Month: August 2022


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Real Estate is an occupation that for some comes very easy. Others find it very difficult to understand. Wherever you may fall between these two extremes lies various terms that need to be understood. Any livable space is defined as real estate. Buying or selling any livable space can bring wealth or disaster, which is why these real estate terms should be learned.

Sooner or later most people will be buying a property to live in. Some people will invest money into a property to earn money from the proceeds the property earns, while others will inherit a property to dispose of. Knowing what to do and how to do it is what this website is all about. Below you will find some Frequently Asked Questions with answers to help you learn the terminology as well as definitions.

Buying property


What Is Buying Property As “Subject To”?

Buying a “Subject To” property is when the seller signs over the Deed to their property to the buyer, and walks away. The property remains in the seller’s name but the property belongs to the buyer. No money is due to the seller. This relieves the seller of the debt, so consequently, they receive debt relief, and many times this will save their credit.  According to, they define Subject-To” as a way of purchasing real estate where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, their interest is “subject to” the existing financing. The investor now controls the property and makes the mortgage payments on the seller’s existing mortgage..

The disadvantages of this type of mortgage for the seller are,

  1. May not qualify for another loan because there is no proof of income to offset the debt that stays on the seller’s credit report
  2. Has no way to take the house back if the buyer doesn’t pay the mortgage.

 The seller that sells their property as a “subject to”, many times are in a situation where they must relinquish ownership because of job loss, relocation, illness, etc. As a last resort, a “subject to” seems the only way out of a very bad situation. However, a “wrap”, used by savvy investors, is a much better alternative that accomplishes the same thing but also protects the seller. See the definition below.


What is Buying Property with a “Wrap Around Mortgage”?

 A “wrap-around mortgage” also known as a “wrap”, is a new mortgage that is created by a real estate attorney that wraps around the existing mortgage of a property. This allows a buyer to buy the property with no money down, as in owner financing. This is a much better choice for the seller because,

  1. There is a recorded note showing the same income to the seller is obligated to pay on their loan. Therefore, most lenders will allow that income to wash out the debt and eliminate the debt-to-income ratio problem. This is not guaranteed but generally,  most lenders will accept it.
  2. The seller has a debt instrument so they can foreclose on the buyer if the buyer doesn’t pay the mortgage.


What is a “Lease Option”?

A “lease option” is when the buyer is going to lease the property from the seller with the option to buy. The payment that the buyer is giving the seller is “rent” and usually doesn’t get credited toward buying the property. There is a set period of time that the buyer has to exercise their option to get a new mortgage to buy the property. The advantages and disadvantages of this arrangement for the buyer are as follows:

Advantage                                                                              Disadvantage

  1. No closing cost                                                                      1. Don’t own
  2. Easy exit                                                                                2. Semi Control
  3. No recording at the county courthouse                          3. No Depreciation


What is “Owner Financing?”

Owner financing is when the owner of a property is allowing the buyer to finance buying of the property through the owner. The owner basically becomes the bank and accepts payments from the buyer to buy the property. Below are some of the advantages and disadvantages of owner financing,

Advantage                                                                               Disadvantage

  1. The buyer owns property                                                     1. The buyer pays closing costs
  2. The buyer has total control                                                  2. Hard to give the property back
  3. The buyer gets to claim depreciation                               3. Recording required

Another benefit the seller receives is in most cases, they will make more money because the buyer will pay the closing costs. If the property is an FSBO, that is, For Sale By Owner, the seller also saves money by not paying any realtor commissions. The seller also benefits from no inspections, no repairs, no hassles with bank qualifications, and quick closing. Many times the seller will pay fewer capital gains taxes because they are not receiving a big lump sum of cash.


Is Owner Financing Legal?

This is a very good question. Most people don’t know that this form of financing real estate property is legal. Of course, most people would rather sell their property in the old “traditional” form of using real estate agents that sell properties. They are conditioned to accept the 6% commissions a realtor charges to sell their property as a cost of doing business.

There is, however, a written clause in every mortgage agreement that the seller must be made aware of. The “Due On Sell” clause. This clause states that if the original owner, “on the title”,  ever sells the mortgaged property without approval by the bank that the full amount of the mortgage debt will be due immediately.

The banks and lending institutions do have the authority to exercise this right. However, less than 1% of all mortgages fall victim to this condition, as long as,

  • The banks are not warned of this condition ahead of time
  • Payments are received on time
  • The seller of the property tells the bank to start accepting payments via the property management firm, alias the buyer or investor.


What is a “Tenant Buyer”?

A “tenant Buyer” is a buyer that leases the property from the seller, buyer, or investor. The tenant-buyer pays rent to the seller or the buyer for a period of time until the tenant-buyer must exercise their option of applying for a new mortgage to buy property from the buyer, or investor. If the tenant-buyer moves or stops paying for the property they forfeit any previous payments or deposits.

