Creative real estate investing covers ways of making money from property beyond traditional methods. Examples include options, wholesale, and tax liens. It does not carry negative connotations like creative accounting.
Creative real estate investing is a general term for making money from property in ways other than the traditional method of obtaining a mortgage to buy a house and then selling it at a profit. Technically, the term could cover purchasing a home outright with personal cash, although this would not generally be considered to be 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 generally does not carry negative connotations or implication of wrongdoing, as do similar expressions such as creative accounting.
One of the main examples of creative real estate investment is an option. This works in a similar way to options used for less tangible financial assets like stocks. An option involves a property owner, or an agent, selling the right to purchase a home on or before a set date at a set price. The buyer of such an option would expect market prices to rise before this date, allowing him or her to exercise the option and then immediately sell the home at a profit. The option seller is trading the risk of losing a higher asking price for the certainty of getting the cash paid to buy the option in the first place.
Wholesale involves buying multiple properties at once, then selling quickly on one property. This could involve buying houses in bulk that a bank has obtained through foreclosure and then selling them individually at a low price. In such cases, the individual sales price will likely be very low compared to the market value. The benefit to the wholesaler comes simply from the fact that the bank will have accepted an even lower price as a form of bulk discount, saving it from the risk of being left with unsold homes on its books.
Tax liens can be another source of creative real estate investment. They relate to the fact that a county government can automatically acquire an interest in a property, known as a lien, if the owner fails to pay property taxes. Some counties will sell or auction off such liens to private investors. The investor then assumes the right to receive the outstanding tax money plus interest, along with the risk that the owner refuses to pay, forcing the investor to seek foreclosure on the property.
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