able to sell the property and the buyer has no obligation to purchase.
3. Short Sales
If a homeowner is experiencing financial difficulties or if the home is owned by a lending institution, then the bank that owns the home may allow the home to be sold for less than what the actually worth. This would be done through a short sale.
The value of the home can be purchased at a discount of 20% or even more in some cases. In order to effectuate a short sale, the buyer must first negotiate with the homeowner. After agreeing upon a price, the buyer must then obtain approval from the bank. It’s not possible to purchase a home through short sale without bank approval.
A foreclosure action is when the borrower stops making payments on the mortgage. Once a certain number of payments are missed, the lender institutes a foreclosure proceeding, and the lender seizes the home. This proceeding is initiated by the bank, rather than by the buyer (in a short sale). Foreclosures take less time to complete than a short sale.
Foreclosed properties are purchased through an auction. On average, 60% of foreclosed homes through Wells Fargo are purchased with financing. A total of 861,664 homes were foreclosed during the year of 2008, according to ATTOM Data Solutions. Additionally, U.S. foreclosures dropped to a 12-year low in 2017.
Evidenced by the statistics, foreclosure are much more common when the housing market collapses and real estate prices drop. It can be quite difficult to find a foreclosure in a thriving real estate housing market.