Avoiding Bad Creative Finance Deals

Creative finance can be an incredible way to acquire properties that traditional real estate strategies can’t touch. But there are a lot of "deals" that look exciting on the surface, only to crumble if you actually know your numbers and strategies.

Let's cover how to avoid the fool's gold.

Many of these "deals" are promoted by people who never buy and operate their own, so they don't even understand the real math and best practices. They're just in it for the short-term paycheck.

Common Pitfalls in Creative Finance Deals

1. Acquisition Costs Are Sky-High

   

   It’s not just the cash to close... The true entry fee includes everything it takes to get that property fully operational. That's composed of down payments, assignment fees, reinstatements and past-due balances, closing costs, repairs, reserves, holding costs, and marketing. If you’re shelling out tens of thousands upfront, that deal had better pay you back well.

2. The Long-Term Rental Cash Flow Isn't There

   

   If you can't afford to hold it while it sits vacant OR while it's losing a couple hundred dollars a month, that 2.5% interest rate doesn't do you any good... Negative cash flow as an LTR is a major red flag.

3. Wholesaler and Buyer Speculation on Short-Term Rentals and Wraps

   

   
   There’s a lot of optimism about Airbnb, mid-term rentals, co-living, and wrap mortgage exit strategies as the solution for deals that don’t cash flow. But relying on these strategies to make the numbers work is a risky bet. Each has its own set of problems. Making sure you can afford any monthly losses as an LTR fallback, or that you can sell it off to get out of the deal without losing $$ is essential to risk management.

Critical Questions to Ask Before You Commit

When you’re evaluating a creative finance deal, you need to go beyond the hype and ask yourself some tough questions:

1. What’s my actual entry cost?
   This includes everything—down payment, assignment fees, back payments, repairs, reserves, utilities, marketing, and closing costs. AND anything else you want or have to spend to get that deal to the point it's producing income for you. Are you comfortable with the amount of cash you’re tying up and how long it will take to get operational? Maybe don't start a short term rental in December if that's the slow season...

2. How does it perform as a long-term rental?
   The property should stand on its own without relying on speculative strategies. If it doesn’t cash flow as a traditional rental, it’s not a sound investment unless you’re getting something significant in return. That can be a discount (so that you're buying it with equity) or a low interest rate that's worth more in the long run, even if it loses a couple hundred per month for the first couple of years. You have to know this before you jump on the deal though; it's not a willy-nilly decision. You have to say it to yourself and partners: "I'm going to lose $275 per month for the next 2 years on this property... and I can afford to do that because _____, and it's worth it because ____. And if things go wrong, my recovery strategy is _____."

3. What’s my exit strategy?
   Every deal needs a clear plan for how you’ll get your money back. It's best to have long term rental or sale as a fallback strategy if you're moving on one of the more speculative strategies. Don't buy over-market price! You won't be able to sell or refinance. Make sure your plan is realistic and aligns with the market conditions and seasonality of the market.

Additional Points to Watch For

• Overpriced Properties: Sellers and wholesalers often attach creative finance terms to properties priced well above market value. Don’t let the financing blind you to the property’s actual worth.

• Underestimated Expenses: Property management, vacancy rates, and ongoing maintenance costs are often overlooked in cash flow calculations. Make sure you account for the full financial picture.

• Tax Changes: Homestead exemption disappears when the owner-occupant sells to an investor... Are you ready for that? In Texas, veterans pay no property tax... are you ready to start paying $1,000/mo or more in property taxes on that deal?

• Insurance Availability and Price: You'd better be sure you can get affordable insurance in that area before you lose your EMD. Some deals can't even get insurance if active disasters are in play (wildfires, earthquakes, hurricanes, etc)

The Bottom Line

The first rule of real estate is simple: the numbers have to work. It's no different for creative finance. There are more ways to make the numbers work with creative, but an opportunity is not a deal. A deal that doesn’t at least break even as a long-term rental is generally unsafe except for the advanced investor who's cashed up to weather the problems.

Don’t let "doing a creative deal" push you into a bad deal. Learn to underwrite; and wait for the right deal.

Want to Analyze Deals Like a Pro?

If you’re tired of wasting time on bad deals, the Creative Underwriter Calculator is here to help. This easy-to-use tool simplifies the process, helping you quickly identify whether a deal is worth pursuing—or if you should walk away.

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