Primer on creative financing

You don't have to teach children about creative financing. They seem naturally to acquire the knack of offering marbles, a candy bar, and a bracelet for a wagon or toy car.

In other words, they recognize that what few assets they control have some intrinsic value in a barter situation.

Creative financing of real estate is based on the same principle.

Admittedly, most people prefer cash, because money is so easily converted into tangible things as well as the fact that it is readily divided into smaller amounts. If you find a seller that is motivated, however, assets other than cash may be attractive as well. Cash

If you can pay all cash for real estate, then you're with the majority. To the seller, all cash means that the escrow can close almost immediately.

Normally, the title insurance will take longer than anything else in the transaction. The seller will not have to wait for loan processing, credit checks , or anything else. Maybe this lack of uncertainty is worth a discount to the seller; maybe not. IOUs signed by the buyer

Observe that the traditional first mortgage, in which the buyer borrows from a third party (and agrees to make payments to the third party), looks like cash to the seller. Usually, the seller receives the loan proceeds right away.

The main difference here is that the escrow cannot close until the loan proceeds are delivered to the seller.

An IOU signed by the buyer eliminates the third-party lender.

The buyer promises to pay certain amounts to the seller; and for this promise , the seller allows credit toward the purchase price. The promise to pay does not have to be structured in the same way as a bank or savings and loan association might want it. IOUs signed by a third party

Suppose you are already collecting a note from a third party.

Assume that your seller would take the IOU from that third party and give you credit on your purchase for it. The question is, how much credit? It depends, obviously, on the face amount of the IOU, the interest rate, the amount of each monthly payment, and how much longer the IOU has to run before it is paid off.

It may also depend on what property the IOU is secured by.

Your handy Realty Computer, which is nothing more than a list of tables to facilitate money conversions, shows how each numerical factor affects the value of your IOU. Obviously, a note with an interest rate of 6 percent is not worth as much as an identical note at 15 percent. Vacant lots

If you own a vacant lot and you think it is worth, say, $20,000, you might be able to persuade the seller to take it in trade.

You'll have to negotiate, trying to convince the seller that he's better off with a deal for a lot than with no deal at all. It works both ways, though. Are you better off with a $20,000 lot that you can't sell, or an $18,000 down payment on property you'd much rather own?

If you own a vacant lot and are trying to trade up, be sure you have cleared the weeds, carted off any debris, and generally prepared the lot to look its best. Improved property

There is a whole school of thought on property exchanges. Now, you're not so much trying to trade up, offering unimproved lots or promises to pay. You're now trying to effect an exchange of more comparable property.

Be sure you are confident as to the value of both your property and the seller's. You may wind up making a trade but ending up poorer than when you began. Professional real-estate appraisers are frequently used when such exchanges are considered.

Why would someone want to trade, anyhow? It depends on a lot of factors.

The seller may be transferred, retired, or just plain tired of his own property. Further, he may want to change areas, get rid of a problem building, the roof might leak - who knows?

You should spend as much time checking out trades as you would in buying your own house for cash (or cash and IOUs).

Don't forget, if your place is worth less than his place, you can combine any or all of these creative financing practices on any transaction. Cars

Why not? If you can't sell your Cadillac or Mercedes in the marketplace, why not use it for a down payment? It could easily be worth middle Blue Book prices.

Naturally, your 1962 Plymouth Valiant won't go as far as a more remarkable model. Gemstones and jewelry

Most of us are not diamond experts, so use professional appraisers. Do not make the mistake of going in to your local neighborhood jeweler and asking for an offer. That is not an appraisal. There is a substantial difference between wholesale and retail diamond prices.

The same is true for jewelry. Just because it only cost you $1,000 10 or 15 years ago doesn't mean it isn't worth $10,000 now. Get it appraised. Promises

Can you start a new business, buy a storefront, and pay with a percentage of future profits, if any? You don't know unless you try.

If you are selling a business, can you obtain property instead of cash for a promise not to compete? Can you buy an option on property based on the promise of future purchase? Boats, labor, ads, silver, mailing lists

Being creative cannot be taught. All one can do is show some examples, explain the structure of the possible deals, offer some advice, and hope for the best.

If your real-estate broker is not willing to consider the various kinds of creative financing for you, you'll have to think about it for yourself. Take stock of what you have and try to evaluate what it is worth.

All you have to do is work long and hard enough to find someone who agrees with you.