This article was posted on Tuesday, Jul 01, 2014

Financing is the absolute heart ‘n soul of building wealth with real estate – beginning from the time you purchase your first property until the time you cash in your chips (sell out).  In the early years most Mom & Pop investors (the folks I associate with) simply do not have enough knowledge to understand that financing will have a great deal to do with your success or failure in this business!  Like most investors starting out, I had no idea that financing would involve nearly everything I’ve been able to accomplish with my properties!

The way you finance your properties when you acquire them will greatly influence future sales, trades, lease options and seller financing when you decide to call it quits.  In other words, the financing you negotiate or place on your property will have a great deal to do with when and how you can retire (“smell the roses”) and more importantly, your profits.  Most institutional mortgages today, banks and mortgage companies automatically write due-on-sale clauses in their mortgages or deeds of trusts.  This single clause prohibits any sale or transfer without their written consent.  Rarely will they waive this restrictive clause without jacking up the interest rate or requiring a brand new loan.

Control Determines Winners and Losers

Underline this next sentence and don’t’ ever forget it!  By far, the biggest profits in real estate are earned by investors who control all the moving parts.  Control over financing is more profitable than neighborhoods, quality of the buildings, timing, negotiating skills and whatever else you can think of.  Please don’t misinterpret what I’m saying here by thinking these things I’ve mentioned are not important!  Location and quality of the real estate are always important.  All I’m saying is control over financing trumps them all!

Creative financing is a term most generally associated with acquiring real estate directly from the seller, as opposed to third party financing, such as a loan or mortgage from the bank.  Seldom are banks very creative!  If you, as the borrower, don’t fit their so-called lending programs – as they like to call them, you can pretty much go suck rocks!  Obviously, banks must have a more conservative approach to lending along with much stricter mortgage rules because they’re loaning out bank depositor’s money.  With bank mortgages (loans) we’re talking about green dollar bills loaned directly from their safe deposit vault to pre-qualified borrowers.  Most new homes are purchased using this type of financing – but not all types of real estate.

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Sellers Always Make the Best Lenders

The big dividing line that determines whether banks will finance real estate or not, for most regular Mom & Pop investors is drawn between four and five living units.  For purposes of real estate financing, one to four units are considered to be a residential mortgage or loan, whereas; five units or more are considered a commercial mortgage.  For Donald Trump, getting commercial loans are easier than a one foot putt – but if you’re not Donald Trump and you plan to purchase the kind of properties I buy – five units or more, you may as well kiss your banker farewell!  Even if you’re good buddies or bribe him with lunch – forget it!  He’s bound by strict rules and your application will probably be treated like chopped liver!

The late Warren Harding, long-time real estate investor and trainer, used to always tell his students  “You don’t dance with the real estate – you dance with the people.”  In my opinion, the wisdom of that statement has no equal and nowhere does it apply more than to seller financing!  Seller financing with customized terms is the Cadillac of financing for buying investment real estate on the installment plan!

Some may argue that the price (what you pay) for investment real estate is the key to profitability!  In my opinion, the amount one pays for an income property pales in comparison to how it’s financed.  In fact, in almost all my transactions over the past 40 years, I’ve given in on the price in order to get good financing terms.  Terms control the cash flow, which most every investor lusts and craves for.

The constant, the amount you must pay every month to service the debt, must be kept low enough so it doesn’t gobble up all the income!  Otherwise, you could end up having to reach in your wallet every month to make up for operating shortages.  This situation is what we call an alligator property (it eats all the cash).  The constant can be kept lower if amortization can be avoided.  This will never happen with bank mortgages – however your chances with a seller improve dramatically.  In fact, many sellers often prefer interest only mortgages when they carry back financing.  I’m in that group myself!

Seller Financing Never Goes Out of Style

McGraw Hill, my giant New York book publisher, called me just before the last housing meltdown when banks were all trying to outdo each other by dishing out the most money to any applicant who could fog a mirror!  Liar loans or no doc mortgages, they called them!  McGraw’s senior real estate editor was baffled by several chapters I had submitted about seller financing.  He nearly dropped the phone when I told him that more than 80% of all my deals had involved seller financing!  His response to me was – “Our local agents are telling us that seller financing is not being done anymore because of easy to get bank mortgages.”  Obviously, he was talking about financing peoples’ homes! I informed him that I’ve kept every single escrow file since I began investing and invited him to fly out for a visit if he needed more proof!  Several days later he called back to tell me that his agents had found several local seller financed properties – so he approved my chapters and quit calling me!

