Keep in mind that these are “overview” definitions and are general in nature
Here is what we do, it is called Creative Financing using *Subject To*, *Wraps*, *Owner Financing*, *Lease Options* and *Land Contracts*. Actually, it is very lucrative. These are generally Not Fixers – Most sellers in this situation either:
1) Creative Financing – Any kind of financing that does not include using a bank for Funding
2) Subject To – Taking over the existing loan – sometimes called “assuming”, but they are two entirely different things. An assumption requires paperwork, tax returns, credit score, bank account, proof of income, etc and being approved by the bank just as though you are the original borrower. Subject To does not involve any of those requirements or bank approval. It is simply taking over the debt and the payments. You now own the property.
3) Wraps – When a property has some equity and the seller is willing to sell, a mortgage is created (by an attorney) that is for the amount of the sale. You then write a check to the seller each month for the agreed payment and they make payments on their underlying loan. For instance, if the property has an ARV of $200,000 and you are buying it for $190,000. Next, they have a mortgage on the property of $150,000 they have $40,000 in equity which totals the $190,000 you are buying it for. A mortgage of $190,000 is created, (by an attorney). You send the payment to the seller. They send their payment to the bank. The seller gets to keep the monthly difference. You now own the property.
4) Owner Financing – Similar to a Wrap except this is for properties with no loans on them. The properties are “free & clear” About 1/3 of properties in the U.S. are “free & clear”. A mortgage is created (by an attorney) that is for the amount of the sale. You then write a check to the seller each month for the agreed payment. The seller is the “bank”. They don’t make payments to any bank because there is no mortgage on the property. You now own the property.
5) Lease Options – A Lease Option requires Two Documents. 1) A Lease and 2) A separate Option. The old one document Lease Options are defunct under Dodd-Frank. The Lease gives the right to occupy the property and the Option is the right to buy the property at some designated point in the future for some designated amount. For instance, a Lease Option with a payment of $900 with the Option to buy in 5 years at $200,000 says that as long as you make the $900 a month payment you can live in the property. You have up to 5 years to come up with the $200,000 (usually a bank loan). If you do not meet the deadline you are released from the agreement. You *DO NOT* own the property and you can not *SELL* the property unless you exercise the Option at closing.
6) Land Contracts – Similar to a Wrap, only the Title doesn’t transfer until you make the last payment. The seller has more control and it is easier to foreclose if you fail to make the payments. You now own the property.
7) Carrybacks – Any type of financing where the seller “carries” a note. Anytime the seller is still in the picture and is getting payments from a buyer, it is a type of carry back.
8) HML – Hard Money Loans – Hard Money Lenders lend money at high interest rates and high fees for business purposes (not personal homes) for short terms like 3 months to 1 year. The loan is usually secured against the investment property and they take the property if you fail to make the payments. Intended for quick flips and quick cash investments. Rates vary but 3% origination and 10% interest are not uncommon. If the project is 60 days or less, it can be profitable to use Hard Money. Many scammers want money up front to “process paperwork”. That is a red flag. When it works out properly, You now own the property.