Real Estate Buying Selling Home
Creative real estate investing is a term used to describe non-traditional methods of buying and selling real estate. Typically, a buyer will secure financing from a lending institution and pay for the full amount of the purchase price with a combination of the borrowed funds and his own funds (or his "down payment").
One way to buy a home is to pay cash. But the typical American family is not in a position to do this, and thus must arrange to finance its home purchase. Most families can afford only a modest down payment and are forced to secure the remainder of the purchase price by mortgage from some lending institution. The larger the down payment, the smaller the total interest payment over the term of the mortgage. Buyers, however, should not use all of their savings for the down payment, thus depriving themselves of any reserve to fall back on if extraordinary expenses arise or income falls in the future.
Bird-Dogging
See also: Bird dog (person)"Bird dogs" get paid a referral fee for finding good deals for other investors. This is often where people begin their investing career as there is only time at stake. They are typically paid when the deal closes. Some birddogs will structure companies and partnership arrangements as they're frequently not real estate agents and may not be able to collect a "referral fee" for their services.
Seller finance or "subject to"
Seller financing can refer to one of two things:
- The seller can act as a bank and rather than receiving all or a portion of their equity at close, they can "lend" it to the buyer and receive a regular payment as agreed. They may receive no payments, interest only payments, principal only payments, or a combination. It could be an interest only loan, or an amortized loan. Additionally it could carry either a fixed rate interest payment or a variable rate. These will vary depending on the agreed upon terms of the contract between the buyer and the seller.
- The seller can allow the buyer to "take over" the loan that he or she has in place. This can be done in two ways. The first way is called an "assumption", wherein the lender formally allows the buyer to assume the loan. This entails approval of the buyer's credit, and often a modification of existing loan terms. The other method is called a "subject to" where the lender is not contacted, and the buyer purchases the property "subject to" the existing financing. This can be financially risky in many ways, since many loans have acceleration clauses which permit the lender to call the loan due if the property is transferred. However, more often than not the lender will not exercise the "due on sale clause" if the payments are being made on the underlying mortgage(s). In the rare event that a lender does call the loan due then an investor could quickly sell the property or pay off the loan using any one of the various financing options available, some of which are described below.
Options
Main article: Option (finance)An option is defined as the right to buy a property for a specified price (strike price) during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price. The buyer of the option hopes the value of the property will either go up or is already low. The seller receives a premium called "option consideration". The buyer may then either exercise the option by buying the property or sell the option to someone else to exercise (or sell). This is often done to obtain control over a property without much cash. Option premiums are typically non-refundable. The option represents an equitable interest in the property and may be recorded at the county recorders office.
Lease option
Main article: Lease-optionThis is made up of two parts: A lease, or rental agreement, and an option. They may be written together as one contract or as two. The Lease is simply a rental agreement between the owner and the potential lessee (tenant). Often these leases will be "triple net lease" leases (NNN) in which the lessee is responsible for paying for the taxes, insurance, maintenance, and upkeep of the property. The lease payment is typically 5-15% higher than rent might be for the same property. This type of lease can be structured so that the lessee can take the tax benefits as if he were the home owner.
Sandwich lease option
A sandwich lease is not an option at all.
A sandwich lease is a lease created by a tenant wishing to exit his/her unit as a tenant while not having a "exit option" written into their lease by the landlord.
To provide a mitigation option , one may find a replacement tenant for a unit. This tenant becomes the tenant of the exiting tenant and NOT a tenant of the current, legal landlord. The new lessor, creates whatever policies and rent and deposits he wishes with the new tenant. The new landlord should inform the tenant that their tenancy lasts only until.......
If the new tenant seeks maintenance or has any problems whatever with the unit, the "new tenant" must contact her landlord who will then contact the legal landlord for maintenance or repairs.
The new tenant makes all her payments to her temporary landlord who then makes her rent payment and everyone is kept legal and paid up.
When the "proper tenant's" lease is about to expire, the proper tenant submits her 30 day notice of intent to not renew the lease to the landlord--unless the lease is a fixed duration lease--which makes the notice unnecessary.
The 'proper tenant returns for the exit walk-through, and introduces the temporary tenant to the legal landlord and helps the sandwich leasee to become the new, sole tenant, of the unit.
The sandwich lease is ONLY used when the landlord's lease does not provide a pre-expiration date exit from the lease option.
Short sale or preforeclosure
When a property owner fails to make their mortgage payments for a number of months they are in default. The first step of the foreclosure process (which typically takes a number of months) that the lender will take is to file the notice of default. This is a public document that is recorded. The property owner will contract to sell the home conditioned upon the lender accepting a lesser amount than what is owed on the mortgage. Note that there are no similarities between a real estate short sale and selling a stock short.
In many jurisdictions, including the United States, the seller is responsible for taxes on the amount of the mortgage left unpaid after the sale as ordinary income.
The Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec 20, 2007, generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The original effective date was through 2009 but in October of 2008, legislation extended the relief through 2012. Use IRS form 982 to handle the debt relief provision.
Wholesaling
Wholesalers typically make smaller profits but buy and sell properties in large quantities. They may buy 50 homes at a time from a bank and then sell them for a small markup to move them quickly and do it again.
A more common wholesale approach among creative real estate investors is to secure properties with no money down and do a "quick flip". Typically the property, or owner must be distressed in some way for the deal to make sense.
Wholesalers work on some sort of distress either by the owner or the property. Distress can come in many way such a s divorce, job relocation, unemployment, severe damage to the property etc... Once a propery is gained at a significant discount the buyer quickly sells at markup of the buying price. Typical amounts range from $5,000-$15,000
Hard money lenders
These are often used to finance projects that are unconventional, great deals, or where money is needed quickly. Typically hard money lenders will lend 50-70% of the value of the property regardless of the sales price (unlike banks). They will typically close loans in 2-7 days. Credit scores and income are often overlooked by hard money lenders, however they may ask to see a business plan or exit strategy for the project. They may get paid via points (e.g. 1 point equals one percent of the total amount borrowed), interest rate (10-20% per year is common), and an equitable interest. These will vary based on the size of the project and the agreed upon contract. Hard money lenders are collateral based and typically require first position on the property.
True hard money lenders do not charge any front fees whatever; nothing for appraisals, app fees, credit fees or anything else. ONE of the unique secrets of many hard money lenders is that they want the property and thus, do not care at all if the borrower is unable to continue with their payments. After one or two missed payments, the hard money lender will file foreclosure proceedings and usually add the reclaimed property to their portfolio. They also do not care about exit strategies.
Tax liens
Main article: Tax liensThis may not clearly fall in the category of "real estate investing", however it is worth mentioning. Each state creates the system and rules for the lien or deed process so careful research is necessary. In general, property owners are notified regarding the amount of taxes owed and are given a period of time t
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