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Creative real estate investing is a catch-all term for making money from property in ways other than the traditional method of getting a mortgage to buy a single house and then selling it at a profit. Technically, the term could cover buying a house outright with personal cash, though this usually wouldn't be considered as being in the spirit of the term. Instead, it covers a wide range of activities, some of which are merely associated with the house-buying process. Creative real estate investing does not usually carry the negative connotations or implication of wrongdoing, as do similar expressions such as creative accounting.
One of the main examples of creative real estate investing is an option. This works in a similar fashion to options used for less tangible financial assets such as stocks. An option involves a property owner, or an agent, selling the right to buy a house on or before a set date at a set price. The buyer of such an option would hope that market prices increase before this date, allowing him to exercise the option and then immediately sell the house at a profit. The seller of the option is trading the risk of missing out on a higher sale price for the certainty of getting the cash paid to buy the option in the first place.
Wholesaling involves buying multiple properties at a time and then quickly selling at a property. This might involve bulk buying houses that a bank has obtained through foreclosure, then selling them individually at a low price. In such cases, the individual sale price will likely be very low compared to market value. The profit for 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 housing on its books.
Tax liens can be another source of creative real estate investing. They relate 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 either sell or auction such liens to private investors. The investor then takes on the right to receive the outstanding tax money plus interest, along with the risk that the homeowner may refuse to pay, forcing the investor to seek to foreclose the property.
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