Do all the creative financing techniques you hear about really work? Yes, actually. They probably have all worked somewhere for someone at least once. The point isn’t if they will all work for you. The point is to know what is possible, so you can find your own creative ways to invest in real estate. Here are ten methods to get you thinking.

1. Hard money lenders. You can ask around or find these online. They specialize in short-term loans at high interest. You typically use this type of financing for a “fix and flip.” You can often get the money fast, and if you make $30,000 on a project, who cares if you paid $10,000 interest in six months.

2. No-doc and low-doc loans. No (or low) documentation of your income or credit required. Again, you can find banks that do these online now. The catch is that you will only be able to borrow up to 80% of the purchase price or property value. If you have 10% in cash, you might be able to borrow the other 10% from a friend or the seller.

3. Seller-carried second mortgages. Sometimes a bank will loan you 90%, and allow the seller to take back a second mortgage from you for 5%, leaving you needing only 5% for a downpayment.

4. Land contract. Called “contract for sale” or other names as well, this just means the seller lets you make payments, and delivers the title upon payment in full. I sold a rental this way for $1,000 down, because I wanted the 9% interest, and the higher price I got this way.

5. Credit cards. If a seller will take $10,000 down on a fixer-upper that you expect to make $20,000 on, why not use credit cards? This is a true 0-down deal for you, and if you turn the project in six months, you will have paid $900 in interest on an 18% credit card. Don’t let $900 get in the way of making $20,000.

6. Retirement accounts. The laws get pretty complex in this area, but you can check with a tax attorney to see how you might borrow from your own retirement account to finance real estate investments.

7. Friends and family. Keep it all business, if you use this source, but loaning you money at 7% isn’t a gift if their money is getting 2% in the bank.

8. Note buyers. The seller needs cash. He raises the price, and sells to you for $100,000 with no money down, taking back two mortgages from you for $90,000 and $10,000. He arranged (or you did) for a note buyer to pay him $80,000 cash for the first mortgage at closing, getting him the cash he wanted. You pay two payments now, one to each note holder.

9. Get a loan on other property. Interestingly, if you take out a home equity loan for a vacation, and then forget to use it for that, you can use it for the downpayment on an investment property, without violating the rules of the bank that gives you the primary mortgage. In other words, you got in with no cash of your own.

10. Partnerships. For bigger projects, you could arrange for five investors to each put money into a partnership, with your share being the management responsibility instead of cash.

There are alternatives to conventional bank financing for land development deals.

OPM, Others People’s Money

But I know you’ve heard all that before, but there are little known secrets that Major Land Developers have been using for years which I want to share with you.

My clients are absolutely amazed when I share these secrets with them, they always respond “so that’s how they do it.”

So why would a commercial financial broker want to share these secrets with you?

The reason is very simple, at the opening page of this site I told you I wanted to educate you, and so I am.

Also if you’re able to implement some of these strategies, you’re eventually going to need capital to build out your project.

And we’ll be here to help you.
There are three ways in which you can secure your land development deal without closing a conventional loan. The last way you must seek professional accounting and legal assistance, and will not be discussed here.

Work Directly with the Seller

Use Options to Control The Property

Arrange a 1031 Exchange

The above are three methods or ways to get a commitment to sell the property with little or no cash at time of opening an escrow.

Working directly with the Seller

By working directly with the seller you can help the seller solve many of their problems, and in return he becomes your partner in the land development transaction.

Sellers often believe that they can get a better price for their real estate if they carry the paper that evidences the debt themselves. Here are some of the reasons

Buyers may have qualification issues, and if that’s the case you as a buyer may not be as concerned about the interest rate, price and terms and therefore the seller as the one assuming the risk will get a higher price and you get the deal that you were not bank qualified for.

The Seller will get greater after-tax profits.

By the seller carrying paper they will not be taxed on the amount of the sale, but their tax will be based on the installments paid over the years.

In other words a large capital gain may “push” them into a higher tax bracket, but if the sale is spread out over a period of years, the seller may not be pushed into a higher tax bracket.

Use Options to Control the Property

An option is an agreement specifying some future performance in exchange for a benefit.

Simply stated, give some money control the property!

You offer the owner a price for the option to buy the land. That price (the option premium) buys you the right to buy the land at an agreed upon price at a certain time in the future.

You can exercise the option by closing the sale at any time before the expiration date of the option. The seller must sell, when you are ready to buy, no matter how much the market value may have escalated during the holding period.

A more sophisticated approach is to acquire a rolling option for large land development transactions.

This is much more complex then a simple option agreement. Rolling option is utilized when there is a great deal of property that an individual needs to control. We usually see the use of rolling options in large master planned communities, where developers are planning to phase the development project into numerous phases with an absorption of the homes exceeding five years typically.

In a Rolling option the buyer controls the entire tract but only puts up the option for the first portion of the land, after each execution of the options, the buyer is able to take down more land, until the developer controls all the property of the original contract.

If you do not exercise your rolling options ass they come due, the entire contract is cancelled as to future property that is secured through the initial option agreement…and of course the seller retains the entire premium, and he can immediately offer the property to another buyer.

Benefit to the Buyer is that they can now plan an orderly development of the entire acreage, as well as knowing exactly what the land costs for the entire project are for the proforma and any Return on Investment calculations.

Benefit to the Seller is that the seller can get the price he wants for the property, and he knows that at the least he received a sizable option premium, and at the best he receives the price he wants for his land.