Is Creative Financing Becoming the New Subprime Lending?

[Steve K.]

Rising interest rates have hurt everyone’s buying power (except cash buyers obviously), and inventory is locked up because nobody wants to move and give up their historically-low interest rate. Word on the street is we’ll never see those rates again in our lifetime.

Having alternative strategies in your back pocket can be very helpful in putting deals together. That’s why more people are looking into different options such as seller-finance, subject to, wraps, lease options, etc. “Creative Financing” 

However, not many people are talking about the additional risks.

For example, with seller-financing: the worst case scenario is a buyer doesn’t make payments. No problem, seller has the promissory note and just takes the property back. Great, except “taking the property back” means foreclosing . Foreclosing sucks. It takes a long time and costs a lot of time and money. Plus, usually no payments are coming in during that time, the tenant(s) may need to be evicted, the property usually sits vacant and comes back in worse condition. Someone still has to cover taxes, insurance, and upkeep during the foreclosure.

Subject to is a similar half-truth: “If the bank exercises their right to enforce the due on sale clause, just deed the property back to the seller and use an executory contract: contract for deed, lease option, land contract instead.” But the bank usually still exercises their right to enforce the DOSC because title changing hands meets the bank definition of a sale. Also, each time you transfer the deed the IRS wants their cut. Not to mention closing costs. Not to mention that executory contracts don’t have the same benefits that sub to does because in a C4D the buyer does not have title and seller can easily cloud title or the seller can get a judgment against them or lien that attaches to the property. This can also cause issues with both title insurance and homeowner’s/landlord insurance. 

Every strategy has its appropriate time and place. But any sellers looking to "become the bank" should be vetting buyers like any other lender would. It doesn't seem like many are as creative financing becomes more mainstream.

$0 down deal structures with "infinite returns" are du jour. People are doing deals and capturing zero equity or cashflow, just to get properties with low interest rates, which is what we used to call being “over-leveraged". 

Too many owners being over-leveraged is what lead to massive foreclosures in the last big downturn 2008-2010.

Many buyers looking to use creative finance wouldn't make it through underwriting, which makes them sub-prime borrowers.

Is Creative Financing Becoming the New Subprime Lending?

[Jay Hinrichs]

in my experience over the decades were I have done quite a few owner carry and quite a few sub to.

And we were doing wraps back in the carter years when rates were double what they are today.

So lots of experience both good and bad.

from my point of view seller carry back IE seller owns the property free and clear and wish's to owner finance.. this can be pretty safe in some states high risk in others.. whats the difference the difference is foreclosure time lines. @Rick Pozos  AS Rick noted he has not had issue when had to foreclose but he is also in Texas VERY short time lines..But you do the same transaction in Mortgage states were forclosures are judicial and time lines are years.. NY being one that can be really bad. So to me on that front its state specific and mortgage compared to deed of trust Trustee sales.

On Sub to the risk falls almost exclusively on the Seller.. And what this does is open up a lot of transactions for undercapitalized investor who talk a great game and sellers are not experinced or do not consult attorney or Broker to the risks.. And the next thing they know the smooth talking guy / gal who took the course .. Has no real money and realizes hey the mortgage is not in my name and well there is no equity so I cant sell it I would have to come out of pocket and well I think I will just stop paying and collect Rents until the bank forecloses thereby trashing the orignal sellers credit and basically ruining their life.. those are the deals I have personally seen and that is why I am very much opposed to Sub too as a long term investment by Most investors who simply dont have the capacity to carry a deal if the tenant stops paying etc.. or is Bent and believe me there are tons of Bent folks out there that will think nothing of screwing nice people.   And I dont care who teachs this Morby  the sub to guys on Bp  myself anyone this is a huge risk to sellers.

Then you have owners who have debt and want to wrap the loan and sell and make the delta I like this the best as they will stay in the game  they have control of the underlying debt and they have a document ( all inclusive Deed of Trust) that they can foreclose out the owner finance buyer.