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Creative Financing - Does It Still Exist??

By
Mortgage and Lending with Reasy Financial LLC NMLS 2446155

Does creative financing still exist or are there ways to purchase homes in Phoenix without traditional financing these days?  If you're like me, you're probably saying, "No way".  If so, read on. 

Recently, I had the privilege of speaking with a real estate investor, by the name of Nick Johnson, thatDavid Krushinsky @daKrusher specializes in Short Sales and "Subject To" purchases.  Nick and I got introduced through a mutual friend, Matt Rosen @entrepreneurHI, from Twitter.  I learned a lot about Nick after talking with him for only an hour on the phone.  I learned all about his high regard for his family, his unparalleled ethics and his business philosophy.  Additionally, I also learned he is also the author of the eBook, "Subject2".    

While most of us in the Phoenix area and beyond are all too accustomed with the term Short Sale, "Subject To" was not a practice in which I was all too familiar.  Being the type of individual that prides myself on keeping current with what is available in today's marketplace, I immediately had to do some investigative research.   I figured that I would share a little overview of what I discovered. 

"Subject To", also referred to as "Subject 2" or "Sub2", is a form of creative financing in which the seller deeds the property to the buyer while keeping the existing mortgage note fully intact.  The buyer, typically a real estate investor, simply makes the mortgage payments on the existing mortgage.  These transactions can provide an array of benefits for both the buyers and sellers.

 The buyers do not need to go through the headache (I know all about this) of getting qualified for a new mortgage note.  There is no credit, income or asset verification required.  The investors own the property, but do not assume the loan.  This leaves personally liability on the sellers.  Typically, the main advantage for buyers in these transactions is acquiring a property at a much lower interest rate than if they were to purchase the property outright.

Subject2_bookcoverIt may seem unbelievable to most of us that a homeowner would deed over their property to another individual, but there are many reasons that sellers find this a great option.  The primary reason that many sellers opt for Sub2 financing is to obtain debt relief.  Some are facing foreclosure and unable to sell their property due to lack of equity.  Owning a property that is "underwater" is a concept that many Arizona homeowners can relate all too well.  Others simply want a fast sale.  They may be moving, transferring jobs, getting married, divorced or a whole list of various scenarios.  

Subject2 contracts should be implemented by a knowledgeable real estate professional.  We've all witnessed the dangers of working with someone who claims to be an expert but has no more expertise than you or me.  A sub2 contract is essentially the same as a standard state approved contract.  The only difference is the 'sub2′ addendum states the terms of the existing loan. 

In today's credit climate, we all know someone who may be struggling to qualify for a loan or continue making their monthly mortgage payments.  I would encourage you, no matter what your preconceived ideas of traditional financing are, to have them contact me before it's too late.  There are many times that I may not be able to help them but I can guide them in the right direction.  Don't let them become just another statistic.

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About the Author

My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
Questions? Call 480.339.1576 or Visit My Website

Comments (21)

Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Also... you mention that Subject2 contracts should be "implemented" by a knowledgeable real estate "professional."  Sounds like it is "practicing law" to me... and that, as you may know, is a great way to both lose your license, and to have charges brought against you for practicing law without a license.  Again... tread lightly.

In fact... if I were the listing agent, and I knew the buyer's agent was working on financing like this on my listing, I would recommend that the seller NOT sell to them... and I would immediately report them to the local state real estate commission.

I know that every state works differently, and this may or may not be legal in that particular state...  but I would let the state real estate commission decide... not me... and surely not my seller.  I would never "hang them out to dry" like that.

Dec 27, 2009 12:23 PM
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

When I hear Creative Financing, I crinch. It sounds like the buyer cant afford a loan but still want to buy. There is a reason why banks - who want to lend money says No. Hence, I think Sellers should proceed with caution.

The Due On Sale clause is also another real factor Karen Anne mentioned.

Dec 27, 2009 12:23 PM
Melissa Anderson
Be My Neighbor Mortgage - San Antonio, TX
Your Texas Lender

The lender generally will not enforce an acceleration clause as long as payments are being made on time.  They have bigger fish to fry.

