Step 1: Subject-To Acquisitions
A "subject-to" deal means you buy a property "subject to" the existing mortgage staying in place. The deed transfers to you, but the seller's loan remains. This lets you acquire properties with little or no money down, assuming a loan with potentially below-market interest rates.
Key Concepts
- How It Works — The seller deeds you the property. Their mortgage stays in their name, and you make the payments. The seller gets relief from payments; you get the property and the existing loan terms.
- Due-on-Sale Clause — Most mortgages have this clause, allowing the lender to call the full balance due upon transfer. In practice, lenders rarely enforce it if payments are current — but it's a real risk you must understand.
- Rate Arbitrage — If the existing mortgage is at 3.5% and current rates are 7%, you're getting financing at half the market rate. This is the primary economic advantage.
- Seller Motivation — Subject-to works when sellers need out fast: pre-foreclosure, divorce, relocation, or upside-down on equity. They're not looking for top dollar — they want the problem solved.
What to Look For
- Compare the existing loan's rate to today's market rate. The bigger the spread, the more valuable the subject-to structure is.
- Calculate the payment savings over the remaining loan term. A 3% rate advantage on a $200K balance over 25 years = $100K+ in savings.
- Always verify the loan is current and get authorization to make payments. Set up a servicing company to protect both parties.
Step 2: Seller Financing
In seller financing, the seller acts as the bank. Instead of getting a mortgage from a lender, you make monthly payments directly to the seller. This opens deals that banks won't touch — unusual properties, land, commercial, or when you don't fit conventional lending boxes.
Key Concepts
- Promissory Note — The legal document specifying payment terms: principal, interest rate, amortization period, balloon date, and default provisions. This IS the loan agreement.
- Negotiable Terms — Unlike bank loans, everything is negotiable: rate, term, down payment, balloon period, even 0% interest. The deal is whatever the seller agrees to.
- Balloon Payments — Most seller-financed deals include a balloon (full payoff) in 3–7 years. Plan your refinance exit before the balloon comes due.
- Installment Sale Tax Benefit — Sellers benefit from spreading capital gains over multiple years (installment sale). This is your pitch: "You'll save on taxes by financing the sale."
What to Look For
- Run the numbers with the seller's proposed terms AND your counter-offer. Show the seller their total interest earned vs. a lump sum — many sellers are surprised by how much more they make with financing.
- Model the balloon payment scenario. Can you refinance or sell before it comes due? What's the property need to appraise at?
- Compare seller financing to a conventional loan at today's rates. If seller financing is cheaper, it's a no-brainer. If it's similar, the value is in the flexible qualification.
Step 3: Wrap Mortgages
A wrap mortgage (or "wraparound") combines subject-to with seller financing. You buy a property subject-to the existing mortgage, then sell or lease-option it to an end buyer with a new, higher-rate note that "wraps around" the underlying loan. You profit from the spread.
Key Concepts
- The Spread — You take over a 4% mortgage and create a 7% wrap note. On $200K, that's a $6K/year profit just from the rate spread, plus any principal markup.
- Three Parties — The original lender (underlying note), you (the wrap creator), and the end buyer (who pays the wrap note). You're the middleman collecting the spread.
- Legal Structure — Wraps must comply with Dodd-Frank and state-specific lending laws. In most states, you need a licensed loan originator and proper servicing. Never DIY the legal side.
- Risk Management — If your end buyer defaults, you still owe the underlying mortgage. If you default on the underlying, the original lender forecloses — wiping out your end buyer's interest too.
What to Look For
- Calculate the monthly spread: what your end buyer pays you minus what you pay on the underlying. This is pure cash flow with no maintenance or landlord duties.
- Model the "principal waterfall" — the underlying loan amortizes faster (lower rate) than your wrap note (higher rate). You build equity in the spread over time.
- Always use a third-party loan servicer to collect the wrap payment and make the underlying payment. This protects all parties and provides a paper trail.
Step 4: Lease-Option Strategies
A lease-option gives a tenant the right (but not obligation) to purchase the property at a pre-set price within a specific timeframe. It's a powerful tool for investors — you collect rent, an option fee, and a premium over market rent, while the tenant-buyer builds toward ownership.
Key Concepts
- Option Fee — The tenant-buyer pays a non-refundable fee (typically 2–5% of purchase price) for the right to buy. If they don't exercise the option, you keep the fee. This is immediate income.
- Rent Premium — Tenant-buyers pay above-market rent ($100–300/mo premium), with a portion credited toward the purchase price. This gives them "skin in the game" and reduces your vacancy risk.
- Strike Price — The pre-agreed purchase price. Set it at current market value or slightly above. If the market appreciates, the tenant-buyer gets a built-in discount — motivating them to exercise.
- Sandwich Lease-Option — You lease-option FROM the seller, then lease-option TO a tenant-buyer at higher terms. You profit from the spread in option fees, rent, and purchase price without ever owning the property.
What to Look For
- Calculate total income from all three streams: option fee + rent premium + spread on purchase price. A well-structured lease-option can generate $15–30K in total profit per deal.
- Model the "fall-through" scenario: if the tenant-buyer doesn't exercise, you keep the option fee, keep the rent premiums, and can re-lease-option to a new tenant-buyer. Each cycle generates another option fee.
- Check your state's laws. Some states treat lease-options as installment land contracts, which triggers different consumer protection requirements. Consult an attorney before structuring these deals.