What is
Creative Financing?
Creative Financing Can Help Sellers:
4 Reasons Homeowners Subto or Seller Finance
#1 Reason: Money
#2 Reason: Pain
#3 Reason: Lump Sum Payment
#4 Reason: Taxes
#1 Reason: Money
Without a doubt, utilizing innovative financial approaches enables sellers to potentially earn more than if they were to rely solely on a realtor or list their property on the market.
Here's the deal – when you sell through a realtor or use conventional market channels, you end up paying a percentage or a commission.
In simple terms, that translates to less money in the seller's pocket.
Many individuals mistakenly associate equity with what they owe and the pricing they find on platforms like Zillow.
But that's not the case.
That's actually referred to as the spread.
Equity is the amount you actually have in your pocket after successfully selling your property.
Often, after factoring in commissions and fees, sellers find themselves with less than they initially expected.
Creative financing, on the other hand, empowers sellers to negotiate terms that suit both parties, allowing them to achieve the desired selling price.
This holds true for seller financing or subject-to arrangements – sellers receive the necessary funds precisely when they need them.
And this brings you to the second reason.
#2 Reason: Pain
Identifying pain points involves recognizing the challenges that individuals face and need solutions for.
For our team, a seller's pain is the driving force behind their consideration of creative finance.
Our team has collaborated with numerous sellers, each with a unique set of challenges prompting them to sell their homes.
In one particular instance, we worked with a woman who had recently purchased a house with her husband. Sadly, just a month later, her husband passed away. Apart from the emotional toll of grieving her husband, he had been the primary source of income. Now, she found herself with a sizable property she couldn't afford, adding to the challenges of managing everything after the loss of a loved one.
Then there's Dave, the individual our team bought the house from. He was eager to move into a new home but was unable to do so until he successfully sold his previous one. Notably, his property had been on the market for six months without any success through traditional realtor channels.
Another seller, Karen, graciously shared her experience in a video. She highlighted how utilizing a subject-to approach helped her sell even when she had zero equity:
With creative financing, both of these sellers not only obtained the necessary funds but also addressed their challenges in a relatively seamless manner.
And that leads us to reason three.
#3 Reason: Lump Sum Payment
When structuring a creative financing deal, in most cases, the seller receives the agreed-upon payment in one lump sum.
Even with seller financing, a monthly fee is still paid on top of the initial house purchase amount.
Consider reason 2 – their pain point.
Some pain points are resolved by relieving the seller of the property, enabling them to enjoy the benefits of receiving their money.
And, in many cases, that money is allocated for another purpose.
For the seller who had recently lost her husband, those funds could have covered moving expenses (as she had to relocate to her son's place), funeral costs, burial expenses, or other unforeseen needs.
What matters is that she promptly received the funds in her hands, allowing her to use them as soon as possible.
In one deal I facilitated, a seller was in the midst of moving cross-country, from North Carolina to Arizona.
The down payment I provided assisted her with moving, rent, and other travel costs.
When a seller needs to sell quickly, the luxury of waiting for a realtor or a listing to gain visibility is often not an option.
#4 Reason: Taxes
Finally, sellers have the opportunity to circumvent the taxes associated with the traditional real estate selling process.
For example, with seller financing, a seller can defer paying taxes on the sale in the initial year!
Creative financing not only helps sellers maximize their earnings, address pain points, and acquire the necessary funds but also assists them in sidestepping a hefty tax bill.
Numerous individuals benefit from creative finance, and for my team and me, that's the core motivation behind what we do.
FAQ’S on Subject To
What happens if your company doesn’t make the mortgage payments?
If we don’t make the payment on time you will get the deed to the property back by us signing a performance deed, deed in lieu of foreclosure or Quit Claim Deed at the time of the sale.
However, as our business reputation and financial investment (i.e expenses for bringing the loan current, paying for repairs/maintenance, closing costs, insurance etc.) would also be on the line, you can rest assured all payments will be made timely. If we don’t make the payment you will get the deed to the property back.
With the loan remaining in my name, how will that impact me getting a new mortgage in the future?
Once we buy the property you will get credit for 75% of the mortgage debt for the first 12 months. Once we have taken over and paid the mortgage for 12 months you will get 100% credit on your DTI* ratio. If the lender requests any additional documents to confirm your prior mortgage is being paid, just contact us and we’ll be happy to provide them a DTI* declaration.
DTI*= Debt-To-Income ratio
Why would you buy this property this way, how are you going to profit on this deal?
We are full time in the real estate business and have been for a while now. We have many different exit strategies depending on how we purchase the property and what type of property it is. Some of our past exit strategies have been to rent, lease purchase, owner finance, rehab and sell, AirBnB, Group homes, Corporate rental plus many more.
How will this affect the Due on Sales Clause?
