The Ethical Dilemma of Creative Financing

Dan Austin: [0:02] Welcome to the Collecting Keys Friday Focus. Hey there. Welcome back to another episode of the Collecting Keys Friday Focus. You've got me, Dan Austin, as your host today. And I I always say this, but I really do mean it. If you have anything you want us to talk about on any of our episodes, but in particular, like a Friday Focus, if there's a topic you want us to do a deep dive on or pull the thread on a little bit more, explain more, hit me up in the DMs. Best place to get me is at investor man dan on Instagram, or if you just simply like the content or don't like the content, love the feedback, we're always looking for ways to improve, because you know, the show is for our listeners, and so we want to serve up what you wanna hear, not just what we want to talk about. Otherwise, we'll just sit in an echo chamber and talk about what we like, and it'll just be the exact same thing over and over again. Not great for our listeners. So anyhow, today, I want to talk about the ethics around creative finance. A couple weeks ago, I talked about a seller financing deal that Mike and I got under contract, and talked about doing like a seller wrap on the back end to sell it, or some other exit strategies you can use on a seller finance deal. I didn't touch on subject two, which I will talk about quite a bit today, because I think there's a lot of ethical concerns around that. And really, the reason why I wanna talk about ethics is because there's a lot of gurus out there pitching how great Sub two is, how great Creative Finance is, and they are great tools, don't get me wrong, but they don't talk about the small details around ethics. In particular, ensuring that the seller knows exactly what they're getting into, and if you choose to wholesale the deal, are you properly qualifying a new buyer, and should you even be wholesaling these types of deals? So again, I wanted to touch on subject two a little bit more in this episode, because I didn't talk about it the last time.

Dan Austin: [1:59] And before I do that, I'll just do a quick explanation for those of you that maybe don't know what subject to or sub to is, or maybe just haven't heard an explanation of it that actually clicked, because I know sometimes it can be a tough topic for people to understand. Fundamentally, what subject to means, or sub two means is that, you're going to be purchasing a house subject to something. In this case, in the creative finance case, it's usually always subject to the first position mortgage, or potentially, if there's a second mortgage, a first and second position mortgage, but typically, it again, it's the first position mortgage. And what that fundamentally means, in even more simple terms, is that you are going to buy a property from a seller, and just take over their mortgage payments. You're gonna start paying their mortgage payments in exchange for title to the property. Seller, again, fundamentally should be able to walk away, you're paying their mortgage payment, you don't have to go get financing or anything like that, it's already in place, and you just do that. So there's some challenges with this, that are talked about, but not really a lot. The first is, essentially what you're doing is a loan assumption. And most mortgage mortgages don't have a loan assumption option. I do know that VA loans do, and I don't know that they're the only ones, but I know that the VA loans do.

Dan Austin: [3:18] And what loan assumption would mean is that you can go and get, go to the lender and say, hey, I'm buying this property, I'm going to take over the loan, and they will qualify you and underwrite you as an individual, and say, yay or nay, whether they are okay with you doing that. Again, I know VA's loans do it, but don't quote me, I don't know very many other loans that have that actual clause in there. Another clause that's in there that is talked about, but again, brushed off, is the due on sale clause. I would say that, what that means is, essentially, if the home is sold, or somebody changes title, the name of the owner is changed, the bank or the mortgage holder has the ability to call that loan immediately due, so due on sale. And that protects the the mortgage holder because if you sell the property, they no longer have the asset backing their money, right? So you could sell the property, take the $100,000 loan, and go do whatever the hell you want with it, spend it, whatever. Sure, you might still be personally guaranteed, but the house no longer is there for the bank to actually use as collateral, because they can't foreclose on you and take it. So the the reason why I bring these two up, the loan assumption and the due on sale clause is because 99.999% of the time, in fact, I don't know if I've ever heard any gurus say this, but nobody's pitching for the seller or the buyer to go to the mortgage holder and say, hey, by the way, just so you know, Bobby over here is going to take my loan over and start making payments. They're going they're going to assume it, please don't call it due on sale. Nobody's pitching that, and more so they they're really saying just dance around it.

Dan Austin: [5:02] And I'm not against that, right? Because the you know, if everything's on on par, it's it's okay, and it and it shouldn't really be an issue, and I do think this is a good tool to employ, so I'm not trying to say not to do it. I'm just trying to set up why the ethics matter. So knowing those two things, when you go into a conversation with a seller, the first ethical point really is, is the seller actually aware of their responsibilities? So most times it's pitched like, hey, I'm going to take over your loan, you can walk away, no worries. That's not the case, because in a subject to deal, the seller is actually still responsible, because their name is still personally guaranteeing that loan, and a lot of gurus also pitch, don't ever put debt in your name, don't ever take on that obligation. What they're saying there is, let that seller maintain that obligation, and you just get the property without actually being responsible. A lot of times, sellers don't understand that, they just think, I can walk away and you're gonna make my mortgage payments. Now there's ways to help enforce that, because sometimes sellers do say, well, what if you don't pay? So one thing that we always recommend is, know, setting up a third party escrow company, and having all of your a whole process for payments, and late fees, and everything on top of what the actual mortgage processor has.