This is not my opinion but fact, I spent a lot of time in operations for a few large national lenders.

Dec 27, 2009 12:25 PM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Melissa:  I see the word "generally" in your comment.  Well... "generally will not enforce" is not never... and when it is my license on the line... that is not good enough for either myself or my seller.  It is easy to deal in generalities, and in what may happen "most of the time..." but... I am there to protect my seller.

Dec 27, 2009 12:29 PM
Melissa Anderson
Be My Neighbor Mortgage - San Antonio, TX
Your Texas Lender

Karen- Of course you are.  Hope you had a Merry Christmas.

My point was lenders do not want to be property owners.  They will avoid that at all costs especially if the payments are being made on time.

Myself- I only handle standard mortgages, but this is a very interesting topic.

Dec 27, 2009 12:40 PM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Karen - You're correct.  The lender has the right to issue a "due on sale" demand.  I wouldn't say that they would kick it in once they "get wind of it" though.  Think about it logically, if the mortgagor is paying on time then why would they feel the need to call the loan due.  Melissa is dead on.... they have much bigger fish to fry, per se. 

Loreena - You shouldn't judge based solely on two words.  It would be similar to the words "short sale".  Many would cringe at those words but there are many successful closings. 

Melissa - Thanks for your expertise.  I don't actually handle Sub2 deals either.  They don't involve a lender but I am bringing the subject to light.  I feel it's a noteworthy topic and should be discussed.  The market won't recover with the Fannie/Freddie vanilla loan products.  We need to educate buyers and sellers alike.  If there are options for someone to get help so they don't have to lose all dignity, then they should know about it. 

Dec 27, 2009 05:03 PM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

David:  You certainly are pretty "sure" of yourself.  I don't think I would work with someone with the kind of attitude you display.  What you are talking about here is someone trying to make a non-assumable loan... assumable.  This cannot, or should not be done without the approval of whatever lender is currently holding or servicing the loan.  It appears to me that you are taking some chances with things that could very much adversely affect the original borrower... along with the person "attempting" the "loan assumption"... what you are calling a Sub2 "deal."

Also... I am sure it is just a habit with you... but I find using the word "deals"... something I do not care to do.  Like I alluded to... your attitude "scares" me.

Dec 28, 2009 02:13 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Your comments on my blog makes me laugh.  I actually know very little about subject2 purchases so I would hardly say that I am "sure" of myself.  

Dec 28, 2009 03:01 AM
Melissa Anderson
Be My Neighbor Mortgage - San Antonio, TX
Your Texas Lender

I think David is just bringing to light what some investors are doing to sell homes.  I don't endorse subject 2 deals either however I found the blog itself informative.

Having been an AR friend of David's for several months, I've never found his attitude to be anything less than professional and kind.

 

Dec 28, 2009 03:09 AM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

@ Melissa:  Perhaps that is because you know him and I do not.  So... I will defer to your judgment... which I trust... and pull back my assessment of him to a much kinder tone.  Melissa... thanks for sharing with me.

Dec 28, 2009 07:34 AM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

David:  Perhaps it is just me... and the way your post "hit" me.  But, as I said to Melissa above, since she knows you... I defer to her opinion, so if I offended you, I apologize.  

Dec 28, 2009 07:35 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Thank you for your kind words Karen.  I'm glad that I have been able to create friendships with other people across the country, like Melissa.  Hopefully, you and I can get to know each other better and become friends as well. 

Dec 28, 2009 08:29 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

I am going to go put that book on my wish list.  I think we are heading to Subject 2!

Dec 29, 2009 01:20 AM
Nick Johnson
West USA Realty Revelation - Phoenix, AZ

David, great write up!

It's always nice to open peoples minds to possibilities that they may have never considered.

Karen, I'm sure you're a very nice and successful Realtor and I wish nothing but the best for you. When you have some free time, feel free to get in touch with me. I certainly don't mind answering questions regarding 'Subject-To' purchases and the array of benefits for everyone involved.