With seller financing, you can buy or sell properties that wouldn’t otherwise be very attractive if they were dependent on a new bank mortgage or a refi!  A seemingly poor investment can be turned into a win-win deal based on terms that people (the buyer and seller) will agree to.  Much of the investment risk can also be eliminated by terms of financing.  As a general rule, the longer the payback period and the smaller the monthly constant (payment), the safer the deal is for both parties.

Creative financing is not simply a seller carry-back arrangement that both parties say yes to!  It goes much deeper than that because it can solve almost any financing problem for buyers and sellers alike!  For example; I have intentionally overpaid for properties because the seller agreed to give me monthly mortgage payments I could easily pay from my rents – even with a small 10% down payment.  Paying a 90% mortgage payment on a typical transaction under average circumstances is very difficult to do without having negative cash flow.  Structuring the payments to fit the available income is more important to me than paying the seller a higher price (within reason of course).  Besides, I’ll get bigger tax deductions because of my higher basis.

Control The Financing – Important

Bank financing is a lot like dancing with a gorilla – the dance ain’t never over till the gorilla says so!  That’s giving up way too much control to suit me.  Legally, when you have a bank mortgage on the property, you need permission to do almost anything that sounds creative!  For example; selling with a lease/option arrangement would not be permitted if you asked!  “Subject to”or taking over loans with a due-on-sale clause only works if the bank looks the other way.  From a legal standpoint however, banks can call the loan making it fully payable anytime they choose.  Most wrap-around or all-inclusive type financing is not permitted by banks should you ask for their permission!

Had I been dealing with banks rather than individual sellers for the majority of my property financing, I’d be roughly one million dollars worse off today.  My seller financed notes (mortgages), both the ones I structured or created when I purchased my properties, and the ones I took over or assumed on the properties I’ve acquired, have given back to me generously over the years!  How do they give back – you’re probably wondering?  It’s called discounting!  The owners or holders of notes (mortgages) payable by me with a total face value of 3.3 million, have graciously accepted discounts from me averaging nearly 28%.  That’s because I paid them off early and gave them cash.  These very lucrative profit opportunities all come from dancing with people like Warren Harding so eloquently put it.

Benefits Have Different Values

There are many parts – or benefits to real estate investing.  These parts or benefits all have different values to different people.  Financing is quite subjective – some folks value the price, others want yield or income.  This is why zero interest mortgages can be negotiated with some sellers while the next guy throws you out for even asking!  Discounting private financing (notes) like I’ve been discussing here is strictly a people business.  If a beneficiary needs money (which most people do), it can work as slick as a whistle!  I’ve negotiated steep 70% discounts and I’ve had other note holders sic their dogs on me for even asking.  There is no right or wrong way to ask – it’s entirely up to your negotiating skills and how creative you can be.  As you might guess, education plays a major role.

When you begin to understand that most people have ups and downs – good times and bad as they bounce along living their daily lives, it’s not too hard to imagine they’ll run into money problems from time to time!  For heaven sakes, doesn’t everyone?  Here’s what I want you to understand and never forget.  When people are experiencing serious money problems and you just happen to have a few bucks lying around – or more importantly, you can get it; you can ask for some pretty substantial mortgage discounts and likely have great success.  The key to this strategy of course, you can provide fast cash relief!  You’ll find my 28% average is probably nowhere near the record.  During my apprenticeship I was a bit too timid with my requests!

Leasing With Option is Back Door Financing

Leasing with an option to purchase is financing by another name.  You can pull off some super cost- saving acquisitions by putting this technique to use!  First of all, most sellers do not think of a lease option contract the same way as a sale and won’t ask you for the customary down payment because they’re leasing!  After all, they still own the property until you exercise your option to purchase!  Let’s say for example; the seller is having difficulty finding a buyer because his rundown property looks so ugly.  With no reputable buyer in sight, the owner has become a bit desperate!  Suddenly, like out of the blue, you show up.  The sale price is $300,000 with 10% down, however; you are exactly $30,000 short!

