The End of Seller Financing?

Free Corvette With Purchase ( Sub2 Deal )

Finding treasure is fun! Finding antique bottles lying around in an abandoned house is a joy for me.

My friend Chip and I used to scrounge in abandoned railway stations and old warehouses in Kansas City and find the most fun stuff ever. We scavenged the old dispatcher’s office that had been empty since the 1970’s. I found a hand-made note paper roller that was nailed loosely to the wall. I still have it as a reminder of good times spent scavenging with my friend Chip.

Speaking of Chip, he led me to this secluded little dump outside Olathe, Kansas where we found a rotted box of old, colored glass insulators. I was in heaven. Chip could care less. I still have those insulators. They’re pretty to me. Violet, blue, aqua, pink, brown and white. It’s like Christmas looking at those things. I imagine the history each of those pieces of early artwork disguised as electrical hardware.

The reason I mention all this is that finding treasure is the spice of life. Everyone loves to do it. It’s addictive behavior. Why else would people scour beaches with metal detectors for necklaces and coins...on beaches!!!

Well, Barney Zick wrote once that leaving treasures behind in homes we want to sell will compel buyers subconsciously to buy our houses. They may not even have liked our house the best, but the thought of getting something for free just makes some buyers irrational buyers. We’re talking about leaving pianos, sewing machines, bicycles, rockers and what not. Buyers love free stuff.

My friend John told me once that a week before Christmas one year he had sold three or four houses, but the last one was not selling. So he went to his used car dealer friend and asked if he had any “sexy cars” on the lot. His friend had an old Corvette available. So John bought the Corvette, put it in the garage of the house that wasn’t selling, raised the down payment by a little more than the cost of the car, and had the house sold in two days. He advertised “Free Corvette With Purchase of Home.”

John says he likes to include freebies with his house to make them more attractive. I have always loved this concept. I’ve left antique bicycles and appliances behind before. I’ve also left bedroom sets. It really helps sell a house, when the buyer believes he’s getting something for free.

So, think about what you can “accidentally” leave behind in the next house you try to sell, and see if your days on market are shortened up substantially.

The Big Sub2 Stick...

It has occurred to me that too many creative investors really aren't that "creative" at all, in the usual sense.

Once, creative investors defined themselves by looking beyond the obvious (thus creative) to find profitable ways to make money in real estate that traditional (non-creative) investors might look passed.

Subsequently, the creative investor found ways to make even more money during the holding time, that the average investor wouldn't consider. Let's look at "seller financing" as an exit strategy. "Ugh!, says the traditional investor, whose only exit strategy is buy/hold/sell for cash.

Yes, seller financing is considered the red-headed step-child of exit strategies for traditional investors. Nobody wants to look at it, or claim it as their own, because to the traditional wholesaler, flipper, or merchandiser, this represents a failure to perform...

That is, the objective of the traditional investor/flipper is to buy for cash and immediately sell higher for cash. So having to finance a sale, is like saying, “Mommy, I did a boo-boo, please spank me...” Okay, maybe that’s just me... :)

The old way of flipping works fine until there's a hiccup in financing, appraisals, or inspections that make the property unsellable for the "right price". Then "Plan B" goes into play...or, "Plan C'... or, "Plan D'..., or Oh, crap, not the "Last Resort Plan?" Yes, seller financing. This exit strategy just represents a "muck up" if you will of the original plan to “get out fast for cash.”

For the Sub2 investor whom isn't bound to traditional liquidation methods, "seller financing" is "Plan A", not the “Oh, crap!” plan." Before I go further, one of the biggest sticking points about the “Oh, crap!” plan of seller financing is the risk of default by a buyer.

The average investor fears the "liar loan squat." That is, the buyer stops paying and won't move, and forces the investor to cover the payments on his own investment situation. This is what the amateurs sweat, twitch over, and dread and dread, as if it were a diagnosis of terminal cancer, or permanent head injury (just to make it vivid).

Yawn...this only happens to amateurs who don’t know how to limit risk with the “Big Stick.”

For the professional Sub2 flipper, “liar loan squatters” are some faint anecdotal thing that happens to others. At the same time, those who inform themselves on how to limit the risk using the “Big Stick” make consistent, huge money in less time than the average investor does.

Meantime, the profits on a Sub2 deal, that appear at face-value to hover between "average and 'don't do it'," are substantial. And of course, the profits can be unbelievable on Sub2 deals that hover between "dreamy and heavenly".

However, limiting risk, is only the beginning of the profits. The juicy profits are in these five words: “Down Payments. Rinse And Repeat.” That just means knowing how to find buyers with down payments, and when/if a default occurs, elegantly moving in another buyer who can "hopefully pay", but nonetheless has ANOTHER down payment. Yay, for repeat seller financing and multiple down payments...!