Yes, there are risks, just like any other investing/purchasing strategy. You mentioned the biggest elephant in the room, Due-on-Sale clause. I can assure you that while it does exist, it is not as much of a danger as you probably think it is. Again, I open the doors for discussion any time.

 

Renee, same goes for you as well. I certainly don't mind giving away a copy if it means the possiblity of a meaningful professional relationship. Maybe you too will find that Subject2 investing is reasonable, doable and profitable.

 

Dec 29, 2009 03:27 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Nick:  We have an abundance of all cash investors in our market so I see the opportunity for "investment" hand in hand with "creative financing."  I have a feeling our "low" inventory situation may switch over soon and there will be an abundance of opportunity for those investors who are trying to "flip" and may get caught with their "pants down" during an inventory shift!

Dec 29, 2009 04:25 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

I agree with your assessment Renee.  Our markets have a lot of similarities.  Honestly, I think that's one of the main reasons we relate so well and sometimes other Realtors in different parts of the country don't fully understand our posts i.e. the 1st time home buyer tax credit post you wrote. 

Dec 29, 2009 04:34 AM
Cody Sperber
Clever Investor - Chandler, AZ
CleverInvestor.com

WOW David...you created a little bit of controversy with your Sub2 post.  You know...back in the day taking over a property "subject too" the existing mortgage was BIG and was taught by all the major "gurus" selling "the dream" to wannabe real estate investors.  Many went out and purchased / flipped many homes subject too and very few of them ever had to deal with the "acceleration clause".  This would only happen if the investor stopped paying the mortgage.

The real problem with a "subject too" deal is that many investors told the old homeowners that they were going to take over their mortgage payments and they had nothing to worry about.  They would then place a tenant in the property (sometimes with an option to buy) and start collecting rents.  They would not pay the mortgage but instead just pocket the cash.  This is obviously a scam and is highly illegal.  But if done right a "subject too" contract is another useful tool in an investors toolbox that allows them to invest in real estate with little or no money down.

I actually prefer a "Wrap" instead of a Subject Too.  A "Wrap" allows you to achieve the same goals but is perfectly okay with the lenders because the underlying liens are "Wrapped" by a new financing instrument and ownership is not officially transferred until the terms of the land contract are met.  CAN YOU SAY NO DUE ON SALE CLAUSE PROBLEMS!!!

The main thing is to do everything at a title company and not a "tabletop" closing.  Also have the title company "service" the loan so everyone knows that the payments are getting made!

It's funny to me how Karen took the position that a Subject Too deal was in some way "illegal" and that your licensing would be pulled.  Ignorance is bliss (but how do you win an online argument with a lady who has no business, making no money, and tons of time to blog)?  I like the fact that you are talking about creative financing and getting others to think outside the box.  Keep on posting and don't ever worry about what other think!

Cheers,

Cody AKA Klever Investor

Jan 19, 2010 12:59 AM
Anonymous
Alin Pirtea

I trust David more than anyone else in this blog......also I think that maybe the lady that looks like man should calm down a bit.  That is all.

Jan 22, 2010 09:06 AM
#19
Anonymous
Joel Sing

Creative financing is when you do a cash out refinance on your home to pay off your astronomical credit card debt and then don't make any payments on the new loan so it goes into default......I've personally done this with much success.

Jan 25, 2010 09:46 AM
#21
Joe Hansen
Joe Mortgage - Precision Mortgage Inc. - Phoenix, AZ
Joe Mortgage Team

Great article.  I was just looking at this same subject the other day. 

I also cringe when I hear the word creative financing.  I don't believe creative financing has ever existed.  Whenever a client of mine has used the term creative financing I think of it more as intelligent financing.  Loan officers don't have some hidden bag of tricks to get loans done but one loan officer may be smarter or more educated which allows them to help more clients out.

Also, back on this topic subject to.  This is a great way for someone who does not qualify right now to still take advantage of the 8,000 tax credit.  These types of mortgages can be done through a title company, where a Hud 1 is provided and the borrower can reap the rewards and get their act together with their financing without missing the boat.

Mar 04, 2010 04:34 AM