Creative real estate investing


Creative real estate investing is any non-traditional method of buying and selling real estate. Confidence tricks and pyramid schemes in the 20th and 21st century such as Nouveau Riche have embraced the term, leading contemporary usage of the term to be synonymous with unscrupulous practices.

Bird-dogging

"Bird dogs" get paid a referral fee for finding good deals for other investors. This is often where people begin their investing career as there is only time at stake. They are typically paid when the deal closes. Some birddogs will structure companies and partnership arrangements as they're frequently not real estate agents and may not be able to collect a "referral fee" for their services. These partnership are often structured utilizing a joint venture agreement.

Options

An option is defined as the right to buy a property for a specified price during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price. The buyer of the option hopes the value of the property will either go up or is already low. The seller receives a premium called "option consideration". The buyer may then either exercise the option by buying the property or sell the option to someone else to exercise. This is often done to obtain control over a property without much cash. Option premiums are typically non-refundable. The option represents an equitable interest in the property and may be recorded at the county recorders office.

Short sale or preforeclosure

When a property owner fails to make their mortgage payments for a number of months they are in default. The first step of the foreclosure process that the lender will take is to file the notice of default. This is a public document that is recorded. The property owner will contract to sell the home conditioned upon the lender accepting a lesser amount than what is owed on the mortgage. Note that there are no similarities between a real estate short sale and selling a stock short.
In many jurisdictions, including the United States, the seller is responsible for taxes on the amount of the mortgage left unpaid after the sale as ordinary income.
The Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec 20, 2007, generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. The original effective date was through 2009 but in October 2008, legislation extended the relief through 2012. Use IRS form 982 to handle the debt relief provision.

Hard money lenders

These are often used to finance projects that are unconventional, great deals, or where money is needed quickly. Typically hard money lenders will lend 50-70% of the value of the property regardless of the sales price. They will typically close loans in 2–7 days. Credit scores and income are often overlooked by hard money lenders, however they may ask to see a business plan or exit strategy for the project. They may get paid via points, interest rate, and an equitable interest. These will vary based on the size of the project and the agreed upon contract. Hard money lenders are collateral based and typically require first position on the property.

Tax liens

This may not clearly fall in the category of "real estate investing", however it is worth mentioning. Each state creates the system and rules for the lien or deed process so careful research is necessary. In general, property owners are notified regarding the amount of taxes owed and are given a period of time to pay. If the amount remains delinquent, the state will take one of the following paths :

Tax lien state

The county in which the property is located sells the lien certificate at a sale or auction. Some states sell the lien for the amount while others allow bidding to begin at that price. The purchaser of the tax lien collects interest from the home owner on the amount that was paid for the tax lien. If the tax lien goes unpaid during the redemption period, the investor may foreclose on the home. Unlike most foreclosures, when a tax lien is foreclosed on, all other liens and mortgages are abolished and the property would be owned "free and clear". Typically the lender will pay off the tax lien to avoid losing their house and/or property.

Tax deed state

The county government sells the deed to the property at a public sale or auction. The benefit for investors is the ability to purchase property at discounted rates, often for the amount owed in taxes. When an account becomes delinquent, the property is listed at the tax assessor's office, some are even online. Properties with homes are usually purchased by investors prior to foreclosure.

Paper/notes/mortgage investing

This also is less of a "creative real estate investing" technique as typically described. Mortgages are often sold by lenders to other lending institutions. Investors can broker transactions by arranging buyers and sellers of notes to meet or by buying them and immediately selling them for a profit.

Flipping

Flipping is buying an under priced property and then quickly reselling it at market value. Homes are typically sold below value by uninformed sellers or those in distress. Often a property is sold under market value because it is a "fixer upper". Sometimes they require very little such as paint and carpet and other times they have mold, asbestos, or foundation issues. These inherently hold more risk and more work, and therefore often have substantial profits.

Land trust

Land Trusts have traditionally been used as a non-profit entity to own property. In recent years, many companies have developed methodologies that allow for Land Trusts to be used to acquire properties in foreclosure allowing homeowners to save their homes and making it possible for investors to see incredible returns. In a Real Estate Investment model Land Trusts bring ease to the transaction. While some people believe that using a Land Trust also brings a benefit of not causing Due-on-sale clauses to force the refinancing of the subject property, this is only true when the borrower is and remains a beneficiary of the trust and which does not relate to a transfer of rights of occupancy in the property. While the use of Land Trusts by real estate investors does make it more difficult for a lender to discover a transfer has occurred, the loan can still be accelerated if it is discovered since a transfer has occurred.
By federal law a transfer to a trustee in an inter vivos trust cannot be considered a due-on-sale violation unless all of one's beneficiary interest would have been transferred to another. Title 12 of the US Code Para. 1701-j-3 - i.e., the Garn–St. Germain Depository Institutions Act of 1982, specifically makes this point.
What this means is that a partial beneficiary interest, of one to ninety-nine percent, can be given to a co-beneficiary without triggering a lender's alienation recourse can be a remainder beneficiary, rather than needing to be remainder trustee, as would be the case with the standard, and far more common, trustee-directed inter vivos trust.