The property rental income is $50,000 annually, so you propose leasing the property with an option to purchase 15 months from now.  You explain to the seller who wants a sale right now – that you don’t have the down payment just yet, but you are willing to take over the property immediately by leasing until the down payment gets paid.  You offer to lease the property for $2,000 per month, with full credit for each lease payment going toward the $30,000 down payment.  After 15 months with credit for 15 lease payments, you can now exercise your purchase option with a balance owing of $270,000.  If you’re successful, you’ve acquired the property with no down payment – plus you’ve made principal reduction payments without paying one dime’s worth of interest for 15 months.  You couldn’t do any better with hamburger helper!

Obviously, the key to making this transaction work has mostly to do with solving the seller’s problem and having knowledge about the various remedies available – in this case, a lease/option arrangement!  The seller had wanted out for sure, but he also wanted $30,000 down before he would even talk about financing the sale.  In the end, he financed it anyway; we just called it another name!

Thinking outside the box and being creative always earns the biggest paydays in the real estate business.  There are more ways to profit than I ever imagined when I first started out.  Like we discussed about discounting notes or mortgages – in the beginning, I would only look for discounts on the mortgages sellers carried back for me when I purchased their properties.  Further down the road, I discovered that when buying multiple unit properties or small apartment buildings – they often came with a whole assortment of private notes.  Seems like each time these income properties were sold, the sellers would carry back a large share of their equity with a note.  I have purchased these small income properties with as many as four or five private mortgages on them, which of course, I would assume or take “subject to” with the purchase!  When I learned about this rich “mother lode” of private party notes or mortgages, I began to purposely hunt for them in earnest.  This is when my note discounting grew to an exciting new level!

Education is The Key to Creativity

Creativity, I’ve found, comes with education.  You can’t expect to be in the driver’s seat – or do much creative financing if you don’t understand numbers or what different terms mean!  I talk with beginners all the time who don’t know a trust deed from a grant deed or general grant.  I’m a strong believer in “on-the-job training” – but please don’t neglect the home study part of learning this business.  With creative financing, you must learn the jargon and what the numbers and values mean in order to make deals and prepare your own contracts that will benefit yourself.

Many newbies stumble over interest rate, yields and compoundingDoes the seller need to have amortized payments or not?  Above, I introduced the word constant – it’s the total mortgage payment you must pay every month on your loan.  It’s not the stated interest rate on the mortgage – it’s higher because it also includes amortization or principal pay down!  Simple interest and compounding interest are completely different birds!  Simple interest is the annual interest rate on the loan amount times the term or number of years on the note.  Thus a $10,000 note with a 10 year term written at 15% simple interest would require a $25,000 payoff in 10 years when the loan matures – $10,000 principal + 10 periods of $1500 = $15,000 = $25,000.  The same $10,000 loan compounded annually at 15% would require a $40,450 payoff in 10 years.  The higher payoff is because compounding applies the 15% rate to both principal and the accumulating interest added on annually for the term of the loan.  When you borrow money, always ask for simple interest!

Learning to draft your notes the way you want them is well worth your time and the cost of learning.  A simple error or even a single word in your note can make a huge difference in the payoff or your profits if you own the note.  You need to understand the difference between including or plus interest.  If your note receivable reads $10,000, including 15% interest due in 10 years – you’ll be very disappointed when you receive just $10,000 ten years from now.  Had you typed in – plus 15% interest instead, you’d receive $40,450 provided your note stated compounding interest.  Learning this kinda stuff will make the cost of a good financing seminar seem cheap – say Amen!


Jay P. DeCima, aka Fixer Jay, lives in Northern California where he operates multiple rental properties.  With nearly 50 years’ experience, he’s a street-wise landlord and best-selling real estate author. Jay’s recession-proof, adding value techniques are ideally suited for small-time, Mom & Pop investors seeking faster paydays and financial security.  Jay’s self-help books have been voted #1 by both the Los Angeles Times and Chicago Sun during the past 12 years.

Nearly 70% of Jay’s seminar students have acquired income-producing properties over the past 28 years.  Investors are invited to download Fixer Jay’s informative eBook, Living The Dream at

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