| Sub2 financing can offer the fastest track to wealth | | | | Well, ever since interest rates fell to the point that |
| creation ever. | | | | most seller financed deals were MORE expensive |
| When my family first started investing in single family | | | | than conventional bank's terms, no bank in their right |
| homes in the late 1960's, credit was THE most | | | | mind would call in a perfectly healthy loan. |
| important thing to "worry" about, apart from scraping | | | | As a result of the lower conventional rates, the DOS |
| up the 20% for a down payment on a conventional | | | | clause has been a flaccid threat to anyone taking over |
| loan. Of course that was for our OWN home, not for | | | | a loan the old fashion way. |
| an investment property. Trying to get a loan for an | | | | Now, how do we create money out of thin air with |
| investment property was a whole different animal. The | | | | Sub2? |
| rate and terms were worse, AND you had to qualify | | | | There are two ways (at least), but the fastest way is |
| for the loan as if you were servicing the loan yourself, | | | | simply to resell a house for a higher price, on terms to |
| without considering the rent from the property. | | | | someone who "really" wants your house, who cannot |
| Things have changed since then. What hasn't changed, | | | | qualify for the "cheaper" conventional loan. This could |
| is the practice of taking over existing loans. This | | | | be for reasons including being new to the community, |
| method has been used to get around the qualifying | | | | changing careers and employment, recently losing a |
| process banks have required since loans were | | | | house in the bubble market crash, and other reasons |
| invented. | | | | that temporarily keep them from qualifying for a new |
| However, the government institutionalized | | | | conventional loan without putting up 20-25% down. |
| 'non-qualifying' loan assumptions. Wasn't that | | | | So how exactly does this help us create money out |
| convenient? Yes, one person would originally pull their | | | | of thin air, again? |
| pants down and expose their financials to some bank, | | | | Well, we're not going to sell a house to a buyer who |
| and qualify for the Federal Housing Authority-backed | | | | needs financing from us for the same amount we paid. |
| loan. Then when it was time to sell, they could just let | | | | We're going to raise the price as a premium for our |
| somebody take over their loan just by signing a couple | | | | service. Typically we'll raise the price by 10% over retail |
| of documents. | | | | -- or if we got the house for 10-20% under retail, we |
| This was technically "subject to" financing, but had no | | | | can ensure a FAST resale by offering the house for |
| name until after the "Due on Sale" clause was | | | | today's retail value, and then work to get our buyer |
| invented. Meantime, there was no income verification | | | | refinanced as soon as possible. Usually this takes at |
| and no credit check to take over these FHA loans! | | | | least 12 months. |
| Yay. And the original borrower, yes, was still on the | | | | The second way to create money out of thin air, is to |
| hook for the loan...! Nothing had changed. Except... | | | | charge a slightly higher interest rate than what we're |
| Eventually conventional lenders stopped allowing their | | | | paying. This isn't usually a large amount, but it all goes |
| loans to be taken over without qualifying. They included | | | | directly to our bottom line. |
| a term called a "Due on Sale" clause. Why did they do | | | | So creating money out of thin air just means that we |
| this? Because they were losing money when sellers | | | | created extra "value" out of thin air. We market our |
| would allow buyers to take over their low-interest rate | | | | houses to a niche of potential homeowners that will |
| loans at 10% instead of qualifying for brand new 18% | | | | pay a premium price in return for the privilege of |
| loans. Well, this 8% spread wasn't going to be lost to a | | | | owning their own home -- without having to qualify for |
| bunch of amateurs! Nosirreee Bob! | | | | a loan, or even having their credit checked, and most |
| So, banks scared off the "sheople" (who were | | | | importantly putting up less down than any bank would |
| otherwise seller-financing new buyers at 10%, instead | | | | require. |
| of 18%) by including the dreaded "Due on Sale" clause | | | | The value of what we offer is SO POWERFUL that |
| in all new loans. Now this clause didn't mean that a | | | | we can actually create value (money) out of thin air! |
| bank WOULD call a loan that was not properly | | | | Meanwhile, our buyers will beg, borrow, and 'probably' |
| assumed, but it just wanted the right to make more | | | | steal to give us a down payment and take advantage |
| money off the new buyer in the event it was | | | | of what we have to offer them with sub2 financing. |
| profitable for them. | | | | |