1. Seller Financing is when you purchase a property and the seller acts as the bank. The buyer usually puts a down payment, 20-25%, similar to a traditional loan, and the lender holds the note for the remainder. The buyer and seller agree to the terms; like interest rate, length of time, amortization, pay schedule, and if the payments are interest only or not, and the buyer provides a Promissory Note agreeing to repay the loan. A transfer of ownership takes place, and the buyer begins to pay the seller regular mortgage payments.

Pros: Usually, you can negotiate better rates and terms with a seller than you can with a bank, especially if that seller is having trouble selling. Also, seller financing helps the seller continue to make money on the property without having to own it, and it spreads their capital gains over a longer period of time vs. getting hit with a large tax bill at sale; a total win-win! When you can get seller financing with better terms, you can acquire deals that normally would not ‘pencil’ with traditional financing. Our team LOVES the potential rates & terms of these deals because it gives us the ability to offer competitive purchase prices to win out on great properties and maintain our cashflow targets for our investors.

Cons: Seller financing takes a very specific kind of seller, and some education. Most real estate owners are not familiar with it, nor have they ever made such a large loan to another individual before. It can take some time to make a seller feel comfortable and confident that you are a credible buyer AND borrower. Experts need to have a ‘Benefits of Seller-Finance’ sheet (ahem, linked) that they can share with brokers and sellers to help them better understand. They also might need to promise to ‘Quit Claim’ the property back to the seller in lieu of foreclosure if the mortgage payments are delinquent enough - meaning, the seller doesn’t have to go through an arduous foreclosure process if things go south. Also, not every property situation is right for seller financing. Only properties where the seller has a low, or no, remaining mortgage balance will this work - that way they already have the equity in place and don’t have some big loan they need to pay off upon the purchase.

2. Assumable mortgages is just how it sounds - the buyer assumes the existing mortgage from a property/seller. Not all loans are assumable. Usually, either the lender needs to pre-approve the assumption, or the original buyer (now the seller) needs to remain in the deal somehow. These can be a little bit complicated, and while it may seem really attractive to, lets say, assume a loan on a property with a 3.5% interest rate mortgage, it might not always be the best idea.

Pros: Sometimes the terms of the assumed loan are drastically better than anything you can find in the current environment (like, now! womp womp). It can potentially offer the new borrower a shorter closing timetable ✔ lower down payment ✔, and lower closing costs ✔.

Cons: The devil is in the details, they say. Some loans, even if they have better interest rates, may not have better terms. If the assumable loan has a short remaining term, it may not make sense to obtain just to have to find a new loan shortly thereafter. Plus, most evidently, assumable loans are harder to come by, making those deals much more competitive. As mentioned above, either the loan needs to be originally written to allow for assumption, or the lender needs to approve the assumption, which is less likely in today’s environment. If you try to assume the loan without notifying the bank, they can call your loan due… dumb, dumb, dumbbb. (Pun very intended).

3. All-cash purchases are when a transaction is done with all cash vs. using some sort of debt instrument or financing. While this clearly requires more cash on hand, experts can use all-cash purchases to buy at an advantageous time, and discounted price, knowing that they can refinance at a later date.

Pros: All-cash gives you the ultimate flexibility and negotiating power. Cash is still king in most transactions and, in real estate, most of all it gives you something very coveted… speed - which is paramount. No lengthy loan underwriting and approvals, and no waiting around for another buyer to come and steal your deal. If you have the equity to purchase all-cash, you have the potential leverage to negotiate a lower purchase price with a fast close, but also the option to finance the deal and take out a loan against the property at a later date to pay yourself or your investors back.

Cons: You need more cash. Simple enough? Depending on the size of the transaction, it can be difficult to come up with that much equity. Plus, with zero debt, you are taking 100% of the risk, and your cash-on-cash returns will be diminished. Sometimes, cash is the only option, sometimes it’s the best option. But first you have to have it.

4. HUD loans are similar to other federal agencies like Freddie Mac and Fannie Mae, the U.S. Department of Housing and Urban Development (HUD) is a federal agency that primarily focuses on multifamily unit loans. However, HUD does not finance loans–they insure 100% of the loan in case there is a default, providing greater security for the lender. Since HUD is a government agency, project sponsors get to lock in the lowest interest rate available, similar to AAA bonds. 

Pros: Lower than average fixed rates. 40 year amortization (yes… 40 freakin’ year!). Up to 85% LTC. And, non-recourse. Enough said!? I think so.

Cons: HUD typically provides these attractive loans to a very selective handful of operators. Only about 2-3% of all multifamily loans are HUD. They have an extremely (read: ridiculously) strict vetting process. We have a partner who is HUD approved, and took 10 years to get it! Also, the operator has much less flexibility in terms of receiving loan disbursements, and frequently have to jump through HUD regulatory hoops, like mandated wage labor, insurance coverage, urgent on-site inspections, and required repairs and construction.

5. Mortgage Rate Buydown is when you pay upfront “Points” to lower your interest rate. 1 Point = 1% of the loan amount. This is a one-time fee, paid at the onset of your loan and lasts the entire term. For example, a mortgage lender may offer a borrower the ability to reduce their interest rate by .25% in exchange for a point. So, if the borrower is obtaining a mortgage for $1,000,000 and is offered an interest rate of 7%, paying $10,000 would lower their interest rate to 6.75%. This strategy truly depends on the interest rate offered, the points-to-discount offered, and the goal for your monthly payment. You have to weigh the cost-benefit. Buying down your mortgage also depends a lot on how long you plan on holding the property.

Pros: Buying down your rate can help lower your interest rate significantly, and thus, lower your monthly mortgage payment. If you have liquidity to pay for these points and have monthly expense goals, this can be a major help. Almost every lender offers points because, as the saying goes, ‘money now is worth more than money later’, so they are happy to take your discount points.

Cons: Real estate transactions that involve investment properties or cash-out refinances are ineligible for buydowns. That said, you can buy down points on a refinance so long as it’s not government backed. And, when an investor is refinancing a $10M, $25M, or $50M project… those points add up!

Conclusion: Sometimes, when you have a great deal but interest rates are sky high, you might need to get creative. Luckily, in real estate, there are endless creative solutions - and financing is a puzzle that experts are constantly solving. Understanding how to navigate the waters, brainstorm with the right partners (cue the Brokers), and generally, that acquiring property is just as much an art as it is a science will be the difference between winning and losing. The more you ask, the more you get. Ask for the terms that are right for you, and use the tools, like these, that are available, and watch how far ahead you get. Making something out of nothing is part of every success story. Go get ‘em.

By Danny Bellish, Managing Principal, The Bellish Team