Which creative real estate financing technique is best (Owner Financing vs Subject To vs Contract for Deed vs Lease Option)? When should you use each technique? How do they compare to each other? The following is an in-depth comparison between the four main creative financing techniques and after having done thousands of creative financing deals, you'll also learn from all of our real world experience on the application of each:
A creative financing technique that I think it BEST when BUYING is owner financing. With this form of financing you will be "on title", so your name will be on the property title. This is the same for Subject To, which differs from Lease Option in the sense that you are not viewed as a tenant, but as an owner.
When it comes to buying property, remember that you want to get on title. It will save you a lot of trouble later on.
Foreclosing is Harder
With Owner Financing, in order for you to lose your property, you must be foreclosed upon. It can take years to legally foreclose on a property.
Owning Free and Clear
Owning "free and clear" means that an owner has full control of the property, financing it themselves, hence the name "Owner Financing".
Short Term Deals
By structuring owner financing to be short term, it is much easier to pull this creative financing technique off. Negotiate the best terms for yourself, watching out for the down payment. If you see in the terms "owner will carry", expect that they will want a hefty down payment.
This form of creative financing is often grouped alongside owner financing, with both being most ideal to use when buying a property. It allows buyers to get on title for the property, but is considered a much more controversial and misunderstood creative financing method.
This creative financing technique is considered a tough sell because it is no easy feat to convince a seller to take part in an arrangement like Subject To.
Due on Sale Clause
The lender will create a clause stating that if the original borrower transfers the property title in the future, then the lender is allowed to call the loan due on sale. This tends to scare many real estate novices, but I would argue if you properly structure your real estate deal, this should not ever occur. I like to consider this feature of Subject To, a myth, as I have yet to see it occur in a real estate deal using creative financing.
The property insurance policy must be approved by the lender in advance. For most people, the simple solution is to adopt a second insurance policy and leave the old one in place. This is not smart as you will just end up paying double insurance. There are ways to get around this insurance blockade that don't involve paying double.
Do not take over someone else's HELOC that has equity. I have a free training available discussing HELOC in more depth.
If you take over a property, a little maturity is a good thing, with more of the payments going towards principal. Be careful, however, in a Subject To. Just because you can utilize a creative financing technique doesn't mean you always should.
Taking over properties Subject To that have other liens can result in a very profitable deal. In a Subject To, you aren't just taking over a mortgage, but all other liens.
Short Term Deals
Short term deals are often a result of Subject To creative financing. After catching up on an seller's payments for them in a Subject To deal, their mindset tends to change after a few months of you doing so. Most time these deals only last 2-3 months, as the seller is now caught up on their payments and becomes eager to accumulate new credit/debt, relying on you even more to pay off their property loans. Negotiating short term deals is best for any creative financing deal, as it is wisest for you to get in and out.
Title Insurance Complications
I want to warn you not to enter into a Subject To deal unless there is clear title. The problems that can come from not ensuring a title is in place are severe. It can take years in court to resolve and there is no title insurance in a Subject To deal, so do your due diligence by checking that a clear title is in place.
Contract for Deed
This technique is what I consider to fall in the middle between Lease Option and Owner Financing/Subject To. It doesn't usually result in the buyer or seller being very satisfied. This form of creative financing involves the property owner selling to you, with the deed being written in such a way where you will be allowed to become the title holder once you pay off the property. This places the power into the hands of the seller, rather than the buyer.
Although the seller holds more power, since the buyer does not yet own the property, they still must address the foreclosure of the property.
Contract for deed, while not a great option, is better for the buyer than a Lease Option, because the title will eventually be transferred.
Capital Gains Taxes
These taxes will be paid out in installments. They are considered an installment sale by the IRS. While I do not typically like to use Contract for Deed, a good example of a real estate niche that would work with this technique is when selling a mobile home in a park.
Transitioning to the side of the creative financing spectrum for selling property is Lease Option. In addition, I have a great training available about how to rent to own your home.
Eviction is much faster than foreclosing on a property owner. This ability to evict gives the property owner lots of power, as foreclosure is not an easy process.
You Own the Property
Under a Lease Option, a wonderful feature is that you get remain the owner of the property! I love this attribute because you get all the benefits of depreciation and appreciation that occur on your property, a whilst leasing it out to a tenant.
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