Subject-to Financing?

May 26, 2021 3 MIN READ

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Today I want to talk to you about taking down a deal with subject-to financing. Which is just another creative way that you can add to your arsenal when you’re going and approaching off-market sellers and trying to buy deals. 

You might be asking, “What is subject-to financing? Subject-to financing is buying a property subject-to the owner’s original loan. This is just a form of seller financing and instead of the seller being the bank, you’re just taking over the existing mortgage that this person has.

What are the advantages of this? One advantage if you’re doing it right and walking into the property not putting anything down, is that you’re simply taking over the existing loan. This means that you’re walking into any equity that the seller has in the property. Hopefully, this seller has a good interest rate and good terms on the loan.

Some of the reasons that we utilize subject-to when taking down properties are: maybe the margins aren’t ideal for a flip, the margins aren’t ideal for wholesale, or the property’s priced too high to use as a rental. Subject-to financing is just another resource that we’d like to have in our tool belt to take down.

Typically what we’ll do with subject-to financing is to wrap the mortgage. Wrapping a mortgage? Stay with me. Wrapping a mortgage is that we are getting seller financing subject-to

and as soon as we buy this property subject-to, we are going to owner finance it to another end buyer. For example, the property has an ARV of about $260,000. It’s here in Pflugerville and the current owner is in pre-foreclosure. They owe about $212,000 on the principle of the loan, there’s a reinstatement fee of about $20,000, they have an interest rate of 4.25%, and the payoff is in about 28 years; the maturity of the loan.

We have this property under contract. We’re going to wrap it to stop the pre-foreclosure. We’re helping this seller so they’re not going to get foreclosed on, they’re not going to ruin their credit, and they’ll simply owner finance the property to us, subject-to his current financing.

At closing we have to reinstate the loan, we’ll have another end buyer, and they’re going to put down $25,000 on the property at the $270,000 sales price that we’re selling to them. The $25,000, ($20,000 of which is going to go to reinstate the loan), we are assuming the loan at 4.25% with the principle of about $212,000. All in one transaction we are going to owner finance this property to the new buyer at a $270,000 purchase price at an 8% interest rate with a $25,000 down payment.

Now, we have the difference in equity between $212,000 and $270,000, and on a monthly basis we’re going to be keeping the difference between 4.25% interest and 8% interest. We’re not putting anything up at closing, the new buyers pay everything to reinstate the loan, and on a monthly basis, we’re going to be collecting what’s called the rake of 3.75% interest on the new principle. The benefit is we’re going to have some monthly income as soon as this new buyer either refinances or sells the property, we are going to be getting our equity out of the property and move on to the next one.

Now you’re probably thinking that we should’ve flipped this property instead. This property would not have been a good flip, wholesale transaction, or a good rental and so we decided to buy the property subject-to where we make money.

Reach out if you have any questions or want to learn more about this creative way to make money in real estate!

-Alex Coffman

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