What is creative financing?
Commonly used phrase which involves non-traditional types of funding that are not commonly used. Most of these techniques involve the seller not having to use much or any of their own money.
• Lease Options
• Subject2 deals
• Hard Money loans
• Seller financing
• Private loans
• Wrap-around Mortgages
Definition of Subject To
A real estate transaction where title to the property gets transferred to the new buyer and the new buyer takes over the payments on the existing loan. The seller’s existing loan is not satisfied or paid off; the house is bought “subject to” the existing mortgage.
Example
Owner of a property has a $100k existing mortgage at 5%. Current payment is $537. The buyer makes an offer to buy the property and simply takes over the $537 payment. Title transfers and the buyer is now the new owner of the property.
Benefits of doing a Sub2 deal
Benefits to Buyer
-Smaller down payment (or maybe no down payment)
-No loan qualification
-Lower closing costs
-Don’t have to work through lender – no arduous underwriting process
-Don’t have to have good credit
-Don’t have to be employed
-Can do as many of these deals as you want because they will never show up on your credit
Benefits to Seller
-Quicker sale
-Increase the pool of potential buyers
-Relieved of mortgage payment
-New buyer will build their credit score with consistent on-time payments
How do they work?
Many sellers will have never heard of a Sub2 deal. Don’t expect people to be offering their homes Subject to. You will need to put the numbers together and incorporate this type of deal into your offer. You will play the part of consultant as you educate them on the strategy as well as show them how it is beneficial to them to do this type of a deal.
This is how you create creatively financed deals. I hear many people say they “can’t find good deals”. Well, we don’t always find good deals, we have to create them.
What to watch out for as an investor
• Make sure the title is clear that you are taking over – Do title search
• Make sure the numbers work on the deal – Work financial analysis before buying
• Have a clear exit strategy – buy and hold, buy and sell, wholesale, etc.
Concerns to the Seller
What if the investor doesn’t make the mortgage payment?
Answer-
• You are an investor and are doing this deal to make money. If you make the payment you make money on the deal. It would be a waste of time to do a sub2 deal and then not make the payment. What’s the point?
• The loan is still in the seller’s name and they can monitor on time payments on the internet or by calling their bank
• Tell them if you are late ONCE you will immediately deed the property back to them
• What other options does the seller have? Probably none. Many Sub2 deals will be with houses going into foreclosure.
What if the bank doesn’t want to do this kind of a deal?
Answer-
• In most cases the bank will not even know you are doing the deal. They don’t monitor the country recorder’s office to see if title is being transferred on their properties.
• Even if the bank does know, typically they won’t care as long as the payment is being made
• Banks will get notified if insurance is changed but, again, they probably won’t care.
The Dreaded Due-on-sale Clause
• When title transfers the bank has a right to call the note due. They have the RIGHT not the obligation. The question is will they?
• If they do call the note and you can’t refinance and don’t have the money to pay the bank, their only option is to foreclose. In this market do you think banks will foreclosure on homes that have a fully performing underlying loan? Probably not.
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