Success in Today’s Real Estate Market Requires a More Creative Approach to Finance
Whether you’re an agent, investor, or just an average homebuyer, the real estate market you’re operating in today is vastly different from just as recent as last year.
What worked then, often, won’t work today due to several factors. That means that if you’re not adapting, you’re at risk of losing out on opportunities, regardless of which side of the deal you’re working on.
So how has the market changed?
Well, for starters, traditional financing has become more difficult and expensive. Gone are the days of zipping quickly through a mortgage application and walking away with a 3% interest rate. We won’t see those rates again anytime soon, and to be blunt—we will likely never see rates like that again. It was a historical anomaly.
The federal funds rate has been going up for a few years now, and that means mortgage rates must follow suit, as they’ve been doing since the rate hikes started. As of today, the average mortgage rate is hovering at 6.78%, which is about double what we’ve seen in recent years. To put this in perspective, the difference between a 3% and a 7% mortgage rate adds about $1,000 to your mortgage payment for a typical median-priced single-family home, and that simple factor prices 18 million U.S. homebuyers out of the market for a home.
People who are stuck in their old habits may just see this as proof that they won’t be able to close as many deals as in the past, but that’s the wrong mindset. This statistic can be concerning—there’s no question. Especially if you’re a seller facing a dramatically smaller pool of potential buyers today. But the truth is that you’re really only limited by your own creativity.
Yes, it’s true that traditional financing has become significantly more expensive, and that poses a challenge both from a budgetary perspective and because buyers don’t want to feel like they’re settling. And it’s also true that underwriting guidelines have become more stringent as well. Lenders have adjusted their criteria to reduce risk by factoring in today’s record debt and growing default rates, so it now requires a stronger credit profile to secure financing compared to recent years.
But there are still lots of other options available, and this is a topic I’m passionate about because I’ve seen first hand how much impact it can have in carrying a deal across the finish line, even when both parties thought they had hit a dead end. This strategy is called “creative finance” and it’s simply a series of tactics to fund a real estate transaction without using a traditional mortgage.
I’m not going to break down the specific tactics because that’s not what I want to focus on. Instead, I want to focus on the mindset because while there are probably hundreds of tactics to achieve the end result, the key to every path here is having the right mindset. Besides that, there is no “one size fits all“ approach to creative financing because each deal is so different.
The foundation is having the confidence to propose an unconventional approach in the first place. This is easier said than done because most people are set in their ways, and unfortunately, most don’t even know that these tactics exist. As a result, you may face some degree of ridicule even proposing the idea. That’s OK—no one is going to die when that happens, unless you happen to be doing a deal with the Russian mob, in which case, you’re probably facing an entirely different set of problems.
If the other party is receptive, you can start discussing potential solutions, but keep in mind that this will likely require far more negotiations than a traditional deal because you have numerous additional variables you now have to account for. If this isn’t an area you’re already knowledgeable about, I highly encourage you to engage a professional who is, because getting this wrong is far easier than you realize, and the results of a mistake can be financially devastating.
If they’re not receptive, that doesn’t necessarily mean anything in the long term. I mentioned before that the market has changed—this means that while they may say no to your creative finance offer today, they may be more receptive six months down the road when it’s still sitting in the market with no activity. Just know that generally speaking, if they first said no and then later changed their mind, once you get into negotiations, they will either be fairly agreeable or very disagreeable, so don’t take it personally if it turns out to be the latter.
This is important for sellers too. Think about it like this—if everyone else on the market is only interested in conventionally financed buyers, but you’re willing to entertain seller financing, your property becomes exponentially more attractive to buyers.
It’s critical to conduct thorough due diligence in this case though, because it’s not just about closing—it’s about taking the transaction all the way across the real finish line, which is you getting paid everything they’ve agreed to. That means making all of the payments and/or refinancing to clear out the remaining balance. If they fail at any point along the way and you’re forced to foreclose, you’ll end up paying out thousands in legal fees while eating costs along the way. So it’s wise to invest more effort into due diligence than usual here to avoid that.
Bottom line—the real estate market is evolving and becoming more competitive on both sides of the transaction, so going beyond traditional financing to make more opportunities more viable for more people will give you a tremendous advantage over others in the market. You have two choices—evolve with the market or be left behind.