Frankly, I'm only talking about seller financing of marketable homes that "everybody" would like to own...not the 45-year old, stucco boxes with one-car garages, gravel roofs, and wall heaters (I've owned many of those). Who wants to buy one of those and put up a bunch of money...? Nobody. That's why the government invented low-income, no down, HUD loans, so buyers with no taste (j/k) can buy these unmarketable, ugly, obsolete hovels that nobody wants (after making sellers do all sorts of retrogrades to make them "habitable" and financeable).

So, what is the “Big Stick?” you might ask...? Hmmm?

You can find the "Big Stick" in my Sub2 investing course I call... ( Click Here )

Sub2 Marketing Future!

"Creating Money Out of Thin Air...the Sub2 Way...!"

Sub2 financing can offer the fastest track to wealth creation ever.

When my family first started investing in single family homes in the late 1960's, credit was THE most important thing to "worry" about, apart from scraping up the 20% for a down payment on a conventional loan. Of course that was for our OWN home, not for an investment property. Trying to get a loan for an investment property was a whole different animal. The rate and terms were worse, AND you had to qualify for the loan as if you were servicing the loan yourself, without considering the rent from the property.

Things have changed since then. What hasn't changed, is the practice of taking over existing loans. This method has been used to get around the qualifying process banks have required since loans were invented.

However, the government institutionalized 'non-qualifying' loan assumptions. Wasn't that convenient? Yes, one person would originally pull their pants down and expose their financials to some bank, and qualify for the Federal Housing Authority-backed loan. Then when it was time to sell, they could just let somebody take over their loan just by signing a couple of documents.

This was technically "subject to" financing, but had no name until after the "Due on Sale" clause was invented. Meantime, there was no income verification and no credit check to take over these FHA loans! Yay. And the original borrower, yes, was still on the hook for the loan...! Nothing had changed. Except...

Eventually conventional lenders stopped allowing their loans to be taken over without qualifying. They included a term called a "Due on Sale" clause. Why did they do this? Because they were losing money when sellers would allow buyers to take over their low-interest rate loans at 10% instead of qualifying for brand new 18% loans. Well, this 8% spread wasn't going to be lost to a bunch of amateurs! Nosirreee Bob!

So, banks scared off the "sheople" (who were otherwise seller-financing new buyers at 10%, instead of 18%) by including the dreaded "Due on Sale" clause in all new loans. Now this clause didn't mean that a bank WOULD call a loan that was not properly assumed, but it just wanted the right to make more money off the new buyer in the event it was profitable for them.

Well, ever since interest rates fell to the point that most seller financed deals were MORE expensive than conventional bank's terms, no bank in their right mind would call in a perfectly healthy loan.

As a result of the lower conventional rates, the DOS clause has been a flaccid threat to anyone taking over a loan the old fashion way.

Now, how do we create money out of thin air with Sub2?

There are two ways (at least), but the fastest way is simply to resell a house for a higher price, on terms to someone who "really" wants your house, who cannot qualify for the "cheaper" conventional loan. This could be for reasons including being new to the community, changing careers and employment, recently losing a house in the bubble market crash, and other reasons that temporarily keep them from qualifying for a new conventional loan without putting up 20-25% down.

So how exactly does this help us create money out of thin air, again?

Well, we're not going to sell a house to a buyer who needs financing from us for the same amount we paid. We're going to raise the price as a premium for our service. Typically we'll raise the price by 10% over retail ----- or if we got the house for 10-20% under retail, we can ensure a FAST resale by offering the house for today's retail value, and then work to get our buyer refinanced as soon as possible. Usually this takes at least 12 months.

The second way to create money out of thin air, is to charge a slightly higher interest rate than what we're paying. This isn't usually a large amount, but it all goes directly to our bottom line.

So creating money out of thin air just means that we created extra "value" out of thin air. We market our houses to a niche of potential homeowners that will pay a premium price in return for the privilege of owning their own home --- without having to qualify for a loan, or even having their credit checked, and most importantly putting up less down than any bank would require.

The value of what we offer is SO POWERFUL that we can actually create value (money) out of thin air!

Meanwhile, our buyers will beg, borrow, and 'probably' steal to give us a down payment and take advantage of what we have to offer them with sub2 financing.

For more information about a turn-key system that will allow you to do this over and over again like clockwork click here: "Screw The Bank!"

There's No "Due On Sale" Jail!

Even if there was a jail for Sub-To "violators", the jail would be empty.

Read my response to a guy who was warning off about 2,500 would-be investors “that banks call loans in on Sub-To investors because they want to make sure they're on the hook for the loan."

Dear So and So,

"I admire your efforts to keep folks out of trouble. And with all due respect to your desire to keep us informed of what banks will and won't do with Sub-To, I can say from experience that banks do NOT "invoke" the DOSC to assure [that] the TRUE owner of a property is on the hook," as you've postulated.

