3 Ways To Structure A Subject To (Creative Financing) Deal

There are 3 different ways of structuring a subject to creative financing deal.

• Cash To Loan Subject To
• Seller Carryback Subject To
• Wrap Around Subject To

Cash To Loan Subject-To Example:

• Imagine Mrs. Smith wants to sell her house valued at $300,000, but she still owes $260,000 on her mortgage.
• Mr. Brown, an investor, steps in and pays Mrs. Smith $40,000 in cash, thereby covering the difference.
• Mr. Brown then continues to make payments on the original $260,000 mortgage.

Seller Carry back Subject To Example:

• Mr. Jones is selling his apartment building for a total of: $500,000.
• Miss Nguyen, the buyer, can only secure a loan of $450,000 from her bank.
• To cover the remaining $50,000, Miss Kim and Mr. Anderson agree to a seller carryback arrangement.
• She promises to repay him the $50,000 over 5 years at an agreed interest rate.

Wrap Around Mortgage Subject To Example:

Example:

• Mrs. Hilfiger is selling her vacation home with an existing mortgage that has an interest rate of 4%.
• Mr. Jones, an investor, agrees to a wrap-around subject-to deal where he pays an interest of 6%.
• The additional 2% ensures Mrs. Thompson covers her interest obligations and gets a bit extra on top.

Now how does all of this really work?

Let's take the Cash to Loan example.

In short.

1. You receive a notification of a lead that came through from one of your marketing campaigns.
2. The asking price is $300,000.
3. Seller wishes to retain $40,000 in equity.
4. You discover the # of payments left on the existing note are 336 payments
5. ($1,179.55) per month @ a fixed interest rate of 3.25%
6. Market rent rates are $1,800 after running comps
7. Once you factor in your operating expenses such as:Management Fee/Maintenance Reserve/Insurance/Property Taxes/Vacancy Reserve /Gas/ Electric/ Water/Sewer/Trash Landscaping/Snow Cleaning Cable/Internet Pool/spa HOA Registrations/ Advertising Other/Solar Panel Misc. Expenses (Whatever it may be) You discover all those expenses, depending on what is applicable rounds up to be right around $1,579.65 per month ($400.10 in operating expenses)
8. Cash Flow per month $220.35.

Let's take the Seller Carryback example.

1. You receive a notification of a lead that came through from one of your marketing campaigns.
2. The asking price is $500,000.
3. You have a written agreement with the seller for a total of $500,000 and was only approved for $450,000 in bank financing.
4. Depending on your state, you can write up a promissory note and deed of trust for the remaining $50,000 in equity in instalments or the course of 180 months (15 years) and repay the seller back monthly @ 3.25% interest making the monthly payment $351.33
5. First position payment towards that $450k assuming there was no down payment upfront will be $1,958.43 and the Second Position for the remaining equity of $50,000 with a total monthly payment of $351.33, making the total amount of $2,309.76 per month towards the property.
6. Once you factor in rents per month of the unit mix, and operating expenses. You will take your Income, minus your expenses, minus your mortgage payments and discover your cash flow for the property.

Let's take the Wrap Around Mortgage example.

1. You receive a notification of a lead that came through from one of your marketing campaigns.
2. The current mortgage in place is a VA loan. ($125,000 @ 4%) with 336 payments left from a 30 year mortgage.
3. The seller wants $150,000 for the property, but has an existing mortgage balance of $125,000 on the property @ 4% Interest Rate.
4. You run comps on the property and discover the market value of the property is $175,000
5. You offer the seller $25,000 down for the property upfront, with a loan amount of $150,000 making the purchase price $175,000 making it ($25,000) over the asking price.
6. Your offer to the seller is a fixed rate of 6% with a loan amount of $150,000
7. The payment towards Bank #1 is $619.02 ($125k balance, 4% interest, 336 payments left with the sellers bank) & The payment towards Bank #2 between you and the seller is $899.33 ($150k balance, 6% interest rate, 360 payments to be made)
8. THE END RESULT: The seller sold for $25k over the asking price. The seller made no repairs to the property at all. The seller is generating a total monthly income of the difference between Mortgage #1 and Mortgage #2 ($280.31) per month.

This is the power of creative financing. It doesn’t only create flexibility for sellers, but also for buyers as well.

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