Christian Osgood explains why subject-to deals are risky: not because of the due-on-sale clause, but because they typically involve distressed sellers with little equity and negative cash flow. He shares a $4.5M resort deal where a $70k existing debt worked, then argues investors should treat subject-to as a niche tool and scale through multifamily instead.
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Welcome back to Multifamily Strategy. I'm Christian, your channel host. I bought hundreds and hundreds of rentals. Most of them have used some amount of creative finance or creative structure. So why not subject to? This is not the typical, like, well, the bank might call the note due. Yeah, it's a glaring problem with a lot of subject to transactions, but there's a bigger issue with subject to that we're going to get into on today's video that's not talked about enough. So welcome to the channel. If you don't know me, my name is Christian. I started in Washington State. I bought hundreds of rentals up there and a seller finance resort. Moved to Texas, bought hundreds and hundreds of rentals down here. In fact, recently just closed on another 144 units in Abilene, Texas, $8.5 million transaction. I've done this a couple times in the Multifamily Strategy Mentorship. One of the most common starting points people get into the group on is, hey, I bought a lot of properties subject to, and I'm joining your group to learn how to get out of trouble on this. I have some experience with scaling your business to try to undo mistakes in the past in your business. So I get I get this a lot. So here's the thing with subject to, if you're unfamiliar with what subject to is, it's become very popular online. And no, this is not an attack on one individual who happened to brand very heavily off of this. This is just the strategy itself. It is a clause in a land contract or contract for deed. Essentially, you purchase a contract that says, hey, I'm buying this property. The seller is effectively seller financing, but instead of transferring title the traditional way, you have a contract to purchase title. Depending on what state you're in, you might actually both show up on title for the property. The end goal is that the mortgage stays in the original owner's name and they continue paying their mortgage and you pay them. Now, there's many different ways to structure how those payments go through, and there's better strategies than others, but here's the core problem. Yeah, there's usually a due-on-sale clause, and so the bank could just end your financial freedom at any time by calling the note due. While there may be some workarounds for this, at the end of the day, we don't want to build financial freedom on an unsturdy foundation. So subject-to usually doesn't work. Now, if you have no due-on-sale clause, go for it. Subject-to, awesome strategy. I'll even share in this video where I have used subject-to and where it does make sense, even in commercial real estate. Here's the real problem though. A lot of people get into the group and they're like, hey, I bought 6, 7, 8, 9, single-family houses or duplexes subject to the existing debt. When you do this, it's almost always you're buying from a distressed seller. Distressed sellers typically aren't the best managers of money and properties. And so you're usually buying an asset that has some sort of operational problem or you're purchasing at a price where there's no equity in the deal. And that's what we keep seeing. I'll get people in the group are like, hey, I bought subject to, it's creative finance. I have 10 houses. Here's the problem. 10 houses in, I'm 100% levered or near 100% levered. I borrowed money as a down payment to buy this thing, or even if they bought it $0 out of pocket, they're slowly bleeding cash flow. What I see consistently in Sub2 constructed portfolios, low equity, low cash flow. Who cares if you own a ton of real estate, if none of it actually makes any money? And this is a core problem with a lot of Subject To deals. You have to follow the fundamentals of any other transaction. You have to win on price, you have to win on terms. And what I typically see in these sub-2 deals is there's no equity to be had. You're absolutely exposed to market conditions. Now, if you came in and you won on price, yes, you still have the problem of due-on-sale clause. There's a lot of issues with it, but I just have noticed this over the past several years. Multifamily Strategy, the mentorship program, has become kind of like a subject-to recovery group. People are like, I thought I could buy all these houses online. Turns out I could buy them and I'm either losing money or I haven't made any money, or I'm working really hard. I've done tons of transactions and I've made like $10,000 in the last 5 years. I don't know about you, but taking financial risk over multiple years to make a few thousand bucks, not a strategy that's going to work. So if you're looking at this as a single strategy idea, hey, I'm going to use subject-to as the secret key to unlock my portfolio. It's not going to happen. Here's where you do use it. One, if you want to scale portfolio, it's much easier to do in multifamily. If you're going to raise capital either way, it's easier to raise for a multifamily deal than a single-family deal. Larger investor pool, more benefits, easier management. So generally speaking, if your goal is to scale and build cash flow, you're going to get out of the single-family duplex, triplex pretty quickly, if not just starting beyond those and get into the mid-size multifamily game. 5 to 50 units. Really the sweet spot that we have seen for a lot of people and where I built a lot of my portfolio. So as you are building this strategy, if you limit yourself to only subject-to deals, you're not going to find a lot. And most of the ones you're going to find are going to have some problems. If you just look at, hey, let's manufacture a deal, let's find a seller who's interested, and then let's line an appropriate debt product. Could be seller financing, could be bank financing, could be private capital, it could be a DSCR loan, and the list goes on and on and on. And then if we need more money, bring on additional people to finalize the deal and close the transaction. It's a great way to do it. Where subject to does come into play, I bought a resort, $4.5 million seller-financed resort. The seller had on one of the 7 parcels, $70,000 of debt. It used to be a single-family home. They added it into the resort going through part of the process. They had $70,000 of debt on one of the parcels. It actually used to be a single-family house. They added it to the Robin Hood Village Resort. And so as of this transaction, even though we've already given them a million down, they're like, man, I would love to not pay this thing off. Here's what clause we put in here that made it work. We said, hey, probably not going to get called. If the note gets called by the bank at any point, you have to pay it off and then you seller finance us the delta. So the risk is on them. Now I have high confidence they can actually pay it because I just gave them a million dollars. It allowed us to move through a $4.5 million transaction. As a very, very small piece of the money. I have the money to back it. They have the money to back it. The bank is not going to be a problem. We bypass the due-on-sale problem and we go ahead and close the transaction. That's an appropriate use. Now, had we bought the resort subject to the existing debt on a multimillion-dollar loan and that comes due, everyone's hosed. We lose the pro— the whole transaction implodes. It's a complete mess. We do not want to get notes called. We also don't want to buy these zero equity deals with tons of hair on them, and I don't want to be paying a seller, trusting that they're going to pay everything correctly. There's too many variables. Eliminate the excess variables. Don't do it. But this is just so consistently. People come to our group specifically because they're like, hey, the subject-to thing didn't work for me. I did buy a lot of rentals. I did do this a bunch of times. The problem is it's not making any money, or even worse, it's losing money. And now I need help to buy multifamily deals to scale through the negative I've created for myself. They just do not tend to work the way that you think. So can you use subject-to? Absolutely. Sparingly, appropriately, rarely. It is one of the least used tools in the creative toolbox for a reason. It has a lot of inherent pitfalls that you want to avoid when used correctly in the right situation, like in the event of the Robinhood Villas Resort. It could be the perfect tool and not that hard to execute. Just put it in your tool belt, bring it out very sparingly, and do not believe the story that subject-to properties are something that you should actively be hunting for or using as a primary acquisition strategy. I hope this helped. If you can avoid subject-to altogether, you're going to avoid a lot of headache. You're going to find more opportunities. Just learn other ways to close the deal. There are tons of different ways to do it, but at the end of the day, it's always the same advice. Follow the strategy of find a deal first, a real deal that makes money. Line the right debt product to it, whatever that product is. And if you need additional capital, then you can find the equity, but you already have the opportunity created. Hope this helps. I'll see you guys on the next episode.
