Can you define creative financing for me please



From: The Wife

Hi All,

Talking to finance people today , and our quest for creative finance, they would like to hear everyones definition of 'creative finance' please :eek:)

~Life is a daring adventure, or nothing at all~
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Reply: 1
From: Michael G


I'd say the first criteria would be a finance structure that a loan manager employed by major lender would say "you can't do that".

Another definition would be...

"a form of finance that enables the purchase of property that;

(i) enables a smaller than commercially acceptable deposit (less than 5%); or

(ii) offers an extended settlement period in which a revaluation of property may be obtained in exchange of deposit; or

(iii) a transfer of goods or services equivalent in perceived valued in exchange for;

(a) deposit; or

(b) balance."

Otherwise, simply say.

"Creative finance is the sale of property between interested parties by means outside normal lending practices"

How's that ?

Michael G.
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Reply: 1.1
From: The Wife

Thats great Michael, I already sorta know what 'creative financing' means, I want to know what it means to everyone else, in a bit of detail please :eek:)

OK, obviously Michael and I agree on what we think OUR versions of creative finance are, whats everyone elses?

~Life is a daring adventure, or nothing at all~
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Reply: 1.1.1
From: Michael Croft

a) More thoughts out of square and more dollars in pocket

b) 1+1=3 or more

c) When 100% plus aquisition costs means an infinite rate of return and real $$ in pocket

d) What would you like it to mean?

Michael Croft
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Reply: 1.1.2
From: RM .

TW, Michael,

When I saw this post,my thought was - hey that's easy. I then stopped and did a reality check!!!

What is creative financing??

I think the answer to this question has its roots in what is wrong with normal financing that gets most property investors seeing red with the major lenders.

Ok, how about this....

I have a sworn valuation by a valuer that the lender uses for $100,000. Why won't the lender advance me 90% of the value without Lenders Mortgage insurance? The risk to the lender should be less because of their own valuer.

I want to buy a rental property that an agent has said will return $200 per week. Why does the lender recognise ONLY 60% of the rent?. If I don't get the quoted rent who loses?

I can service a large IP loan? Why does the hoop of fire you have to jump through suddenly become more difficult when you want to borrow more than $500K, more than $1 million etc? Isn't the loss of risk the same ie 80/20 rule?

Lending rates are at historical lows. Money is cheap. Why then do major lenders use lending reference rates in excess of the 5 year fixed rates you can get your loan at?

Why do major lenders not take into account the after tax position of IP's even if it meant you had to go to one of their own "qualifying accountants" for confirmation?. What, they don't have access to clever accountants?

Why do some lenders loan money on the Reserve Bank Bill rate and then add a "customer premium"? Why can't ALL AAA rating property investors get money at close to that rate?

Why is it that most investors with borrowings well in excess of the mums and dads investors pay the same interest rates?

On extended settlements, why do major lenders not take into account the time value of money? That is, they know the inflation rate, they should be able to reasonably predict the value at settlement time. Hell, they can work out the time value of an interest rate in five years time with fixed rates?

I think if someone could address or even solve some of these issues, I think you would be able to call it creative financing?

So TW, how long before the Freestylers Bank is in operation? I would like to be your first customer.

Thanks for your wisdom.

Thanks RM.
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From: Michael Croft

Hi RM,

The banks are the perfect definition of creative finance; only it's always in their favour.

Michael Croft
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From: Michael G


I think you nailed one version there, actually I'm not sure its a definition, but I sure would like it to be a result of creative financing, ie..

"The ability to borrow all costs against the registered value of a property"

ie, if purchase costs = 10% (solicitor and bank fees etc) and the property had a registered value of $100k and you negotiated $90k, so costs would be $9k, then creative financing would allow an investor to borrow $99k against the value of the property.

Or maybe a lower negotiated price would be required to allow the lender to have a safety margin of 3-5% for sales costs in the case of a mortgagee sale.

Michael G.
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Reply: 2
From: Anonymous

Creative financing ?

I earn 25 000, and have $ 5000 saved. I have been to a course that says I can buy a million dollars + of property without any money down. Can you help me ?
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From: The Wife


Great post, and yep, you guessed it, I'm going for a freestylers bank, of sorts.

I have now had 3 goes at acquiring finance and supplying it creatively, and when push came to shove, all 3 times, the lendors couldnt get out of the square. Getting lendors out of the square is near impossible, I say near, because I am still chipping away at the system, this will probably be a life time project for me, just as well I have good patience.

I have come across someone else now who I think may just start coming our way, but I am testing them with scenarios like the ones you and everyone is posting, and then I would like to tie them down to it, my last 3 fallovers with others has left a bitter taste in my mouth, and I will be damned if I get so deep into again without the rules coming my way first.

