Real Estate 036: "Subject to" creative financing

In most of my previous blog posts, I have discussed traditional ways of purchasing real estate whether it be through the MLS, buyers agents, wholesalers, turnkey providers, and for sale by owners (FSBO). I wanted to discuss a new creative financing strategy that I have recently discussed with an investor friend of mine called "Subject To". They are lessor known to newer investors, but nevertheless are powerful strategies to scale your portfolio and maximize returns.

"Subject To" is a shortened form of the phrase "subject to the existing finance" of a property. At first, this may seem too good to be true. Many times than not, this strategy allows you to buy real estate without cash or credit, and also take advantage of good terms (lower interest rate through owner occupant sellers). You may be asking yourself, "why would a seller allow someone to take title (deed transfer) of a property and still leave the original financing in place?"

This is where investors need to realize the difference between sellers who "want" to sell vs those who "need" to sell. Those who "need" to sell already have the motivation, whether it be financial distress, health issues, a death in the family, divorce, or a myriad of other reasons that is not our business. However, by working with a seller who is in distress, investors are able to apply these creative strategies for effectively (Refer to my post on negotiating real estate/seller financing for more tips on talking with a motivated seller).

There are two key concepts we must remember when applying this strategy:

  1. Full transparency: We need to disclose to the seller what we are trying to do (e.g. purchase the property through seller financing, rehab the property and sell it retail/or hold long term for cash flow, refinance with another lender, etc.)

  2. Due on sale clause: Most loan documents (if not all) have a clause that specifically states that the lender is able to accelerate the due date of the loan if there is transfer of title. Regardless of whether or not the lender decides to call the loan due, it is important to understand the risk involved. 

I recently attended a 3-day seminar hosted by Protect Wealth Academy, where Clint Coons and Anderson Advisors spoke about a loophole to bypass the "due on sale clause" for asset protection, which also happen to be applicable to this strategy.

Clint mentioned that the Garn-St. Germain Act of 1982 allows anyone to put real estate in their own "trust" without triggering the "due on sale clause". This appeared to be intended for the wealthy to be able to transfer their real estate assets down to future generations, however, savvy real estate investors quickly started using this for creative financing strategies.

In a nutshell, a land trust is simply an agreement where the trustee holds ownership of the belongings of the trust for the benefit of a third party (beneficiary). In this case, an investor wishing to use the Subject To strategy would create a trust whereby the buyer is the trustee and the seller is the beneficiary. The seller would transfer title to the buyer/trustee and further assign their beneficial interest to you. The assignment of interest is not publicly recorded and now you have control of the trust and its benefits. As long as you continue to make payments, the lender should not have issues with receiving payments from a newly formed trust.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!


Real Estate 010: How to buy Real Estate through Seller Financing

How to buy Real Estate through Seller Financing

A lot of newbie real estate investors have a common problem when first starting out - lack of capital. As discussed in previous blog posts, there is more than one way to successfully invest in real estate, and that includes financing. An investor can save their money and purchase a property all cash, obtain a conventional or commercial mortgage, or look for private or hard money lenders. Another method that experienced investors love to use is seller financing, or owner-carry.

This simply means that the seller of the property becomes the bank and the buyer will now pay the monthly loan amount to the seller, and not a bank/private institution. Let's take a quick look at some of the advantages and disadvantages of seller financing:


  1. Flexibility of terms (Interest Rate, Downpayment, Amortization period, payback period, balloon payment amount, etc.)

  2. Easier to qualify (No bank involvement means less paperwork, as long as you and the seller agree)

  3. Cheaper closing costs (No bank fees, appraisals)

  4. Purchase through an entity (Corporation, LLC - this is generally not allowed for conventional mortgages)


  1. Premium for flexibility (Higher interest rates/purchase price)

  2. Balloon payment

  3. No bank underwriting (No objective third-party that may identify blind spots in the deal that may make it a “dud”)

  4. Property may not appraise for expected ARV (After repair value)

These are general pros and cons, and typically, the pros far outweigh the cons. Experienced investors know that conventional fannie mae or freddie mac mortgages are the cheapest money that an investor will find in the market. This is because they are backed by the government, have no balloon payment, and the loan is amortized over 30 years, which drastically improve your cash flow numbers as long as you are a long term buy and hold investor. However, there may be situations where investors have issues with repairing their credit, do not have enough reserves to meet fannie mae guidelines, or want to purchase a distressed property to rehab and refinance down the road. These issues may lead to the investor not being able to obtain a conventional mortgage, and where seller financing comes in handy.

Case Study: Bo’s seller financed deal.

