In a transaction involving a loan from a traditional Lender there are fairly strict rules about what is allowed for down payments. But in transactions involving Creative Financing, anything of value to the Seller or anything that increases the Buyer’s equity in the property will make a safer transaction for the Seller. Ten of my favorite sources of non-traditional down payments are:
- Exchange of personal property for part of the equity. This can be anything of use to the Seller or which the Seller can later sell for cash. It can also be anything that the Real Estate Licensee is willing to accept as all or part of the commission. Examples that I have seen included snow machines, boat, vehicles, campers and jewelry. But of course anything of value is a possibility.
- Services for equity. One of the more creative uses of exchanging services for real estate equity involved a real estate developer who had his barber give him a number of certificates good for one haircut as a down payment on a lot purchased by the barber.
- Sweat equity. This is actually a form of exchanging services for equity but it involves the Buyer performing work to repair or improve the value of the property being purchased. Sweat equity arrangements should be secured by a performance based deed of trust outlining the work to be performed and the date of completion, if the work is to be done after the transfer of title.
- Exchange or sale of a Seller Financed Note owned by the Buyer from the sale of the Buyers property. This could be a property previously sold or it could be a property that is being sold in an effort to purchase the Seller’s property. In either event, the Seller could accept assignment of the Note as all or part of the down payment or the Note could be sold to a Note Investor to raise cash. (See more examples of this technique in my FREE eBOOKLET).
- Create a new Note secured by property owned by the Buyer or the Buyer’s relative and assign that Note to the Seller as all or part of the down payment. This technique works well when there are parents wanting to help a young couple buy a home. In such instance, the Note is secured by property owned by the parents and the parents can make the payments as a gift to the children or the children can have a side note to repay the parents.
- Secure a Seller Financed Note with additional collateral owned by the Buyer. Technically speaking, this is not a down payment but it does get “Buyer’s skin in the game”, because the Seller
Financed Note is not just secured by a deed of trust against the property being purchase but is also secured by a deed of trust against the Buyer’s equity in property already owned by the Buyer. - Have the Buyer borrow against credit cards or other assets. On the first property that I purchased, I refinanced my car to raise most of the money used for the down payment. A particularly good source of such loans is to borrow against the cash value of life insurance policies because such loans to not have to be repaid. It is also possible to borrow against 40l k plans and other pension plans. I recently used this technique to raise cash for a down payment to buy a rental condo.
- Sell annuities or inheritances tied up in probate. When someone has been the victim of an accident the insurance settlement is often in the form of an annuity paid over many years. Likewise, lottery winners in some states are paid over many years with the payments secured by an annuity. In either case, some or all of the payments can be sold for cash to be used as a down payment. In some states it may take several years to settle an estate, but someone who is the beneficiary of a will can sell part of their future inheritance for cash to be used as a down payment.
- Refinance other real estate to raise cash for a down payment. This is a particularly useful technique for investors with large equities in desirable properties that they don’t want to sell. An additional advantage of this technique is that refinancing proceeds, unlike sale proceeds, are not currently taxable.
- The Buyers can give a note to the real estate licensee as all or part of the down payment. This allows the Seller to net greater cash from the transaction and provides future income to the real estate licensee, while at the same time helping to close a transaction that might not have come together any other way. I have done this a number of times based upon the philosophy that “a deferred commission is always better than no commission!”
The above list is far from exhausting all of the possibilities, but provides examples of some of the more common techniques that I have used or seen used by others. THE TRUE BEAUTY OF CREATIVE FINANCING IS THAT YOU ARE NOT BOUND BY THE REGULATIONS OF A BUREAUCRATIC LENDER!