Dan Austin: [6:23] So you're setting up a third party that's gonna make the payments, that's going to send you a late fee notice, that's going to send the seller notice that you haven't paid, and make them aware. Right? So that's one way to help kinda put some rigidity around this. But making sure that they understand that, because you're going to need you know, power of attorney to access their mortgage information and be able to change anything on it, like addresses and stuff like that. So, it's like a pretty real deal thing. Okay. So the next and most important ethical point I wanna make here is about wholesaling subject to or seller finance or creative deals. It's totally possible, and it's totally a tool. But from an ethical standpoint, does the seller know you're going to do that? Do they know that you're telling them you're gonna take over their mortgage payments, but in reality, you're going to go on Facebook and say see if somebody wants to buy a deal, and you might position that as special financing, no credit required, however you pitch that, that makes it more lucrative for a random buyer you don't know to come on board and actually get into a home that maybe they otherwise wouldn't be qualified for, and maybe otherwise can't really actually make the payments.

Dan Austin: [7:35] Because what's going to happen, if you don't get the right buyer, is they stop making payments, and you are not You're no longer the deal, right? Because you have wholesaled it for a fee, maybe you've wrapped it, so you're getting a monthly income off of it, so you you basically get it at a certain interest rate, and you sell it at another interest rate, and you know, say it's 5%, you sell it at 6%, you're collecting that 1% mortgage interest margin for yourself, so maybe you're still in it that way. But really fundamentally, you don't have to be, and you could sell this thing to somebody, and you could walk away. Seller tries calling you because they think you're the person that is supposed to be paying them, and you don't answer your phone. Or you say, know, sorry mister seller, I don't know. Or maybe you are nice and you try to call that buyer, the buyer's like, dude, peaced out, ran to Mexico, see you. Now you've put yourself and or that seller in kind of a weird position. And again, it goes back to the ethics of this, and I really wanna be clear here, because it's easy to pitch and talk about subject to, but in reality, putting it into practice and doing it the right way does matter. So if you do wanna wholesale this, do you trust the buyer? If it's a crappy sub two deal, should you even be wholesaling?

Dan Austin: [8:48] And here's my point, so a lot of gurus are out there saying, the price doesn't matter, you're getting that you're getting to assume the debt with buy a no money down deal, assume the debt, all this sort of stuff. Well, the purchase price does matter, and it does matter if it doesn't cash flow, because you're basically saying you're going to sell a house that somebody's immediately upside down in, and that they're not going to make any money on, but they'll make the payment, don't worry. Not likely, that's just not a good deal to be wholesaling, and so I think there's some some ethics just around the deal structure, let alone qualifying the right buyer. Are you able and capable to qualify a buyer? Do you feel confident in that? Who are you going to sell this to? Is it another close investor that you that's got a great track record, that has bought subbed to before, that yet they have a portfolio, they're going to do it? Or is this some Joe Schmo that you found on your local houses for sale, creative financing, you know, webpage, or on another Facebook group that a lot of people frequent? That's really important, and I I just don't I don't feel comfortable with what I see a lot of people teaching, and what a lot of people try to tell people. Because in reality, that's not what that's not what that's not what is happening.

Dan Austin: [10:01] So two points here, and I'll stop talking about ethics, and let you be on your way. But the two points really are, does the seller actually know what they're getting into? Do they know that they're still responsible for the mortgage? And b, should you be wholesaling this deal to somebody? You can, and I do agree with the option to do that, but are you properly qualifying the buyer and setting the deal up such that that seller is protected? That's the key right there, is the seller protected? Okay. One last point, let me make one more point. The subject to is not a business. Okay? The only business that's for are the people that are pitching it as a business, and that's because most of them are getting some additional deal flow and structuring deals or partnerships with people, so they are getting additional income from, I don't wanna say a pyramid scheme, but kind of a ladder of of people coming up to them, and giving them profit share as in return for teaching how to do subject to. So those are the people that are making a business. If your whole business, your whole off market real estate business is all about no money down subject to's and seller financing, you can't build a business because you're not getting enough deals. There's not enough sellers out there that you can pitch to and get to understand this type of deal, or that agree to doing this type of deal. This is a tool in your toolbox, you should be able to employ subject to sparingly when their opportunity presents itself, as if you do it ethically, same thing with seller financing, same thing with seller wraps.

Dan Austin: [11:33] This whole creative structured business is just a tool, because cash offers still work, and those are in my opinion, the best way to do it. It's just like how Mike and I pitch like marketing. You know, you got SMS marketing, you have cold calling, you have direct mail, you have online, TV, radio, all that stuff. Not one of those is likely going to be the only one you should do, except I'd argue direct mail, you could just do that one. They're all just kind of a tool in your toolkit. Same thing with creative finance. So don't think that you can build an entire business on this. It's quite frankly bullshit. Anyhow, I will stop my rant there. I hope that this hits at home and just adds a little bit of flavor to the whole creative finance realm, if you do if you are questioning it, you should, because there are some ethical dilemmas with it, and there are ways around it, and there are ways to ensure you're doing it ethically. You just need to take a little bit of time to think about it and do the right thing. Alright. Catch you all later. Thank you. If you like this, again, hit me up. If you hated it, hit me up. Instagram at investor man dan. Also, if you're curious to learn about the ethics around this sort of stuff, or just learn how to add this tool to your toolkit, learn how to do off market real estate like Mike and I do, go to collectingkeys.com, hit the blue button that says become an instant investor, that's our group mastermind program. That's a great program, we got lots of people, a lot actually, we're going to be doing some case studies of the individuals in that program for these Friday episodes coming up, so wait for some of that. It's gonna be super cool to to really showcase some of the awesome deals that our group's doing.

Dan Austin: [13:09] So anyhow, have a great weekend, and I will see you next time. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.