Let me give you an example of a recent deal I took down with a partner of mine in the midwest. These two duplexes that were in the same neighborhood (Not same street) were being listed on the MLS for above what I thought market prices were at the time. However, I knew the market well and wanted to explore the option of “making” it into a deal that would work for me.

(Note: The best advice I got from my mentors is that in real estate, you only need to win ONE of the two: purchase price or terms. If the seller is focused on receiving an X amount for his properties (within reasonable range of course), then you can dictate the terms to make it into a good deal. Contrarily, if he was Y terms, you can negotiate the price to still win on the deal).

I flew out to the market and looked at both duplexes and knew that it needed a little bit of work to get it to my standards (read: meat on the bone). The properties have been on the market for quite some time so I knew I can negotiated. My first order of business was to talk to the seller and agent to understand why they are selling and what their motivation was. Through multiple conversations, I found out that the seller was an experienced investor who has owned the duplexes for 20 years free and clear, looking to retire and move to another state. I verified this information through online searches as well as looking at his other properties he had in the area that he was selling off one by one.

This taught me three things: 1) The seller is motivated 2) The seller may also benefit from a stream of cash flow, and not necessarily a lump sum. 3) The property is owned free and clear which is perfect for owner financing (No bank involvement and triggering of the “due on sale” clause).

I ran my numbers conservatively and made the following offer:

  • 40K off of purchase price X

  • 6% interest

  • 10% downpayment

  • 10 year balloon

  • 20 year amortization

Quickly thereafter, the seller accepted my terms, but countered at only 20K off of the purchase price. I called the seller myself explaining my reasoning for requesting 40K off of the purchase price (read: its very important to build rapport with the seller/agent and not get emotionally tied down). He agreed at came down to 30K off of the purchase price. I agreed to the terms and we signed the contract.

I quickly performed full house inspections, sewer scoping, termite inspections on both properties and found multiple issues, and estimated that the property needed atleast $15-20K worth of work after closing. This was not too far off from my estimate at $10K, but still higher than expected.

I went back to the seller and told them I will need to go back to my original offer of 40K off of the purchase price for the above reasons. (At this point, the seller was irritated that I was attempting to “retrade”, however, the inspections discovered new issues that I was unaware of before, as such, this is normal in the due diligence process and I knew I needed to be courteous, but firm in my numbers and reasoning).

After multiple emails and not gaining any momentum, I decided to let go of purchase price X, and focus on terms Y. I adjusted the numbers in the calculator to make the deal still work for me. As I am a cash flow investor, I crunched the numbers with the following new terms:

  • 30K off of purchase price X (Same)

  • 5.25% interest (Down from 6%)

  • 12.5% downpayment (Increased from 10%)

  • 10 year balloon (Same)

  • 30 year amortization (Increased from 20 years)

As you can see, I left the purchase price and balloon payment period the same, reduced the interest amount, and amortization period, thereby increasing my monthly cash flow, but also increased the downpayment amount by 2.5%.

Negotiations is a relationship game (refer to my blog post on Book Review: Never Split the Difference), and I knew that if I only “took” from the terms without giving anything back, the seller would feel it as another loss and possibly want to increase the purchase price or back out of the deal. As I realized from previous conversations that purchase price and cash at closing was somewhat important to him, I increased my downpayment by 2.5% (couple thousand dollars), but reduced the interest rate and amortized it over 10 more years. This move allowed my property to cash flow $150/month better than the previous offer and made this financing much more competitive that a traditional conventional mortgage which would have required 25% down for 2-4 units and had quotes for 5.875-6.125% interest rates at the time of this deal.

I knew that in 10 years, we would have heavily paid down the loan, property appreciate it value, and cash flowed enough that we could refinance the balloon or pay it all off if we wanted to. In the end, the seller accepted my terms and we created a win-win deal. The seller received steady monthly mortgage payments and a nice interest rate on top of his equity in the property, and I did not have to use my conventional mortgage slots, and obtained 4 units with only 12.5% down. Further, I feel with the relationship built with this seller, I can reconnect in 6-8 months to inquire about purchasing his other 10-15 properties in the area.

The biggest lesson learned for me was that to succeed in real estate, you have to have many tools in your toolbelt and think outside the box. Figuring out the seller’s why, solving their biggest problem, and offering multiple options is a sure method for you to get your deal accepted.

As Brandon Turner from biggerpockets often says, to an investor who only has a hammer, every problem is a nail. Many investors say, I cant invest because I dont have THIS: time, knowledge, money, confidence, etc. I highly encourage you to think outside the norm and ask yourself the question “how can I do X”. By changing your mindset from a fixed mindset to a growth mindset, you will be able to force your mind to come up with new solutions.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision.

Good Luck!