We have bought plenty of deals like this in the past and have never had an issue. The most important thing to the bank is to make sure the insurance stays current and to keep the payments current which we always do. Banks don’t have a Due on Sale Clause department and are not in the business to foreclose and take homes back in fact that hurts the banks credit with the government.
However, in the very rare 1 in 1000 chance this comes up we are always happy to discuss with the bank to help them understand why this is beneficial for them and if that doesn’t work we keep a cash reserve for these types of potential issues. There is also an insurance company that sells a policy that we can purchase that if this happens they will pay the bank off and give us the same exact mortgage with same balance, rates and length as we had with the bank.
How does this program work if I have a mortgage?
After terms are accepted and due diligence completed, the closing is done through a local real estate attorney. At closing, the deed would be transferred into our company name and the mortgage loan would remain in your name until it has been paid off in full.
Is this legal?
Yes, on line 203 of the HUD statement (document provided when a home is bought/sold) there is a line option that indicates a property is being sold ‘subject to existing financing’.
This is exactly what we are doing by purchasing your property under this option.
We are keeping your current mortgage in place and making the payments on your behalf.
Why don’t you just go ahead and a new loan to pay off my loan?
I have a bunch of loans already and the banks won’t let me get an unlimited amount of loans. I want to buy hundreds more homes so this is the best way. Also it really doesn’t make much sense to get a loan to pay off another loan especially since you have a good rate. Getting a new loan will just cost us a bunch of money that the banks will get that will ultimately be less money in our pockets.
How long will the mortgage stay in my name?
The time frame to pay off the mortgage is typically set for the remaining life of the loan. However, as our profit is made once the property sells, it is our priority to sell the property and pay off the mortgage balance sooner rather than later.
How long will it take to close?
We typically close within 30 business days, but this can be adjusted according to the needs of the seller, status of the mortgage (example: if there were a pending foreclosure date) and/or if other issues impacting closing arise. We have been able to close in as fast as 7 to 14 days.
Who handles maintenance and repairs on the property?
We do, our company will be responsible for all maintenance and repairs on the property per the terms of the agreement.
Are there any out of pocket expenses for me to sell my home using this option?
No, our company covers all expenses related to closing the transaction with the real estate attorney.
Do I need to make any repairs or updates before the property is sold?
No, our company will purchase the property in as-is condition.
How can I confirm payments are being made? Payment confirmations can be made by contacting the lender’s customer service number or logging into your online account with the lender. I can also send you a confirmation receipt each month that the payment has been made.
Will I receive any additional money at closing?
Yes, you will receive the amount of money we both agree to in the purchase contract
If I have little to no equity in my property, can I use this option to sell?
Yes, equity is not a factor, as we purchase properties with varying amounts of equity.
If I’m behind on my mortgage and facing foreclosure, will you bring my loan current?
Yes, at closing, the past due amount will be placed in escrow with the closing attorney’s office. The attorney will then forward it directly to the lender via wire transfer, thus bringing the loan current.
How will selling using this option affect my credit?
Our timely payments on your mortgage should strengthen your credit score. As the number of on time payments grow and the loan balance decreases you should begin to see a positive impact (given other items on your credit report are also in good standing).
Do I need to notify the bank of the pending deed transfer?
No, they do not need to be notified, timely mortgage payments are the priority for the lender, not who is making the payments.
What if either my spouse or I die, what responsibility will my heirs have?
There would be no responsibility to the heirs. Since we would own the property, we’d continue to make payments to the lender as normal.
Who pays for the property insurance?
We do, our company will obtain a new non owner-occupied policy. All parties listed on the loan, the lender and our company will be listed as policy holders. If an insurance claim needed to be filed at any time, we would file it.
If I have a mortgage, what would the purchase price be on the closing documents?
The purchase price will be set as the current loan balance unless you are paid extra for your equity.
When will you start making my mortgage payments?
Right away
*Note: If the loan is past due and/or has a potential foreclosure date, the mortgage would be brought current at closing.
Can I claim this property as a rental on my taxes once your company takes ownership?
No, as we would own the property, the tax benefits of ownership would follow.
Is this the best option for me?
The motivation to sell a property varies from seller to seller, so that would be for you to decide.
This option typically works best for a seller who:
*Needs to sell but does not need cash upfront
*May have little to no equity in the property and is unable to sell through traditional means
*Has inherited a property with a mortgage, but has no desire to keep or maintain the property
*May be experiencing a financial hardship or have health concerns which impact them from keeping the loan current
*Has a mortgage with some equity, but do not have time to list it and wait for it to sell through a realtor (example: if relocating for a job/military etc.)
© Copyright. All rights reserved.
We need your consent to load the translations
We use a third-party service to translate the website content that may collect data about your activity. Please review the details in the privacy policy and accept the service to view the translations.