I have had plenty of people and organisations come and offer me the so called holy grail "creative finance' but it always turns out to be standard bank stuff, this i find out in the first phone call with these people.

If anyone in the banking industry is reading this, and you think you can do creative financing, then please email me, although by now, I think you would have put a post up here saying something to that effect anyway.

Having spent a considerable amount of time now, looking at the finance sector, I can now see their side of the fence, I can now see all the rules and regulations they must follow, and if you follow the sequence of events that happens inside a finance institution when they loan out money, you will understand why they have these rules in place.

One bank person said to me, that if you want creative financing, put yourself in the banks position, and ask yourself, would you invest that much money, in your deal? Imagine yourself as the bank, would you do it?

Because thats what the bank is doing, they are investing. They also pointed out to me, that they are not a public service, they are investing for the long term, and we all know that when we say long term, the risk factor goes down considerably.

SO, what do we do? what if a brand new bank pops up? and they are on fine cutting edge of creative financing, they would then be investing for the short term, looking for good hard quick gains, would you put all your business with this bank? do you think they will fall over, and take all you have with them? Yes?

then why should a good long term solid bank invest with you for good hard quick gains?

I know I know its not quite the same, but in a way it is,

Ok, I had a good round table discussion with a group of financiers and a group of people who wanted creative financing, the finance people said, "we will give you more creative finance, but you have to give us some form of guarantee that we will get our money back, something other than the standard guarantee's" me, this sounds fair enough, as the finance people are the 'investors' in this deal, they want to know what and how their return will be, they said they will raise their mortgage Insurance to be appropriate with the risk.

Low and behold, the people wanting the finance rejected this, I didnt understand why they would reject it.

Their options where, higher MI, or no deal, and they couldnt do the deal anywhere else, no other financier wanted to know them, it meant that their bottom line, was a little bit thinner, but they would still get a decent percentage of something, as opposed to nothing, the figures to me, still looked viable, but the people wanting the finance said no, to much to pay in MI.

To me, this is cutting your nose of to spite your face. I found it very frustrating, I dont think these people realised , that in business, and investing is business, you sometimes have to do a deal, for a deal. Think of the bank as a joint venture partner, because thats certainly how they think of you.

I cannot stress the importance, of a deal for a deal, if you are looking for that elusive creative fiance. So many people want the bank to be creative, and yet, they themselves wont be creative in the higher split of the deal going to the bank.

SO you make a little less money? big deal, its better than no money, in the scheme of things, that little less money is just a spit in the ocean, as you make pockets of money here and there, you gain momentum, and far more push and shove in the finance world, the more money you make, the higher your demands can be, but you are never going to get there, if you dont do a 'deal for a deal'.

Now, having said all this, not all banks will do deals for a deal. You will have to shop around. Hopefully I can create a finance company that will naturally just give you a deal for a deal, but then I am sure you guys will lift the bar even higher again, and want more :eek:(

Anyway, I am still working on my little bank, so please, lots more ideas.

Cheers TW
~Life is a daring adventure, or nothing at all~
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Reply: 2.1
From: Michael Croft

Hi anon,

You've been to a course and it tells you how to do it.

Why aren't you? Don't you believe or trust them?

People here can help but we need more info. You might be a 96 year old pensioner with several million dollars worth of assets. This might change our collective input somewhat.

With $5,000 you can control a million dollars worth of real estate. The question is would you want to?

Michael Croft
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From: Sim' Hampel

Very well said, TW.

I started thinking about these kinds of issues just recently when asked to put forward money to fund a couple of deals.

The person in question was complaining about how the mortgage insurers couldn't see a good deal even if it bit them on the leg (or words to that effect). High yielding properties that would pay for themselves. Why wouldn't lenders/insurers agree to lend money based on that fact alone ?

I thought for a while and came up with this question for the person:

"So tell me, why won't I lend you any money for your deals ? You know I have enough and can draw on it today ?"

After a moment, the reply was...

"Umm... because you think my deals are too risky ?"

"BINGO !", I said, "This type of deal doesn't fit my personal risk profile !".

I had to explain a few truths to the person that the banks are trying to run a business - they need to maximise their returns and minimise their risk to their shareholders at the same time. The insurers are the same... they need to insure the risk, so there must always be limits as to what they will insure.

To make an analogy with the recent horrific events in the US, just take a look at what is happening with insurance for airlines, also travel insurance, even building insurance. Because the risk is now percieved to be greater, they must charge more for their premiums to ensure that they receive more money for payouts if it's needed and to try and ensure profits.

Paying more LMI for a more "risky" loan is fair enough. If the choice is between paying more LMI and not getting a loan at all... then paying more LMI seems like a no brainer ?

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Reply: 2.1.1
From: Sergey Golovin

The other side of that is coin -

In India (?) someone did open a bank and they do lend money to poor people.

When asked - why to poor, they do not have any money...

