Seller Finance VS Subject to - The best way to Buy Real Estate W/ NO Money

There are so many different creative finance strategies, dozens and dozens of ways to play the game with or without money, regardless of your financial position, which one's gonna work best for you. Today we're comparing apples to apples, two different strategies, seller finance and subject to. Pros, cons, there are unique strengths and weaknesses to both. Here we go. Hello and welcome back to the channel. My name is Christian Osgood. I've bought hundreds of multifamily properties starting with absolutely no money, and these strategies helped me get there. There's so many different ways, so many ways that you can structure a creative finance deal. There's not just seller finance. Or land contracts. There's private money, hard money, equity partners. There's a million different ways to structure a deal. Today we're just going to compare the main two, the two that are most popular right now: straight-up seller financing and subject-to. Now, I built a majority of my portfolio on seller financing. I did this for one specific reason. In seller financing, the property and the debt are all in your name. When you own that property, There is no one else directly attached other than the lender. Now, in seller financing, it works basically exactly as a bank. If you're new to this, by the way, like and subscribe. But if you're new to this, just like the bank, the seller can finance anything that they own. So they can put a loan against their equity in a property. So say they own 90% of the equity in the property. They owe $100,000, but the property is being sold to you for a million. They can seller finance $900,000 of those dollars, which means if you don't want to involve any other money, you just need to come in with a $100,000 down payment that pays off their existing debt and they can seller finance first position loan. That means there's no other loans behind them. There's a single loan on the property from the seller. You pay it exactly like the bank. It's a note that they create that is backed by a deed of trust. The note is a promise to pay. The deed of trust says Hey, we trust you, but if you default on the note, we get the deed back, property goes back to the owner. Now that is seller financing. It's been amazing for me because when there's trust, people want to lend to you more. They don't want the property back. There's a lot of situations where this can happen. A retiree scaling down their portfolio, perhaps their family doesn't want it, which is actually very common. A property that has little debt, maybe it's been in a family for a while, but it's in disrepair. A bank wouldn't lend on it, but they're trying to get it off their books. If the property repair is not in the right place, or their bookkeeping is in a bad place where a bank doesn't want to look at it, seller financing could be their only way out, getting a little bit creative. Now let's talk a little bit about subject to. What is subject to? It is not in itself a strategy, it is just a clause on a land contract. Now seller financing, very similar to the bank, right? Note, deed of trust, I own the property, I own the debt. Land contract's a little different. It's a sales contract, very much like buying a car. If you're going out to buy your first car and you get a car loan, the bank actually holds on to that deed. You don't actually get the deed. They just kind of stay on there. And then when your contract is complete, now you officially own the vehicle. It's a little different. You have what we call economic use of the vehicle. You have the ability to drive it, use it as you will. You bought it, sell it. You have full economic control of the vehicle. However, the bank holds title. It's very, very, very similar in a land contract. It is a sales contract. What's unique here is it does not put a lien or a loan against the property. So what can you do? You can do something called a subject-to clause, subject to the existing debt, because you're not putting any new loans on the property. You wouldn't violate a no further encumbrance clause or anything else that would come with traditional debt. You can actually leave the debt in the seller's name. Say they have higher debt. Say they only have 20% equity in their property. You can just start paying their mortgage for them, take over the economic ownership of the property, and they keep legal title. Now, it depends on where it is and whether you're a title theory or lien theory state. It's recorded differently in different places. Someplace, both people show up as owners of the property. Other states, you show up as the owner, though the deed is technically held by title or the prior owner. Interesting, right? By not creating a loan on the property, you can go subject to the existing debt And you can own properties that have debt on them without actually clearing or removing that debt. Now, what's the danger? The catch with subject-to is that almost every note has a due-on-sale clause and the property is in fact selling. Now, in the past, people didn't really call those. Banks don't want to call the note due. Why not? Because they were 6 or 7% interest and then rates came all the way down to 3, high 2s for a little while. When rates are low, What does the bank not want to do? They do not want to call that note due, lose their 7% money, and replace it at 2.9%. That's a horrible deal. But when there's a whole bunch of debt that's now been refinanced into the high 2s to low 4s, you have low interest rate debt and rates skyrocketed to 6, 7, 8%. Well, now the bank has every reason in the world to want to pull those back and replace that money at a higher interest rate. It's just business sense. And what we're seeing right now Talk to any title company, they'll back me on this. So many more subject-to notes are getting called than ever before because now it makes economic sense for banks to do so. And they have data requirements where they have to have enough data to be able to track every loan that they place. If they use CoStar, which most of them do, it is very easy to run a very basic search for properties that we have lent on that have traded hands. If title has changed, they get an alert and they can call any of those notes due. It's an automated system. It takes almost no time or skill for a bank to do. So if you think you're being really sneaky, you're not. There are ways to try to protect yourself, but Subject To does have that one glaring problem. Other than that, it's one of the most— it's one of the simplest ways that you could ever take out a property because all of a sudden you can buy everything. The weakness of seller financing, you can't seller finance everything. If they have a lot of debt on it and they can't just pay off their debt, they can't lend on something they don't own. Seller financing, you have to find the right owner who is ready to sell with the right equity stack. Subject To, you could do it on any property, but you're going to build your financial freedom on a portfolio of callable notes. Apples to apples, seller financing or subject to, I think especially in today's economy, seller financing is the clear winner. Yes, it's a little bit harder to operate. Not everything's going to fall into the seller-financed bucket. Subject to will allow you to buy absolutely anything, which is so cool. I have friends who've done a lot of subject to deals. I actually use subject to in one very unique way. I bought a resort seller financed, $4.5 million purchase, and it was consisted of, I think it's 3 or 4 different parcels. And then we have 18 cabins in the woods, on the water, is gorgeous. One of those cabins, just one of them happened to have a $75,000 loan on it. We bought the resort seller financed, but the one cabin we bought subject to the existing debt with a clause there that says if this note is to be called, the owner has to pay it off and seller finance it to us. So we addressed the fault in subject to in that structure. I think that's a great use of subject to though. If there's a little bit of debt on a larger transaction or there's a very specific use case, subject to should be in the arsenal of things that you are able to do. However, minimize the amount of deals that you do subject to existing debt, because if those notes get called, and they often do, you could build your entire financial freedom on a cash-flowing portfolio and the bank could take all of it away. If your goal is freedom, if you have a very specific target that you're chasing and you're using real estate to get there, subject to is not the one that you want to build your foundation on because it's not solid. It is an amazing tool that can do so much, but it is not a solid foundation for your portfolio. Lay those out on bank debt, on conventional debt, on seller finance debt, on standard deal structures that are less likely to implode. You can still do it with or without money. There's many ways to do it, even playing the bank route to do the game without any money in pocket. We'll share all of those strategies on this channel for you. So if you want to see more of how to play the game, with or without money. Stay tuned. Like, follow, subscribe, share with a friend if you guys are trying to get into this, because I want to build this channel to be huge, not just for me but for everyone else. Thank you for watching. We'll see you on the next episode.