Real estate investing is probably the second oldest profession. Real estate investing is about controlling property to improve your situation in life. If you think about it for a moment, ancient wars were fought for the control of real estate. In its broadest sense, wars for real estate were an investment strategy (obviously not recommended) because going to war requires dedicating wealth and resources to the purpose. The only point here is that real estate investing goes back as far as we have recorded history.
I don’t want to go too far into the history of real estate investing but setting sail across the seas to discover and conquer new lands was another investing strategy. As was, traveling west to the new frontier by wagon train. Those can all be considered old-school creative real estate investing strategies. But let’s look at today’s difference between creative and traditional real estate investing.
Today, traditional investing involves finding available properties on the internet-based MLS (multiple listing system). It’s about working with a professional agent to narrow your search and help you navigate through the purchase process. It also requires qualifying for a bank loan based on passing a set of rigid qualification standards.
The process is very detailed orientated by requiring all of the Ts to be crossed before moving to the next step in the process. It requires writing earnest money checks before you can even communicate with the seller. It means proving you are pre-qualified for a loan before you know what house you might buy. In recent days, it means getting into bidding wars and making a ton of offers before getting anything accepted.
Once you have an offer accepted, a whole new set of people start looking at the agreement to see if they approve. Although the professional inspection is for your peace of mind, your lender can refuse to accept it. Lenders have very strict requirements for the appraisal process. And the lender closely scrutinizes your finances up to the very day they approve the mortgage.
Here’s the point, almost every step of the process is controlled by someone other than the buyer and the seller. Yet the buyer and seller are the main parties to the purchase agreement. Once the price is locked in and the purchase agreement is signed, there is no more room to negotiate terms and conditions. It’s not as if the seller is going to call the buyer to say, “The inspection report recommends replacing the furnace and I can get a great price on a top-quality furnace but I need something from you. Can we talk about what will work best for both of us?”
The key difference between a traditional and creative real estate deal is that creativity allows both the seller and buyer to find a solution that works for both of them. A Win-Win Solution.
Unfortunately, a win-win solution can look like either the seller or buyer is trying to take advantage of the other one. It can be a distressed seller giving a generous price discount in exchange for some cash they need immediately instead of waiting two months for the sale to close. Or it could be a buyer willing to pay top dollar in exchange for seller-financing because they can’t quite qualify for a bank loan. It can still be a win-win solution even if it costs you some money.
The key difference between a creative and traditional real estate investment is that a creative deal allows for much more negotiation and interaction between the buyer and the seller. A creative deal can be just as much about the terms as the price (often more so). That’s why creative investing involves such things as taking title subject to existing financing. Or seller financing. Or a lease with an option to purchase.
The investor can even make several offers on the same property at the same time to learn what will work best for the seller. When you learn what the seller needs most, you don’t have to offer top dollar. In creative deals, it is often getting money fast rather than the most money. A lease with an option to purchase can generate money in a day or two without ever involving a bank. It’s about solving the seller’s most urgent problem.
The traditional approach works well for most sellers. That is why it has evolved into a highly structured process where everyone knows exactly what the next step will be. Creative deals tend to be messier. You might start down one creative path only to learn that a different path will result in a better outcome for both the seller and buyer.
Obviously, very few deals requiring creativity fit the traditional process. A seller needing cash next week can’t wait for marketing materials and the listing to become available on the MLS in a couple of weeks. Or a buyer who knows that it is futile to look at MLS listings when they need a lease with the option to purchase.
The bottom line is that creative real estate investing requires more effort on the part of either the buyer or seller (usually more effort on the part of the buyer). Someone has to make the effort to match the unique needs of the seller with the unique needs of the buyer. That is NOT what the traditional process is intended to do.
Please leave a comment on your unique thoughts.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].