Show Me the Money! Sources of Funding for Real Estate

Show Me The Money

Real Estate Agents and Mortgage Brokers will tell you that there are only two sources of money for the purchase of real estate properties--Loans and Other Loans. This is what they have been trained on, and they have procedures in place to put transactions together using standard traditional financing.
But as investors, we seek for more varieties of ways to fund the purchase of properties. There are five categories of sources for funding, with some sub-categories below. My favorite method will be listed last, along with the reasons this method is my top choice for property purchases, and the reason I have used it more than any other method of funding for both personal residences and investment properties.
1) Conventional Loans--These are the loans used by purchasers for owner-occupied loans, 1 to 4 units. these loans offer the most favorable terms because they are for the lowest risk purchases, but they also have the most strict requirements. Included in this category would be federally insured loans, such as FHA and VA, plus loans that resemble the federally insured loans from other regulated lenders.
2) Non-Conventional Loans--This category includes other loans from regulated lenders for the purchase of residential or commercial property. This category includes loans for higher risk owner occupied purchases, and investor loans for residential and commercial properties. Many hard-money type loans fall into this category, depending on the type of lender. These loans are generally considered higher risk loans, so the interest rates and down payment requirements will be higher, the loan-to-value ratio will be lower, and sometimes the term of the loan will be shorter.
3) Private Loans--This category includes loans from friends, family, or other private lenders. Since the lenders are not regulated, the terms and qualification requirements are set by the lender, and may sometimes be negotiable. The nature of these loans can vary from short-term to long-term, and in any other way that is acceptable to both lender and borrower.
4) Buyer's Pocket--This category includes any asset owned by the buyer that can be used for the purchase of real estate. It can include cash, money in bank accounts, mattress money, lines of credit, signature loans, objects of value (collections, jewelry, vehicles, guns, etc.), home equity, or any other asset that can either be converted to cash or used as collateral.
5) Seller Finance--In a seller finance situation, a seller can "lend" you their credit capability, their equity in the property, or actual cash money. Lending money is actually the least common. There are three types of seller finance transactions--"Subject To," where title is transferred at the beginning, and a wrap-around mortgage is created between the buyer and the seller; "Land Contract" where a purchase contract is modified to be in force for a lengthy term, payments are made during the contract phase, and title is transferred at the conclusion of the agreement; and Lease Option, which begins with a lease, and offers the buyer an option of either purchasing the property, or walking away at the conclusion with no further obligation.
Seller finance is my favorite method of finance for the following reason:
1) Approximately 50% of ALL real estate transactions include some version of seller finance;
2) Terms of seller finance transactions can include very low down payments of 1 to 5%;
3) As the buyer, I do not need to use my personal credit to qualify for a loan;
4) Terms of the agreement can be established to provide solid protections for both buyer's and seller's rights;
5) Seller finance is actually the largest source of funding in the world, and each new transaction has a new potential lender;
6) As a seller I can usually make significantly more money in the sale of a property than cash at closing, because there is no bank involved who will be earning interest.
I frequently buy and sell properties using seller finance, and encourage anyone who thinks it can't be done in their area, or that it is not an effective or legal source of real estate funding, to do a little deeper research. It's legal, and it can be a good deal for both sellers and buyers, and may work in more situations than you would imagine.