It’s a fact that almost all real estate is purchased with OPM, Other People’s Money. Therefore, the first question you should ask when you’re buying real estate is, “How do I get THE MONEY?” It’s true, all brokers occasionally see clients with cash, but for the most part, you will have to get money to finance your purchase. Here are the current viable options:
1. “Conventional” Loans, meaning loans that are not guarantee or subsidized by any governmental or quasi-governmental agency.
This used to be the only way to finance property in Southern California, because virtually all the “government loans” fell under the amount needed for most property here. These are also the loans typically used by investors to obtain property for their investment portfolios. However, conventional lending became so liberal and easy to get in the last decade that many lenders experienced disastrous losses–and now conventional financing is more difficult to get, requiring 20%+ down and proof of income.
2. ”Government” Loans, including FHA, VA, Fannie Mae, Freddie Mac and lots of other abbreviations and acronyms.
These are now the method of choice for people desiring to purchase property for themselves to live in. Some are still fairly liberal in qualification terms, and most will allow you to “buy more” than the equivalent conventional loan.
3. ”Private Money” (also called “hard money”) Loans, which are loans actually made by individuals or a small pension fund or LLC.
These loans often are easier to get, but harder to pay, since the rates on those loans tend to be much higher than those on conventional or “government” loans. In addition, the fees on these loans are typically much higher. Private money is actually a good alternative for the investor client these days, although the buyer needs to be prepared to pay more for the loan, and to invest a higher percentage of his own capital in the property. Private money loans normally will go only as high as 60% of the equity of the property, meaning that creative financing has to be used to secure the additional money, or the investor must himself come up with the 30-40% downpayment required.
4. Creative financing options.
These normally involve one or more of the following–a seller-carryback, where the seller actually provides part of the downpayment as a note, and the buyer brings in cash up to the amount of the old loan, a 2nd trust deed (mortgage) by a 3rd party (private money is the normal thing here), or a scenario where the seller receives a note for the bulk of the purchase price, and executes a note that binds the buyer to pay him personally. In times of slow or difficult financing, the creative financing options are normally explored extensively. These will probably become much more popular as the current real estate recession ends, and purchasers of property need additional means to buy property.
I have personally done a great deal of private money lending and brokerage, and many creative-type transactions. They are complicated-looking, but normally the easiest of all to do, since you are dealing with human beings and not with a bureaucracy. If you need assistance with this, please call.
If you need specific advice on any of these issues, please email or call me. I will be happy to assist you, and help you find the best way to buy your home or investment property (I don’t charge for an initial consultation, even if it’s fairly extensive).
