Creative real estate investing involves making money from property in non-traditional ways. Examples include options, wholesaling, and tax privileges. It does not have negative connotations like creative accounting.
Creative real estate investing is an umbrella term for making money off property in ways other than the traditional method of getting a mortgage to buy a single home and then selling it at a profit. Technically, the term could cover buying a home outright with personal money, although this would usually not be considered in the spirit of the term. Instead, it covers a wide range of activities, some of which are simply associated with the home buying process. Creative real estate investing usually doesn’t have negative connotations or implication of wrongdoing, as similar expressions like creative accounting do.
One of the prime examples of creative real estate investing is an option. It works similar to options used for less tangible financial assets such as stocks. An option involves a property owner, or agent, selling the right to purchase a home by a set date at a set price. The buyer of such an option would be hoping for market prices to rise before this date, allowing him to exercise the option and then immediately sell the home at a profit. The seller of the option is trading the risk of missing out on a higher selling price for the certainty of getting the money paid to buy the option in the first place.
Wholesaling involves buying several properties at a time and then selling a property quickly. This could involve buying houses in bulk that a bank obtained through foreclosure, then selling them individually at a low price. In such cases, the individual selling price is likely to be very low compared to the market value. The profit for the wholesaler simply comes from the fact that the bank will have accepted an even lower price as a form of wholesale discount, saving it from the risk of being left with unsold housing on its books.
Tax privileges can be another source of creative real estate investments. They refer to the fact that a county government can automatically acquire an interest in a property, known as a lien, if the holder fails to pay property taxes. Some counties will sell or auction such liens to private investors. The investor then assumes the right to receive the outstanding taxes plus interest, along with the risk that the homeowner may refuse to pay, forcing the investor to seek to foreclose on the property.
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