I hear people use the term creative real estate investing all the time. Creative real estate investing can mean a lot of things, but I tend to see it when people are trying to make a deal out of a property that is not a deal. That may rub people the wrong way, but in my opinion, investing in real estate with basic fundamentals is better than creative real estate investing all day long. I am not talking about creative financing, which could include finding private money, or seller financing, but trying to make a deal out of a house that is overpriced or is a bad investment. There are so many opportunities out there for good investments; why waste time on the bad investments?
What is creative real estate investing?
I see the term creative real estate investing thrown around a lot. Usually, I see someone trying to make a deal out of a property that is not a good deal. The property is overpriced; it does not cash flow; or there are other major problems. The person asks, “How can I make this deal work?” My answer is usually to go look for another property. One of the best things about real estate is the ability to get a great deal. Why would someone want to buy a house that is not only not a great deal but a bad deal?
Here is a scenario I saw on Facebook:
A house was for sale with an agent, and the owners owed around $260,000. According to the poster, the house was worth about $220,000.
The thread went on and on about how to make this deal work. The solution the poster wanted to hear was to do a subject to sale then lease option the house and somehow make your money back. I hear stories like this all the time about a motivated seller that has no equity, the price is too high, or the house had major problems. How can we make this a deal?! Some deals aren’t worth doing.
What about being creative with real estate financing?
If you want to get creative with real estate financing, that may be a different story. Maybe you found a great deal but do not have any money. I have nothing against people getting creative to find money with partners, private money, seller financing, or other options as long as the house is a good deal. I use private money all the time, and I am always exploring new financing options. I talk all the time about how to find money for deals that are actually good deals. Below are more articles on the subject:
- How to find private money
- How to flip houses with no money
- How to buy rentals with no money
- How to invest in real estate with little money down
What does “subject to” mean?
The term “subject to” means subject to the mortgage. If someone buys a house on subject to terms, they are not paying off the mortgage but taking it over. The problem is they are not taking the mortgage into their name: just promising to take it over. Almost all mortgages have a due on sale clause that says if a house is sold, the lender can call the loan due, which means it has to be paid off.
It could be really tough buying a house using a title company with subject to terms because they will not guarantee a clear title. Buying a house with subject to terms also does not relieve the seller from the loan obligation. The loan is still in their name, and if payments are not made, they will be in default.
Some creative real estate investors may see a subject to deal as a way to buy a house with little money and no risk. There may be little risk to the investor in the beginning, but there is a ton of risk to the seller. Some investors may not accurately portray that risk to the seller when they do a subject to deal, especially if the investor feels they can just walk away from the deal if the bank calls the loan due or the deal does not work out for them. If the investor is buying the house for more than it is worth, they have almost no incentive to stay in the deal if things go south.
If the house is a good deal and someone uses subject to financing, there are many more options. If things do not go as planned, the investor could sell the house and pay off the loan.
Are lease options a good way to be creative with real estate deals?
Another strategy that some investors like to use to be creative is a lease option. A lease option is where the owner leases the house to someone with the option to buy. A lease option usually has the tenant making all repairs and taking full responsibility for the house. The tenant usually makes a substantial down payment and pays more than market rent for the chance to someday own the house.
If you couple this strategy with a subject to deal, the real estate investor could rent the house for more than the mortgage payment, collect a down payment, and have very little risk in the deal. Sounds great, right? To the investor, it sounds like an okay deal, except they have no skin in the game, and they will most likely bolt and leave the seller in a bad spot if things don’t go as planned.
Are lease options and subject to deals a bad investment?
I do not use lease options or subject to strategies to invest in real estate, but I am not going to say everyone who does them is a bad person. In many situations, the strategies work great for both sides when the deal makes sense. What I don’t like is using the strategies to try to make a bad deal a good deal.
Why buy a house for more than it is worth with these strategies when you could buy a house for less than it is worth and still use these strategies? Then, if things go bad, you can sell the house and make sure the seller is not abandoned with a bad loan.
For more information on buying, financing, and managing rentals, check out: How to Build a Rental Property Empire.