Real estate transactions can be complex, especially when traditional financing isn’t the best option. This is where creative financing strategies like seller financing and subject to come into play. 

But what exactly are these options, and how can you, as a real estate agent, leverage them to help your clients and close more deals?

Understanding the Key Differences

The primary distinction between seller financing and subject to lies in the buyer’s monthly payment:

  • Subject To: The buyer assumes the responsibility of making the existing mortgage payments on the property. 
  • Seller Financing: The seller acts as the bank, creating a new financing agreement with the buyer. Seller financing can be applied to properties with or without an existing mortgage. 

Now, let’s get into the benefits of each. 

What is Seller Financing?

Seller financing is a financial arrangement in which the seller extends credit to the buyer instead of the buyer obtaining a loan from a traditional lender. This can occur when a property is owned free and clear or when there is an underlying mortgage. 

In seller financing, a new payment schedule is created based on negotiated terms such as down payment, purchase price and interest rate, which determines the new monthly payment. 

Key Benefits of Seller Financing:

  • Flexibility in Negotiation: All terms are negotiable, allowing buyers to tailor the agreement to their financial needs. 
  • Simplified Process: With no banks involved, the transaction can be smoother and cheaper as there are no lending fees.
  • Potential for Better Terms: The buyer and seller negotiate all the terms of the payment, not just the purchase price. This can lead to better and more flexible loan terms. Every aspect of the deal is negotiable.

What is Subject To?

Subject to is a financing option where the buyer takes over the existing mortgage payments of the seller’s property. This means the original mortgage taken out by the seller remains in place, and the buyer takes over the mortgage payments, but the loan itself is not formally transferred to the buyer.

With subject to financing, the property’s deed transfers to the buyer, but the existing mortgage stays in the original homeowner’s name. The buyer owns the property but makes payments on the existing mortgage. 

Key Benefits of Subject To:

  • Lower Entry Cost: This often requires less cash upfront compared to traditional financing options. 
  • Favorable Interest Rates: Buyers can benefit from taking over an existing mortgage with a lower interest rate than currently available in the market. 
  • Maturity Advantage: If the mortgage began even one year before the purchase, buyers benefit from a more mature amortization schedule, effectively skipping a significant amount of interest. 

What Real Estate Agents Need to Know

While both methods allow buyers to secure financing without a traditional bank loan, seller financing involves the seller providing a new loan to the buyer, whereas subject to involves the buyer taking over the seller’s existing mortgage without formally assuming the loan. 

A major challenge with these types of financing options is the lack of understanding and acceptance among some real estate agents and buyers, who might view these arrangements as less conventional or risky. However, educated agents who understand these methods can offer them as viable solutions, especially in tough market conditions or for properties that struggle to sell traditionally. 

When it comes to creative financing options, real estate agents need to: 

  • Educate Yourself: Join investor communities or seek training to understand creative financing options.
  • Inform Your Clients: Clearly explain the benefits and risks of Seller Financing and Subject To arrangements.
  • Network with Investors: Building relationships with experienced investors can provide insights and opportunities in these financing methods.

Of course, you and your clients must always consult with legal and financial experts to navigate these arrangements. However, understanding these financing methods—and partnering with reputable vendors—can expand your toolkit. This not only allows you to provide more value for your clients but also sets you apart from the competition.