How creative finance helps you buy better deals

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The first step

1. Where creative finance starts
2. Low rates and the house as collateral

How deals appear

1. Houses that have sat on the market
2. The due-on-sale clause

What it buys

1. Into a house with no money down

Where creative finance starts

Hey, Lance Morgan here, and I want to talk about the first step of the scholarship house business. That's the acquisition process. That's actually finding the property, buying the property that you're going to make into an amazing vacation rental that's going to eventually allow you to exit for lots of money and do it all over again. So, in this first step, there are three things that we're looking for to be able to get a good deal on a property to start with.

First is always the price. We always want a deal. Everyone wants a deal on price. When you're thinking about real estate, you're typically thinking about how do I get a discount on the price?

Maybe there's a house that's listed for 700,000 and you could get it for 650,000, or maybe even 600,000 in a buyer's market. Now, other times, you're like fighting and you're putting in bids and everybody's bidding on the price and you're paying more than the asking price. But, in a perfect world, we want to be able to find a house at a deal and get a discount on the house. But, that's not the only way to get a good deal on a house.

The second way to get a good deal on the house is through picking up somebody's existing interest rate. Now, this is not an assumable mortgage. This is where you are literally taking over someone's mortgage payments and the mortgage stays in place. This is called a wrap mortgage, where you're basically wrapping your payment, okay?

You're making the payment on their mortgage, but the title actually gets changed into your name. Now, I'm going to explain how this works cuz a lot of people have never heard about this. This is what we call creative financing. But, I'm going to tell you the most common type, which would be seller financing.

Seller financing is where maybe the house is already paid for, but somebody's had the house for a long time and they don't want to sell it because they don't want to pay all those capital gains. So, they become the bank and that's seller financing is another scenario with creative financing. So, that's the one that's a little bit easier to understand. Seller financing is where you go to a house that is paid off and you go to the seller and you say, "Hey, what are you going to do with that money?

If I give you all this money for the house, you're going to take it and put it in a CD. The CD is going to give you 3 or 4%? Why don't I just give you 3 or 4% and you can have the house as collateral to make sure that I pay you cuz, hey, if I don't pay you, you get the house back, right? Just like if you don't make your mortgage payment.

If you don't make your mortgage payment, the bank takes your house back, right? So, in a seller financing situation, the seller benefits because you give them a down payment and if you don't make the payment, they get to keep your down payment and they get to walk away with the house. The house is being used as collateral. Now, the third and then I'll get back to the creative financing, the sub two, which is where everybody has all the questions, but the third way to get a good deal on a house is getting into a low down payment or a low entry fee.

So, let's say that you normally would go into a house as an investment property, you would have to pay about 20% down. So, if you go pay 20% down on the house and then put another 20% into design and furnishings and making it into this amazing themed house that's going to be in that 80% occupancy and get the highest average

Low rates and the house as collateral

nightly rate you can possibly get and crush it on the market to be able to get high revenue, you're going to want to put some money into it, right? So, what if we could get into the house with about 10% down or less than 10% down? If we could get into the house with a low down payment, then we've got more money that could go into the design and the theming and the setup, which is actually number two in our scholarship house business process. But, back to number one, back to the acquisition.

We're trying to get one of three deals. We're trying to get a low price, a low interest rate, or a low down payment. Now, let me tell you a couple of stories to understand why somebody might let you take over their mortgage payment. The first house that I bought, the first scholarship house that I bought, was a cabin on a lake in Idaho.

And I really wanted to own a cabin in this area. So, I actually had someone on my team call on all of the houses in that area and ask if anyone would be interested in creative financing. Now, what does this mean, you might say? Well, some of these houses had been on the market for a while, and it was the off-season as well, so they were likely to sit on the market even longer.

So, one of my team members would call and say, "Hey, your house has been on the market for a while. Would you like to sell your house at the asking price if you let us take over your mortgage payment?" Now, think about that for a minute. We might not get a deal on the house cuz one option would be to say, "Hey, your house has been on the market for a while. What if we lowballed you, and what if you we gave you $100,000 less than the asking price?" Well, they might take it, they might not take it.

But, what if we went to that seller and said, "Hey, we'll pay you what you're asking for the house, but we want to take over your mortgage payment?" And so, the seller said, "Oh, sure, why not?" They had a 2.9% mortgage payment or 2.9% mortgage. So, I was able to take over this seller's mortgage payment. Now, he also had some equity in the house, so we negotiated a rate on the equity as well. So, it was actually a combination of seller financing because of all the equity that he had and what they call a sub-2 mortgage where we take over his mortgage subject to.

So, we make the mortgage payment. Now, this is all done through a third-party payment processor, so the title company in this case actually takes the money out of my bank account and pays the mortgage payment on my behalf. And if, for whatever reason, that money wasn't available, then the third-party payment processor or the title company would notify the seller and the seller could technically foreclose on me, just like a bank. If I don't make a mortgage payment, the bank could foreclose on me.

If I don't make this seller's payment, he could foreclose on me as well and he could get the house back, right? Now, we also negotiated a low down payment, less than 10% down. So, I was able to get into this house with a low down payment. Now, this usually comes with a balloon payment in around 5 to 7 years.

Sometimes it doesn't, but I'm able to have this low mortgage payment for 5 years and then I can refinance later on down the road through what they call a DSCR loan. Now, why is that important? A DSCR loan is a debt service coverage ratio, meaning that it's a loan that underwrites the house. So, you might say,

Houses that have sat on the market

"Well, what happens if the bank finds out that this seller let me take over his mortgage payment?" Well, they would have what they call a due-on-sale clause. So, let's take a look here. If you go into Google and say, "Are sub-to mortgages legal?" it'll say that they are legal. Yes, they're legal, but they're in the gray area.

