Creative Finance – Sometimes the best Mortgage is no Mortgage at all!

One thing I’ve learnt as a real estate investor  is that sometimes the best mortgage is  no mortgage at all. 

If this sounds cryptic, let me explain.

In many real estate deals you don’t need a loan or any real finance.

If you are wholesaling a property it is almost always to your financial advantage to not close on the deal but rather flip or wholesale it to another real estate investor.

The biggest problem with funding deals is that finance is very expensive. In particular the closing costs can make or break a deal. On average it costs $7,500 in closing costs to buy a property. This covers loan origination fees, title fees, lender escrows etc. That’s $7,500 worth of wasted costs if your intention is to flip the property. By the time you add holding costs and costs to resell the property you will have wasted at least $12,000.

You just gave away a nice chunk of your profit. 

Closing on a deal also creates a number of other problems.

The biggest problem is that banks hate it when you flip properties because it’s just bad business for them as they actually lose money on the loan. To stop you flipping a property banks have “seasoning” requirements. This means that they will not finance a new loan or refinance an existing loan unless the original loan is at least six or twelve months old. This is a huge problem for you because if your new buyer can’t get a loan your deal is probably dead. 

So what’s the solution? It’s simple really – don’t close on the deal.

There are a number of ways to avoid closing on a deal: 

i.          Assignment

The easiest way to flip a property without closing is to assign the contract. Effectively you are selling your rights in the contract to a new buyer. Take note that what you are selling is the contract, not the property. 

By law all agreements are assignable unless specifically excluded. However, note that most real estate contracts prepared by real estate brokers and real estate commissions have a clause that excludes assignment without written consent by the seller.

To make your contract assignable, simply add a clause that says, “This contract is assignable by the buyer” or contract in the name of “Your Name and or Assigns.” 

Assignment does have some problems. The main problems are that the seller and your buyer get to know each other before the deal closes. This creates an opportunity for them to cut you out, especially when the new buyer finds out how much you are making on the deal. 

The second problem is that the lender doesn’t like assignments and will often require you to write a completely new contract between the seller and your buyer. This increases the risk that you will be cut out of the deal. 

ii.         Be the Real Estate Broker

If you are serious about real estate investing I HIGHLY RECOMMEND that you get a real estate license. It is the single most important tool that you can use as a real estate investor. I know you will meet many investors who will tell you why they don’t have a real estate license but I promise you that they are wrong. I got a real estate license and it made me at least $250,000 a year by doing deals that would not have worked if I didn’t have a license. 

A real estate license allows you to structure deals so that you get your money out of the deal easily and at closing. Whenever I assign deals, I simply rewrite them to take my name out the buyer and put my name in as the real estate broker. My profit is reflected in the agreement as a commission. I get my money at closing with no hassles and no chance of being cut out of the deal. The best part is that the lender has no problem with the seller paying a commission to a broker, even if the commission is 10% of the purchase price.

On a $200,000 house that’s $20,000. Paid at closing, fully disclosed and signed off by the lender. It’s that simple.

Just try and push a $20,000 fee past a lender as a “third party pay off” or “marketing fee”.

And don’t forget that by making yourself the broker you avoid having to close on the deal in your own name. 

iii.        Double Close 

Sometimes it is not possible to assign or broker a deal and you will be forced to close. This usually happens when the seller is an institution like a lender with a REO or a HUD home. They simply don’t allow assignments. 

There is a creative way to close the deal but not incur the costs or problems associated with closing. It’s called the double close. 

A double close occurs when the seller sells you a property that you resell to a new buyer and the closing takes place at the same time. Effectively the new buyer gets a home loan and the proceeds of that loan are used to pay the seller. You don’t get a loan and consequently avoid all the costs of raising the loan. You also don’t hold title as title passes through you to the new buyer.

As you can guess it’s a pretty complicated process and needs the full support and co-operation of the title company. Most title companies won’t do double closes as it exposes them to too much risk. However there is an ”investor friendly” title company in every major city who has the expertise and experience to handle a double close. 

The sticky issue concerning a double close is the funding.

Some title companies don’t require that you bring any funds to the table as they will use the funds from the new buyer to fund the deal and pay the seller. This is called phantom funds as your funds don’t exist. 

Some title companies do require that you bring funds to the closing. Believe it or not, but there are hard money lenders who will provide this short term funding. It’s called flash funding and usually costs a couple of points. 

I’ve used flash funding for a number of deals. My hard money lender has accompanied me to the closing with a cashier check for my purchase price. The check never left my lender’s hand. He sat at the closing table with the check in his hand. Only after the resale of the property to the new buyer had funded and the title company had authority to disburse funds did he hand the check over to the title agent – who promptly handed the check back to him plus a check for $4,000, being the two points on a $200,000 loan.

 $4,000 for four seconds of funding! Good work if you can find it. 

The point of this story is that it was worth it for me to pay $4,000 in fees because it was the key to making the deal work …. and I got a check for $11,000 at the close

In the next article I’ll give you my first tip on using creative finance for your real estate deals.

About Ross Hair

Ross Hair is the Real Estate Advocate andPresident of eRealEstate.com, a social network for real estate investors and professionals.