Real estate broker Joe Homs explains four creative financing strategies: seller financing, subject-to deals, wraparound mortgages, and lease-options. A wraparound mortgage layers a new loan over an existing one, letting investors profit from the interest spread between the original rate and what they charge buyers.
Chapters
Hey everyone, welcome back to our channel. If you're not using creative financing in your real estate investing career, you could be leaving millions of dollars on the table, and we certainly can't have that, can we? Today we're going to crack the code of creative real estate finance together. Before we dive in, if you need more one-on-one help, reach out to me and book some time. Now, creative real estate finance sounds fancy, but it's just about thinking outside the box or outside the bank, if you will. It's about crafting deals in clever ways that benefit all parties involved. Seller financing. Seller financing, put simply, is a way for a seller and a buyer to agree that the seller is going to become the bank. So there's a property, let's just make it simple, it's free and clear and the seller needs to sell it. And the buyer said, well, you know, if you were to finance this for me with seller financing, it would make it easier for me and I'm willing even to pay you more than you're asking because I'm getting these type of terms. So then the seller says, Okay, that sounds great. Let's do that. I will lend you 80% of the property's value. I need you to put 20% down. And both parties agree. And there you go. You have a simple seller finance deal that somebody has put together. So now the buyer doesn't have to qualify for a loan. They don't have to go through that process. They don't have to give up their firstborn to get this property. And Everybody's happy at the end of the day. The seller becomes the bank. The seller gets monthly income from the sub— the loan for this property. So hopefully it's a win-win for everybody. Let's talk now about subject to. Now subject to is, I would say, similar but not exactly like seller financing. So in seller financing, Maybe you have a loan on the property as well. So let's say there's a loan of $200,000 on the property. In a subject-to deal, you are taking over the responsibility to make that mortgage payment for the seller. That mortgage payment and loan still remains in the seller's name, but you as a buyer come in and say, I will make this mortgage payment for you. Okay, on top of that, if you want to add some seller financing on the back end as well, then you can have what's called a subject-to seller finance deal, and it's usually taken care of by an all-inclusive trust deed. So you're wrapping all this up to a nice little package, and everybody knows at the end of the day that the mortgage is going to stay on there, it's going to stay in the seller's name, But the buyer is going to make those payments on top of whatever seller financing there is. Another strategy is wraparound mortgages, very similar to what I just talked about. And a lot of people like to use all-inclusive trust deeds. And so what happens in that case is, again, you have a loan on a property, somebody's taking that over subject to, maybe there is some seller financing on the property. So now you're going to wrap this, okay, around a contract most likely known as an all-inclusive trust deed and do a transaction that way. Those are very attractive. At the end of the day, me as an investor, if I put something like this together, there should hopefully be enough room where I can sell this off even to another person. And wrap that as well. What's nice about wrapping these type of loans is let's say the first loan that you're taking over the responsibility, the subject-to, is 4%. And the seller said, you know, I'm a little smarter than the bank was back then. And I'm going to do seller financing, but it's going to be at 5%. And you say, great, awesome. I'm paying 4 on the first that I'm paying for you, and then you're going to charge me 5 on the second, which is fine. So when you wrap this, okay, that's what it looks like. Me as an end user, at the end of the day, if I go and sell it to somebody else, now I'm going to wrap the whole thing. Okay? I'm not just going to part it out like I just explained. So That the person coming in is going to pay me, let's say 10% down, which should be enough to get my money out of this deal. But then I'm going to do a wrap for the entire loan amount and I'm going to charge him 7%. So when he sends me the 7% interest every month, my responsibility, okay, or somebody that I hire, a service company, is going to pay that 5% seller finance back To the seller, and then they're going to pay the original note, okay, to the bank at 4%. So I'm actually making a 2% spread on that seller financing and a 3% spread on the original loan. How can you complain about that? And then obviously, hopefully there's some equity in there that you're also wrapping up. So that's going to all be paid at the 7% level. Okay, so those are good strategies to remember and learn about them. I'm happy to teach you, just need to reach out. Let's talk about lease options. Lease options, a little bit trickier. These options are basically, I'm going to sell you my property. I am not really going to give you title to it. I'm going to give you a piece of paper that says I am willing to sell you this property for $200,000 and I'm going to give you an option to buy it in 5 years. So if you think as a seller that the market is going up, it's probably not a good idea to do a lease option. If you're thinking as a seller the market's going to stay level or even go down, then a lease option might be a good thing for you. You still own the property. The person coming in is just buying an option for them to purchase this property. Yes, there's some money that they have to give you upfront. Most of the time they're making your mortgage payment for you, plus some, because the plus some you use at the end of the day, if they do decide to exercise the option, They can say, okay, well, I've been paying you $400 or $500 a month more than I should have been because of this option. So I want you to take and use that $400 or $500 as my down payment. Okay? So that's kind of how lease options work. You really, really have to look at the market. You really have to figure out which side you're on. You're on the seller side. Are you on the buyer side? The buyer's hoping that the property shoots up. Okay. The seller's hoping that the property goes down so that the buyer doesn't exercise that option. And then he gets the property back and gets to keep the option money, which is usually $5,000, $10,000, $15,000, whatever you decide to negotiate. Folks, with 40 years of experience as a broker, mentor, and investor, I've seen firsthand how creative real estate finance can be the game changer in building wealth. These aren't just tactics. They're tools to expand your possibilities and potential. Thank you for tuning in. Hit that like button if you learned something new today, and don't forget to subscribe for more wisdom from experience. Here's to making smart moves in real estate together. See you next time.
