One Story of Creative Financing

What does creative financing look like in real life? We asked one of our lender partners about his experience with creative financing, and he had a great story. 

Here’s a real-life example of someone using creative financing well while still leaving room for improvement.

Vicky’s Story of Creative Financing

To protect her privacy, we’ll call her Vicky. Vicky was in her 60s, and she owned a great home with about half of the mortgage paid off. On her way to retirement, Vicky decided that she wanted to downsize, but some of her medical and pension benefits would be reduced if she exceeded certain limits in her investments and cash assets. 

Real estate and other illiquid assets did not affect these limits, so, to avoid a giant deposit, she decided to sell her home using a hybrid financing strategy of seller and subject to financing. 

Her buyer paid her enough at closing, so that she could afford a down payment on a smaller home, and the rest of the purchase was financed on a 20-year contract that she carried with terms she established. She structured the terms so that her existing mortgage was paid with a small monthly surplus of cash paid to her, and the buyer is responsible for maintaining taxes, and insurance. 

Ways to Improve Vicky’s Situation

Vicky did a great job calculating and structuring the terms of her contract. However, she didn’t use all the tools available to her to streamline and document the arrangement. 

When Vicky came to our lending partner to refinance her downsized home, the paper trail on her creative financing was a mess. 

She had a contract, but that was it. She had been accepting direct deposits from her buyer every month for years, and then she would still write a personal check to the original mortgage holder on that property. But the transaction was never recorded properly, and there was no third-party managing and recording the monthly payments. 

Vicky created a lot of extra work for herself, manually confirming her buyer’s payment and then remitting payment to her mortgage holder every month. On top of that, when she wanted to refinance, she had to go through twice as many steps and produce twice as many documents for the underwriter working on her refinance on the down-sized home. If Vicky had used the proper third-party channels to record and manage these ongoing transactions, she could have simplified the steps every month and every time she needed to qualify for a loan.

A Few Important Considerations on Seller and “Subject To” Financing

Like any other Creative Financing structure, remember that when implemented well, Seller and Subject To Financing can maintain all of the following:

1. Proper third-party title and escrow channels to manage and record the transaction,
2. Protection for Realtor commissions (often increasing them), and
3. Protection for Sellers with contracts that provide clear and simple recourse.

Final Thoughts

Creative financing is a great way to achieve multiple financial goals at once, and when done correctly it will not prevent your seller from qualifying for their next mortgage loan. However, there are steps you can help your sellers take from the start to ensure they set things up as efficiently as possible. This will save them time and trouble down the road.

The more you know, the better professional you become; able to help more clients and close more listings. Broadening your knowledge and skillset frees you up to be more flexible and creative. And the more listings you close, the better you position yourself as the industry expert, in turn, winning you more referrals.

You’re the expert, and we want to support you with solutions that give you:

More control by cutting out variables and middlemen, and

More gross commission income with dual or designated agency.

Let us know how we can help. You can find more of our resources and content, or simply reach out and start a conversation to learn more.