What that means is is that the seller is breaching their contract technically because when you get a mortgage, you basically say that you won't change the title, the owner. So, you kind of breach your contract with the bank. So, that means that the bank is able to foreclose on you if they want through what they call a due-on-sale clause. Now, as long as the mortgage payment is being made, then usually there's no reason for the bank to, you know, foreclose on you.

However, about one in every 500 transactions, maybe, if you're not making the payment or if you don't do the insurance correctly or for whatever the case may be, there is a possibility that the bank could say that you now have to pay the bank, you know, the mortgage in full. So, what do you do in that situation? Well, first of all, I'm going to encourage you to go to the YouTube and search for a person called Pace Morby. He is the expert in creative financing.

This is where I've learned everything I know about creative financing is through Pace Morby. So, if you go to YouTube and you look at Pace Morby's videos and you search for Pace Morby due-on-sale clause, you can see some videos where he explains what to do in the case of a due-on-sale clause. There's actually about five things that you can do. You have several options.

You can do a lease-to-own option or whatever. There's a several different options. One option is you could just refinance to a DSCR loan. Since you're going to be refinancing to a DSCR loan more than likely in the future anyway, you can just refinance if the bank does a due on sale clause.

So, there's it's not illegal, there's not a lot of risk, it's just a matter of getting a lower interest rate. Now, let me tell you another story about the second house that we bought. The second house that we bought was in Florida. Now, in Florida, it was in the Panama City Beach area where there's a lot of military housing and a lot of military families, and the seller of the house that we bought in Florida had been transferred with the military to Arizona.

So, he was already gone. The house was sitting vacant. Now, if you're familiar with the VA loan, you can get into a house with no money down. So, this particular person was able to buy this house with no money down.

Well, that's a good thing except for the fact that he was then transferred to Arizona, and there wasn't a lot of equity in the house cuz he didn't put anything down on the house. And so, he was trying to sell the house, but there wasn't even enough room to pay the realtor's commissions. So, he was having a really hard time selling the house. So, again, the house was sitting on the market because everyone came in and offered him less, but when they lowballed him for a lower price, he was going to have to come up with money out of his pocket to get out of the mortgage because he didn't have any equity.

Now, somebody else came along and said, "Hey, what do you think about doing a creative financing deal?" Now, in this particular case, he had about a 4% mortgage. They said, "Why don't you just let somebody take over your mortgage payment?" Now, remember, he had no equity. So, there was nothing for him to lose. He

The due-on-sale clause

he just walk away and not have to keep paying two mortgages. So, it was a win-win for him because he got out of the mortgage payment by letting somebody else come along and take over that mortgage payment. It was that simple. I bought the house through this person, okay?

I paid them I paid them a fee to find me the house, but I got into the house by just basically taking over somebody's mortgage payments. It was about a 4% mortgage and it didn't have a balloon payment. So, I'm able to keep that mortgage for 30 years if I wanted to. And I could just make the mortgage payment.

So, these are what we call creative financing deals. It's called sub-two or subject-two mortgages. It's not an assumable mortgage, okay? And it is legal.

And if the bank says, "Hey, we didn't authorize this. We didn't say you could do this. We're going to foreclose on you." then you could just refinance. It's not that big of a deal.

So, again, just to recap, there are three ways to be able to get a good deal when you're buying a house, okay? When you're buying a house, you want to look for three things one of three things. A good deal on the house, a low down payment on the house, or a low interest rate. Now, in some cases you can get two of the three.

I don't think I've ever seen three of the three very often, if at all, but the better you can get on the low interest rate, the better you can get on a low down payment, and the better you can get on the sales price, the better the deal is. However, we've also bought multiple properties with an 8% mortgage. Now, you might be saying, "Why in the world would we want to do that?" Well, because we got into these properties with a really low down payment. We got a huge tax benefit with a very low down payment, and we had more money that could go towards the design of the house.

So, we were able to put more money into the house to get the occupancy up and to get the average nightly rate up. And then we can just refinance. We can always refinance to a lower rate. And then the other thing that I want you to think about, and I'll talk about this in another video, but it's not always just about

Into a house with no money down

the lowest mortgage payment. Everyone is focusing on the lowest mortgage payment. But what if through the design and through the management and through the sales and marketing and through optimizing the revenue, what if you could increase your occupancy and increase your average nightly rate? Did you know that just by adding two or three more nights in the month, if you just rented out your house two or three more nights in a month, that's the equivalent of going from a 6% mortgage to a 3% mortgage.

So, everyone is so focused on lowering that mortgage payment, and that is step one. Yes, that is step one. You want a low mortgage payment and you want a low down payment. However, it's not a deal breaker cuz there are other things to consider.

And if you can capitalize on all of these other areas, you'll increase your average nightly rate, you'll increase your occupancy, and you'll increase your overall revenue. If you want to learn more about how you can partner with us on buying one of these properties, click the link in the description and learn more. If you want to watch a video, click this video here and you can learn all sorts of details about how real estate compares to retirement assets like IRAs and 529 accounts to pay for college. So, if you want to learn how to pay for college and retirement and still increase your retirement income using real estate, click this video to watch more or click the link in the description to book a call with our team.

We'll talk to you soon.