Collecting Keys - Real Estate Investing Podcast

Creative Finance, Subject-To & Novations: How the Deals Actually Work

Creative finance is any way to buy real estate without a new bank loan: seller financing, subject-to, wraps, lease options, land contracts and novation agreements. Mike DeHaan, Dan Austin and Dylan Koch have used all of them, had a lender call a $586,000 loan on them, and argued publicly about where the ethical lines sit. This guide collects what the show has actually said.

Start with these episodes

When does creative finance beat a cash offer?

Dan lays out a hierarchy on EP 188: a cash offer is always best, seller financing is a close second, and the more creative you get — subject-to, wraps, novations — the harder the deal becomes. His warning is that newer investors reach for creative structures to force bad deals to work.

On EP 173 he names three seller signals that point toward a terms offer: the seller wants more than your cash number, they don't want to pay capital gains tax, and they want residual monthly income, ideally from a rental already leased below market. On EP 199 he adds a screen for the deal itself — sick cash flow, a big equity spread, or great terms. If it has none of the three, negotiate until it does.

From: EP 173 · EP 188 · EP 199 · EP 179

How do you structure a seller-financed purchase?

Dan breaks the negotiation into three inputs on EP 173: down payment, interest rate, and amortization. He calls amortization \"monthly payment\" with sellers, because stretching the term is the lowest-friction way to hit whatever number they care about. Trade the inputs against each other — a big down payment should buy 0% interest, and a high rate is tolerable if the term stretches.

Their Post Falls, Idaho deal on EP 188 shows the shape: 5% down, a $400,000 note at 5% interest, $1,800 a month with amortization stretched to hit that payment, and a 10-year balloon. Dan notes that extending a balloon from five years to seven or ten de-risks the eventual refinance, since debt paydown has time to create the equity you'll need.

On EP 113 the hosts describe asking what the seller nets monthly today and offering slightly more, then adjusting amortization on their end — one deal used a 48-year amortization to hit $1,100/month at 5%. On EP 208 Mike mentions 57-year and even 90-year amortizations paired with a ten-year balloon.

From: EP 173 · EP 188 · EP 113 · EP 122

What actually goes wrong on a subject-to deal?

Subject-to means taking title while the seller's existing mortgage stays in place and in the seller's name. On EP 179 Dan stresses the part sellers often miss: they remain personally liable, most loans have no formal assumption path (VA being an exception), and the due-on-sale clause lets the lender call the balance when title changes.

Mike and Dan lived it. On EP 244 a DSCR lender spotted the new LLC on title roughly 48 hours after closing on three duplexes and demanded payoff of $586,000 within 30 days. Because they hadn't owned the properties 90 days, the refinance had to be a delayed purchase loan with 10% down — about $60,000 they say they wouldn't have had as beginners. Mike went through five lenders to find one that would work, and on EP 259 they report the original lender stonewalled for six weeks until they threatened to deed the properties back.

This is where the show disagrees with other practitioners. On EP 171 Kevin Amolsch argues lenders rarely call due-on-sale on a current loan, since servicers are graded on current buckets and foreclosure losses are heavy. Mike's account on EP 384 — a lender calling $850,000 in loans within 30 days, with deeding back not fixing it — is the counterexample.

From: EP 244 · EP 259 · EP 301 · EP 384

How do you sell on terms — wraps, lease options and land contracts?

Creative finance is also an exit. On EP 308 Dan walks through a wraparound on a Spokane short-term rental they sold for $325,000 furnished: 10% down ($32,500), 8% interest amortized over 30 years, payment set at $2,100 so $600 a month flows to them, with the whole balance including the underlying loan due in five years. Lawyers papered it as two notes — the subject-to on the existing DSCR loan plus a second note for their equity.

Dan says insurance kills most wraps. His fix: the buyer gets his own policy re-underwritten by the same agent, the sellers are named additionally insured, and the lender stays listed as lender. On EP 310 they hit the mirror-image problem when an insurer refused to add a buyer who wasn't on title.

Lease options are the softer version. On EP 126 Dan explains that as the owner you keep title, depreciation and principal paydown while passing maintenance and utilities to the tenant-buyer. He collects an option fee around 10%, charges above-market rent, and prefers a 36-month payoff date. His screening line: if a buyer can't produce the 3–5% a conventional or FHA loan would require, they probably can't afford ownership costs.

From: EP 308 · EP 126 · EP 264 · EP 310

What is a novation agreement and how is it structured?

