Jade’s financial ratios didn’t meet the bank’s criteria for either a residential or commercial loan, and she didn’t have the money for the down payment, but driven by experience in real estate and her comfort level with accepting that level of risk, she looked for an alternative way to buy and finance the Atwood house. Here are descriptions of several alternative financing options for real estate.
If the seller has substantial equity in the property, the seller acts as the bank for any or all of the financing to the buyer. Documents are prepared outlining the terms and conditions of the note, including the amount of the note, payment amount, interest rate and length of the loan.
There are people who like investing in real estate but have no desire to perform the “hands on” part of finding and managing property. If you like the operational part of real estate investment, this type of arrangement might work for you. As true partners, it is recommended you form a partnership by way of a partnership agreement, spelling out the specifics of your arrangement, e.g. percentage of ownership, scope of responsibilities, division of management, share of income and losses, etc.
Lease to own.
In this situation you would enter into an agreement with the seller to lease the property for a specified period of time, and you would be given credit, when you purchase the property, for a portion of the lease payment. The agreement would also contain an agreed-upon purchase price. This arrangement gives you the option to purchase the property, not an obligation.
Family and friends.
Mixing family and finances can turn out badly. But if you treat them as you would any other investor, including signed notes with clear cut consequences, this arrangement could be a win-win for both sides. Prove to them how they’re going to get a good rate of return and when they will get their money back.
Hard money lenders.
These investors loan money for short periods of time (usually for less than six months) at a high rate of return. Since these notes are private arrangements, you can oftentimes receive the necessary funds within days of the request. This type of loan is an excellent source of funds in situations when time is of the essence, when permanent financing is perhaps unnecessary, or when traditional lenders are unable to fund a loan.
As Jade discovered, sometimes a situation presents itself where an exchange of services could be a source of funds. Even though there are tax consequences to barter income, the benefit of this option is that you don’t have to come up with cash.
These are but a few ideas. There are several good books devoted to this subject alone including those by Robert Allen and many written on the general subject of real estate. Check out your local library and bookstores to find the ones that work for you.