Selling Financing and Buying a Property "Subject To"

If you are new and are just starting out in the quick turn real estate investing game there are two concepts you will inevitably come across and have questions about. These concepts are "selling financing" and "subject to". Here is a quick review of both of these real estate investing strategies.

What is seller financing?

When you buy real estate using seller financing this simply means that the seller carries financing for some part of the purchase. It could be for all of the purchase price or for part of it, and it could be a first or second mortgage. The portion of the purchase that is not financed by the seller could be paid in cash, or it could be paid by taking over payments on the existing financing, which is called acquiring the property "subject to" the existing financing, or subject to for short.

What is "subject to"?

Buying a property "subject to" the existing financing simply means that you take over the payments of an existing loan on the property. This is different than assuming the loan. Assuming a loan means that you would have to go qualify for financing with the seller's lender and guarantee the loan personally taking on recourse debt.

When taking over payments "subject to" the existing financing the loan stays in the seller's name until it is paid off and as far as the lender is concerned the seller is responsible for the payments. Although you will have agreed with the seller to make the loan payments and you should fulfill your responsibility, the type of debt that you will be dealing with is non-recourse debt.

Profit centers

When dealing with owner finance and "subject to" deals there are three ways to profit: on the front end, monthly, and on the back end. Front end profit is the difference between the down payment you promise the seller and the down payment you collect from the buyer. Monthly profit is the difference between the payments you promise the seller and the payments you collect from the buyer. Back end profit is the difference between the purchase price you promise the seller and the purchase price you agree to with your buyer, including any discount you eventually negotiate with the seller.

Advantages of seller financing and "subject to"

There are a number of reasons why seller financing might be desirable for you as the investor as well as for your sellers and buyers:

Advantages to the investor

-No bank qualifying is involved and hence no credit bureau activity, which means that your personal credit is protected.

-You can often negotiate highly favorable down payments, rates, and terms when working with motivated sellers.

-Being able to offer no qualify financing means you often will be dealing with motivated buyers, those who can't buy a house conventionally, as well as motivated sellers. So you get the best of both worlds.

-Closing costs are minimal any time you're not dealing with a conventional lender; until your end buyer cashes you out you don't even need to purchase title insurance.

Advantages to the seller

-Debt relief is the primary advantage of selling on a subject to basis, right up there with avoiding foreclosure.

-The seller's credit will be improved as you continue making payments and eventually pay off their loan.

-In the case of seller financing the seller will receive a steady income stream from the property. This can be desirable to many different people for many different reasons.

Advantages to the buyer

-The main advantage to the buyer is no qualify Financing: getting to move into and perhaps gain ownership of a property without qualifying for a loan.