STRATEGY REPORT: Leveraging Seller Financing for a Secure Sub2 Purchase
Website: www.REISkills.com
Strategy: Buy “Seller Gets a New 1st Mortgage” then Sub2 Purchase
1.0 Executive Summary
This report outlines a powerful and secure real estate investing strategy that combines traditional seller financing with creative acquisition techniques. The core concept involves having the motivated seller obtain a new first mortgage to cash out their equity before you purchase the property “Subject-to” the existing financing (Sub2) and place it into a Land Trust.
This approach effectively neutralizes the seller’s primary objection regarding their ability to qualify for a new loan after the sale, minimizes the investor’s cash outlay, and significantly reduces the risk associated with the Due-on-Sale clause. The subsequent use of a Land Trust and a Contract for Option (CFO) provides privacy and flexible exit strategies.
2.0 Core Concept: “Seller Gets a New 1st Mortgage” Then Sub2
The strategy is a two-phase process:
- Phase 1 (Seller’s Action): The motivated seller, who typically has significant equity but may have credit or DTI concerns, works with a mortgage broker to secure a new first mortgage on their property. This loan pays off their existing mortgage and provides them with a cash-out refinance, converting their equity into tax-free cash at closing.
- Phase 2 (Investor’s Action): Immediately after the new loan is recorded, the investor purchases the property “Subject-to” the seller’s new mortgage. The investor makes the payments on this new loan but does not formally assume it. The property is then deeded into a Land Trust for privacy and liability protection.
Result: The seller achieves their goal of accessing cash without any selling costs. The investor acquires a property with little-to-no money down (only the cost of the Sub2 purchase, if any) and a potentially favorable mortgage in place.
3.0 Addressing the Key Seller Objection: “Can I Get Another Loan?”
As detailed in the article by Tim Randle, the fear of not qualifying for a new home loan is a common and significant seller objection. This strategy proactively eliminates this objection by having the seller get their new loan first. The article provides the foundational reasoning to reassure sellers:
- Lenders Can Work With It: Even if the property is treated as a rental, lenders will typically credit 75% of the market rent as income to offset the mortgage payment when calculating debt-to-income (DTI) ratios.
- Documentation is Key: In a Sub2 transaction, the seller can provide the lender with the Purchase Agreement and a HUD-1 Settlement Statement as proof that the investor is responsible for the payments. This often satisfies the lender’s requirements.
- It’s a Common Practice: The article emphasizes that qualifying for a new loan after a creative sale is a routine process and should not be a barrier.
> > Critical Note: The article strongly advises against creating or backdating contingency documents (like a Contract for Deed) solely to help the seller qualify, as this could be construed as fraudulent. Transparency with the purchase agreement and HUD-1 is the recommended and ethical path.
4.0 The Investor’s Advantage: Risk Mitigation & Control
By having the seller secure a new mortgage before the Sub2 purchase, the investor gains several critical advantages:
- Fresh “Seasoning” Period: A new loan has no “seasoning” requirements. This eliminates the risk of a lender calling the loan due under the Due-on-Sale clause shortly after acquisition, a perceived risk when taking over an older, seasoned loan.
- Modern Loan Terms: The new mortgage likely has a competitive interest rate and is a conventional, conforming loan, which is preferable to an old, possibly outdated loan.
- Clear Title: The process clears any secondary liens (second mortgages, HELOCs) from the title, simplifying the chain of ownership.
- Seller Satisfaction: The seller receives their cash upfront from a third-party lender, not from the investor’s pocket, making them a satisfied partner and reducing post-sale disputes.
5.0 Finalizing the Deal: Land Trust & Contract for Option (CFO)
Once the Sub2 purchase is complete, the investor should immediately deploy two advanced tools to maximize control and profitability:
- Land Trust Purchase: The property is deeded into a Land Trust with the investor as the Beneficiary. This provides anonymity (as the trust name, not the investor’s, appears on public records) and adds a layer of protection against the Due-on-Sale clause being triggered, as the legal title hasn’t changed “hands” in the traditional sense—it has been transferred to a trustee.
- Contract for Option (CFO): The investor can then create a cash-flowing asset by offering a Contract for Option (CFO or Lease Option) to a tenant-buyer. This involves:
- Contract: A lease agreement with monthly rent.
- Option: A separate agreement giving the tenant the right, but not the obligation, to purchase the property at a predetermined price within a set timeframe (e.g., 3-5 years).
- Benefits: The investor collects monthly cash flow, a non-refundable option fee upfront, and can later sell the property at a locked-in higher price or simply keep the option fee if the tenant does not purchase.
6.0 Conclusion
The “Seller Gets a New 1st Mortgage then Sub2” strategy is a sophisticated, win-win approach that aligns the interests of the motivated seller and the creative investor. It systematically dismantles the biggest financing objection, drastically reduces investor risk, and sets the stage for a profitable long-term hold or a flexible exit via a Contract for Option. By following this structured process and utilizing a Land Trust, investors can build a secure and scalable real estate portfolio.
Source Adaptation: This report synthesizes and expands upon the concepts presented in the article “Yes, the Seller Can Get a New Loan” by Tim Randle (REIClub.com), applying them directly to the www.REISkills.com strategy.