A novation is a conditional release of the original purchase agreement, replaced by a new one. On EP 130 Eric Brewer explains that this is what makes the deal financeable — unlike an assignment, which FHA, VA, Fannie and Freddie borrowers can't use. You never take title; you prepare and sell the seller's house to a retail financed buyer and take a spread, which means you can pay a higher percentage of current-condition value than a wholesale offer allows.

On EP 421 Mike walks through the four documents: a purchase and sale agreement with a novation clause and your fee terms, a limited power of attorney so you can list and sign MLS documents, a recorded notice of interest to protect money you put in, and the novation and indemnification agreement signed once a retail buyer is found.

The hosts changed their structure over time. Their early novation on EP 20 gave the seller everything under $400,000 and kept the rest. By EP 52 they had switched to a fixed profit plus budgeted costs and commission, which Mike said was better in a cooling market where upside is uncertain. They also take power of attorney so a seller can't back out after the work is done.

From: EP 130 · EP 421 · EP 52 · EP 20

When does a novation beat wholesaling?

Novations rescue deals that won't pencil any other way. On EP 415 Mike describes a tenant-occupied wholesale that collapsed when tenants stopped paying and talked the property down to buyers. Weeks after the seller walked, a follow-up call produced a novation: a $275,000 floor to the seller, the team handling notice, eviction and cash-for-keys, and a 50/50 split above the floor — roughly $25,000 to them versus the original $20,000 assignment.

On EP 395 Dan joint-ventured a novation with a direct competitor rather than bidding each other up. They contracted at $246,000, the partner funded and managed the rehab, and the house eventually sold at $305,000 for about $22,000 split. On EP 427 Dan describes a rural manufactured-home novation where neither a wholesale nor a flip worked, partnered with a member whose construction company supplied labor — but he also draws a line, criticizing operators who do no work and collect a large fee just for listing the house.

From: EP 427 · EP 415 · EP 395 · EP 444

Where do the hosts draw the ethical line?

On EP 179 Dan says that before wholesaling a subject-to or seller-finance deal you must ask whether the seller knows you plan to assign it, and whether you can actually qualify the end buyer. On EP 223 he and Mike argue that sub-to deals marketed at above-retail prices with a seller second are cash-flow negative from day one, with a balloon coming due in about five years and no equity to cover it.

The hosts have been openly critical of parts of the sub-to education world. On EP 292 they recount a DM exchange with Pace Morby after he invited critics to reach out, and say he sent personalized video and voice messages but, in their telling, never answered their question about why sub-to deals require a special insurance company. On EP 509 they relay an investor's now-deleted post alleging locked portals and unanswered emails at Morby's Sub2 fund — allegations the hosts pass along, not facts they establish.

On EP 495 guest Aaron Bihl tells Dan that wholesaling a subject-to deal doesn't end your involvement: both seller and buyer keep calling for years, and he describes one cleanup tied up in suit and countersuit for two and a half years. The shared position: creative finance is fine if you can personally cover the downside when a loan gets called.

From: EP 179 · EP 223 · EP 292 · EP 495

Frequently asked questions

What's the difference between subject-to and assuming a loan?

On EP 179 Dan explains that subject-to means taking title while the seller's mortgage stays in the seller's name and the seller stays personally liable. A formal assumption moves the debt to the buyer, which is why Chris Prefontaine says on EP 103 he avoids assumptions — they put the debt back on his credit.

Can a lender really call the loan on a subject-to deal?

Yes. On EP 244 Mike and Dan describe a DSCR lender spotting a new LLC on title about 48 hours after closing and demanding payoff of $586,000 in 30 days. Kevin Amolsch argues on EP 171 that lenders rarely call a current loan, so the hosts and some guests genuinely disagree on how common it is.

How is a novation different from an assignment?

On EP 130 Eric Brewer describes a novation as a conditional release of the original purchase agreement, replaced by a new one, which makes the deal financeable for FHA, VA, Fannie and Freddie buyers. An assignment cannot be used by those borrowers.

Does seller financing let a seller avoid taxes?

No. On EP 391 Dan explains depreciation recapture is owed in full the year of the sale regardless of structure, and seller financing spreads capital gains rather than eliminating them. He also says you can't know a seller's recapture without their accountant. This is educational, not tax advice.

Do you need money to do creative finance deals?

The hosts say yes. On EP 271 they argue someone always funds the gap between the existing loan and the purchase price, usually the buyer. On EP 259 they add you shouldn't do subject-to without reserves, because you have no backup plan when a loan gets called.

All 76 episodes on creative finance, subject-to & novations