Meanwhile, in the event of a transfer of equitable interest, subject to the existing financing, the DOSC allows a lender to exercise it's right to either call the loan due, or require the new owner to qualify for a new loan, and/or assume the existing loan(s) --- as a practical matter. However, the motivation for calling a loan due, if it's ever happened with a "current" loan, is NOT to mitigate risk, but to otherwise secure a better interest rate on the existing financing, and certainly NOT to create more REO's for itself.

The only reason the banks started inserting the DOSC was because there was a rash of Sellers in the late 1970's and very early 1980's that were seller financing their homes at 10%, because buyers couldn't qualify with the bank's 18% interest rate. As a result, the banks were losing business --- because they wanted 18%. So the DOSC, short of a default, is all about making money, not mitigating risk.

Today, the bank interest rates are very hard to compete with. Seller financing is usually more expensive than bank financing. So Buyers will look to get bank rates as soon as possible.

As an aside, I'm fairly certain that banks know that their rates are generally more attractive than the average seller is offering. So, short of a credit issue, they're attracting most of the potential "profitable Buyers" already.

There's no need to force the rest to qualify, or mitigate risk, or create REO's for themselves. It would make no sense for the bank.

Anyway, I appreciate your conservative approach, but in practice, what you're suggesting just is not happening. If bank rates climb back up to 18%, your scenario may very well become likely, but not before.”

What I didn't mention was that there is already a person "on the hook" for the loan. Yes, it's the original borrower. Sub-To financing doesn't change this.

The bank still has a person it can "go after" in the event of default. So it's not like the bank has lost anything in the transaction. What's more, there is now not one, not two, but three parties that are motivated to keep the loans "current!" It's the bank itself, of course, but also the borrower, and the new sub-to title holder. That's a better position for the bank than what they originally bargained for.

So banks don't deliberately "switch out" borrowers just because they can.

However, if the loan becomes delinquent, all bets are off.

Share this with anyone who claims banks are calling in "current" Sub-To loans.

The "White Pad" Analysis

It pays to know your numbers. I've been plowing through lots of operating data sheets for apartment buildings lately. When I first started looking at them after so many years of not doing that... I was hilariously rusty.

I used to be able to rattle off percentages and do mind calcs like "Rainman." However, for a while, I looked blankly at data sheets trying to remember why agents continue to pawn off "Pro Formas" on me, and never offer the actual operating numbers.

I've had agents tell me that they don't provide the actual operating numbers without a written offer. In other words, the Seller is testing the water, and doesn't want to get organized unless he's got an actual sucker on the line that would actually fall for that approach.

Normally, I would pass on a situation like this, but let me tell you a story about a Seller who had no numbers, did not know his numbers, and as a result gave me several hundred thousand dollars in equity because of his ignorance.

The Seller had just foreclosed on the building that he had previously seller-financed. He didn't have any numbers, except the taxes and insurance invoices. He also didn't have a clear idea of who was in the building, or who was paying rent. He didn't know the market rents or vacancy factor in the area. Otherwise, I had to make my own assumptions of what the potential was. This was my first apartment purchase.

After all was said and done, I bought this property for less than 25% of it's retail value because the Seller himself didn't know his numbers whatsoever. He offered a sale price I felt was too good to be true, and I recognized the sale price as being so grossly under market that I could literally barely hold the pen to write up the agreement. To make matters worse, I didn't have a pre-printed sale agreement with me, so I had to write a "shorthand" contract on a sheet of yellow lined note paper. All I listed was the price, the down, the closing date, the loan balance, and the interest rate. I closed three months later.

Now because I knew my numbers I was able to confidently and quickly, if not not nervously and feverishly act! :D

The Seller, meantime, did not know what he'd done to himself until he went back home and found his answering machine full of inquiries about his building. I would love to have been a fly on the wall and saw his face after listening to 30 messages asking about his apartments! he he he

I did spend 90 days defending my contract after the Seller realized what happened and wanted to back out for obvious reasons. I wouldn't back out, and we finally closed after threatening to tie the property up six ways from Sunday, or until his great grand children were dead, whichever occurred last.

This story would have never happened had I not analyzed over 100 operating data sheets in depth, and performed forecasts and what-ifs on every one of them to see what I could do under various scenarios. I knew my farm, and my numbers.

Since I knew exactly what I could do with 30 newer units in downtown Kansas City, and the Seller did not know, I achieved a 75% discount.

The moral of this story is, know your numbers, be able to make educated guesses, and then seize the opportunities when they present themselves.

Somebody might say, "But Jay, that was a gross steal. How could you not know that, regardless of whether you had analyzed 100 other data sheets, or not?" Well, the analysis gave me confidence to avoid second-guessing myself, and flinching at the last moment. Months before, without having done hardly any analysis, I had come across other "steals," but hadn't really appreciated what I was looking at...or the scarcity of deals like this. As a result, I blinked...and lost deals to investors that did know my farm better than I knew it.

Meanwhile, the fact remains that the Seller did not know I WAS BUYING A STEAL --- from him.

Someone recommended that we, "Know Thy Numbers". I never recommend this to Sellers! :D