This is exactly the point - they do not have it, but they do need money to build houses, to buy seeds, etc. In regards to repayments - reach and middle class people always looking for way out (how to get away) and pay less, poor on the other hand borrow money and pay everything back, dollar by dollar. It is honour for them to pay all of it back and they are not running away.

What about interest rate and time frame – it is exactly the same as for rest of them.

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From: Sim' Hampel

On 10/5/01 9:40:00 AM, Sergey Golovin wrote:
>When asked - why to poor, they
>do not have any money...
>...poor on the other hand borrow money
>and pay everything back,
>dollar by dollar. It is honour
>for them to pay all of it back
>and they are not running away.

Ahh... the benefits of living in a society not tainted by the welfare mentality.

Then again, having been to India and seeing the quality of life for people there, I feel quite a lot better about paying a lot of taxes so that the majority of people here in Australia can live in relative comfort.

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From: Sergey Golovin

Yes sorry Sim,

I did not mean to say lets go to India.
I guess I'm saying would be nice to have more options. May be not. May be it is already as good as it gets.

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Reply: 3
From: Rolf Latham

Hi Tw

I have been holding off, perhaps because Im chicken.

I hear creative - I run.

I suppose its only my experience but here goes.

From my point of view creative deals are the ones that will cost you the most pain, risk your lenders accreditation, and pay you the least money for the work done.

What is creative finance ? Its when a client comes to you after having been to a HK seminar and wants you to help him/her get a dozen deposit bonds with one preapproval.Creative normally implies at the edge of legality, morality, sanity, normal risk management or otherwise.

Its clients that dont understand that we all think we are all better drivers than we really are; that is, we all think we are better credit risks than we really are.

A progressive broker finds the best deal for the scenario that a client presents. Sometimes the challenge might be one of serviceability, or rental reliance or low deposit, or chequered credit history, or variable income, or dubious security. There is usually a lender that will take on the risk of one of these out of the square issues.

The problem as I see it comes about when you have (lets look at the extreme) a person on a pension, with little deposit, that wants to "take out" a development of townhouses worth 4 million $. Can it be done ?, yes it can but none of it is above board.

All the replies to the post so far are valid "complaints" about how lenders consider different aspects of lending. Each individual concern can be easily overcome, such as 60 % of rental income considered for example. All of the issues put together Can NOT be overcome, and if they could I would not want my money being lent on that basis.

I mean, would you lend 107 % LVR to someone with a dubious credit history, on variable self employed income, in a small country town for a wrap mortgage, whose entire income is from two properties, - well would you ?? Thats how mainstream lenders see those at the edge of their envelope. Tis important sometimes to walk a mile in someone else's shoes.

Creative ? pass thank you.

Give me challenging, difficult and even previously refused, yes please anytime, thats where i make my muffins.


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Reply: 3.1
From: Dale Gatherum-Goss


Has anyone considered establishing their own bank via a credit union or building society?

There ya go, TW, it may be another benefit to the freestylers group. . . .

In a nutshell (and off the top of my head given that it has been a long while since I have been involved in one of these) a set of rules is established by which the FS bank will operate. This is drawn up by a solicitor and ratified by a board of original members of the bank.

Then, the group takes deposits from members and pays them interest at a rate determined. Then, that money is loaned to the person buying ppty so that the bank makes a tidy profit.

The merry go round rolls on and on and on.

It's just a thought . . . .


Ps Have you heard the joke about the old lady and the Governor of the Bank?
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Reply: 3.1.1
From: Rick Otton

how about have the seller deliver you the house in your name as part of the contract price all expenses of giving you the house that way are his.

he gives you all his furniture as part of sale not just the blinds that way he doesn't have to move it or sell it....then you rent the house fully furnished or empty but offer your furniture package (for a fee) which can for (an extra fee) be super sized to include tv,vcr etc

or have estate sale of all furniture which usually creates enough money for paying to move your stuff in

if the house needs work then its costed into the price of the house with your contractor doing the work being paid by vendors proceeds at settlement

i once bought a house which came with a free car....or a very expensive car that came with a free house,which ever way you wish to look at it

why do sellers do the above? because
a/ suggested they throw in something free to complete the transaction
b/... they just got sick of the negotiating

rick otton- vendor finance (wraps)association
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From: Michael G


Isn't it amazing what you can ask for and get, I'm only just starting to work this out.

Vendor to give purchaser two $200 gift vouchers for buying their house? done!

Michael G.
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Reply: 3.2
From: Victor Mann

I have to agree 100% with rolf.
Its has to do with risk assessment and just because the bank disagrees with your risk valuation dosent make it the bad guy!!!

Those that are successful long term success stories are not "creative but prudent" they seek opportunity, are patient , the rest will follow those in the 80"s that became property tycoons and then property goons.
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