In most cases, the tenant-buyer is a buyer that can’t qualify for a bank mortgage because of credit report issues. Statistics show that out of all the people who desire to be homeowners, only 22% actually qualify for a mortgage. This leaves 70% or more families that want a home of their own but can’t qualify. In most cases it is not a money issue, it is just a glitch or two on the family’s credit report. These families are prime candidates for becoming tenant buyers. They have employment, sufficient income, and a desire to be homeowners.


What is “Creative Financing”?

“Creative Financing” is another term for owner financing. The owner of the property is willing to accept payments in lieu of an all-cash sale. Many circumstances permit this form of financing beneficial to not only the seller but also the buyer. Also, see the Post “What is Creative Financing”.

 What is a “Term”?

A “term” is the period of time that the seller and buyer agree to for making payments for the property until the final balloon payment becomes due for the buyer to pay the seller in full. There are many various ways

What is a “Cap Rate”?

Cap Rate is an abbreviation for the capitalization rate.  This is the return on investment on a percentage basis if you paid all cash. The formula for Cap Rate is NOI divided by the purchase price. The Cap Rate is the equalizer and will tell you how good a property performs.

What does the term “Acts” mean?

Acts is an acronym for “Assign Contract to Tenant”, which is the process of getting a contract between the Seller and a Tenant Buyer to lease the property for a period of time. The investor that creates the contract with the seller as a lease option to buy, will have the option to sub-lease the property to a tenant-buyer that the seller approves of. The investor now has options. The investor may assign this contract back to the seller, stay in the deal as in a “sandwich lease”, or assign (sell) the contract to another investor.

What is a PML?

A PML means Private Money Lender– which is an entity that furnishes money to the real estate investor for investing in real estate properties as an investment. In other words, this entity loans money to an investor to earn interest on the money that is loaned. The money is secured by the property that is bought by the investor. This type of investment is by invitation only. Many PML people use their retirement accounts to invest in these properties because they can earn up to eight percent. Banks pay less than one percent interest on the Certificates of Deposit and real estate loans are much safer than the very volatile stock market. The earnings on the money borrowed stay invested until the property are sold. This gives the maximum amount of interest the PML can earn. Their interest can be either paid per month or usually everything, principal and interest, all paid at the same time.

What is an HML? 

An HML is a hard money lender which happens to be a broker of many PML investors. A hard Money Lender charges a much higher percentage for the privilege of borrowing money from them. They also have many fees associated with their money, like origination fees, points, extension fees, etc. There is a limit to how much you may borrow, and these brokers never invest a full 100% of the costs, only up to 80% of the buy costs and sometimes 100% percent of the rehab expense.


Frequently Asked Questions

Categories: Blog


What Is Creative Financing?

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creative Financing

What is creative financing is a term that is frequently used today but is so misunderstood. Most people have no idea that creative financing can actually benefit them when they are trying to sell their real estate property. I hear so many questions and even more biased opinions against creative financing. It is time to set the record straight once and for all. I’m about to blow the lid off of creative financing and what it can do for you.


Wikipedia defines the term “creative financing” as:

In real estate, creative financing is non-traditional or uncommon means of buying land or property. The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of his own money as possible, otherwise known as leveraging. Using these techniques an investor may be able to purchase multiple properties using little, or none, of his “own money”.

I can already hear the name-sayers exclaiming how only the buyer or investor is the one that benefits from this transaction. But for the truth be known the seller is also benefiting from this form of transaction. You ask how is this so? Let me tell you how I know.

Let us take a look at my last deal in creative financing. The seller had just put their home up for sale as an FSBO, more commonly known as For Sale By Owner. It is what investors refer to as a “pretty house”, which is a property that doesn’t need any repairs or cosmetic defect that needs addressing. A pretty house is ready to sell to a retail buyer.

It was a huge house with more than 6100 square feet of livable space. Two stories with three bedrooms and two bathrooms upstairs with the master bedroom downstairs. The master had a bathroom to die for, that had a closet that could fit as many clothes in it as most stores have in stock. A shower and a sauna/bathtub, marble countertops with gold inlays, simply beautiful.

The property owner was moving to another state and needed to sell their house. They weren’t in a rush to sell but wanted the security of knowing they could move and not worry about the mortgage still attached to the house. Their mortgage was just over $4300 a month on a house they were asking almost Two Million dollars for.

Most people can’t afford a house with a $4300 a month mortgage. I advised the homeowner that her market for a potential buyer was going to be a little smaller since only a handful of people walk around with $200,000 in their back pockets.

Through careful negotiations, I explained that I represented an investment company that buys houses in their area and I would pay their asking price AND all closing costs if they would be willing to accept a delayed cash-out. Obviously, they had no idea what I was referring to.

A delayed cash-out simply means that I would buy their house as is, with no inspections or hassles, close quickly, and pay their asking price and closing costs if they would accept monthly payments until I could pay them in full sometime in the future. In other words, I buy their house on terms and pay their mortgage, which includes the Principal, Interest, Taxes, and Insurance, with a balloon note that pays the house off in full at a later date.

The seller agreed to a three-year term, which means I continue to pay their mortgage for three years. After three years, the balloon note will come due when I must pay the full amount to satisfy the contract. This type of creative financing is also considered “owner financing”, where the owner is actually the bank that finances the buyer in buying their property.

The seller actually made more money in this creative financing deal than they would have in a traditional house sale. Three different ways the owner earned more money than a traditional transaction. First of all, the owner didn’t have to negotiate a lower sale amount on the house. The investor (buyer) paid the full asking price.

Secondly, the seller didn’t have to pay any closing costs, which on a house of this price range would have been substantial. Normally you can figure around 3% of the selling price for closing costs. And last, by accepting monthly payments the owner will save money on the capital gains tax that uncle Sam will surely be expecting. Other advantages are no bank approval period which can be up to two months, and no more house showings to potential buyers.

As an investor, I choose my own closing date, so if the homeowner wants to close fast and vacate the property, I can usually close within seven days. If the homeowner needed time to live in the house until the place they were moving to was ready, I can wait.

Many homeowners are fearful about their chances of getting another mortgage if they carry the note on their old home. That shouldn’t stop them from getting a new mortgage on another property. The reason is I put a wrap around their old mortgage which basically is a new mortgage encompassing the old mortgage. There is a paper trail that shows the old mortgage getting paid, so it washes the debt away that would normally prevent the seller from getting a new mortgage because of the debt to income ratio.

What about a property that is free and clear with no mortgage? This becomes even better for the homeowner selling their property because now, they will be getting paid every month, just like a mortgage company would. They will be getting cash flow which being in smaller increments the taxes are reduced significantly, saving the seller even more money.

I know there are a lot of skeptics that will want to argue about what is better, to receive cash flow every month or one lump sum when selling your property.

Yes, I must confess, it is a win situation for the investor/ buyer to be able to buy a property without having to pay a down payment on a property. However, it is also a win for the seller because of the savings that will be created by not having to pay all the fees that go with a property changing ownership. Tell me that is not a win/win deal for everyone involved.

Advantages of Creative Financing


Creative financing is good for all parties involved, the seller and the investor/buyer. I have already given some highlights on the savings the seller will receive by engaging in owner financing. The seller is taking the place of the bank. Why do you think that the banks all have big, beautiful buildings? Because their business model is for everyone to pay them. They lend out money at a much higher interest rate and pay very, very low interest on the money they have to loan. So the banks are maximizing the profit on the money they lend.

The seller in creative financing becomes the bank for the investor/buyer. Sometimes there is a down payment required from the buyer. Sometimes the seller will want interest on the money they are receiving every month from the buyer. Every deal is unique and it is the job of the investor/buyer to find the best solution.

Just some of the many advantages are:

  1.  Debt relief (the number 1 motivator)
  2.  No management
  3.  No repairs
  4.  Gets cash when sold
  5.  Saves credit
  6.  Helps seller qualify for new financing

There are several reasons a homeowner will pick my way of owner financing over the more traditional way of selling a home:

  1. Bankruptcy
  2. Pre-Foreclosure
  3. Loss of employment
  4. Job transfer
  5. Relocation
  6. Downsizing in size of home
  7. Death of a family member
  8. Property needs a lot of repairs
  9. The property owner is not in hurry to receive money or wants to earn more
  10. Divorce
  11. Appreciation of home value

Sellers Market vs Buyers Market

In a seller’s market, where the available inventory of homes for sale is smaller than the demand there are only a few sellers that see how they can benefit more from owner financing than by accepting one lump sum of cash. Most people need cash when they sell their property. There are as many reasons to get the full amount at the sale as there are to get paid more later.

In a seller’s market, something that we are experiencing now, it is much harder to buy a property at a discount unless it needs substantial upgrading or repairs. Homeowners want the money from their property as soon as they can so they can move forward with their life. This creates some disadvantages for the buyers that are shopping for a new home.

One of them is paying too much for a home. With multiple bids coming in on a home for sale, it becomes a bidding war, with the high bid winning. Many homeowners are paying thousands of dollars too much for their properties. They don’t see the pitfalls of paying too much because the demand is so high. If they don’t buy now, they will not get another chance. It is never a good idea to stretch your resources (income) too thin.

As an investor, I see both sides of every deal. Which way makes more sense for the homeowner, my way or the traditional way? Well, for starters, I don’t use the banks with all their rules and regulations. I see so many houses get an offer, the house gets tied up for the pending sale, then the buyer doesn’t qualify or for other reasons, the deal fails. Time and time again, this problem prevails. On the other hand, my way avoids the banks, plus I buy without any inspections or hassles, no more open house showings, or vendors finding problems with the property.

selling my house

Creative Financing is not for everyone. But for some homeowners, it is a blessing come true. As an investor, I work really hard in finding the best solution for a property owner. I strive to create a win/win solution for not only the seller but for the buyer as well.

In my last post, How To Sell A House Faster, you learn that using an investor over a realtor is to your benefit. The buyer will net more money selling their property than what they could have earned from the realtor. You will also learn that a realtor will not buy your property or make the payments on the property while it is vacant. An investor will.