Start Here: Seller Financing Is the Default
If you are reading articles about creative financing, you probably want to buy properties without going to a bank. Good instinct. But here is what most courses skip: 80% of creative acquisitions should be straight seller financing. Before you get into wraps, sub2, novations, or gator lending, master the simple seller-carry note.
Why does seller financing dominate?
- Clean title from day one
- Simple structure any seller can understand
- No due-on-sale risk
- Easiest to refinance later
- Works on free-and-clear properties (which is where the best deals are)
Now, here are the five structures you need to know.
1. Seller Financing - The Foundation
The seller acts as the bank. You negotiate price, down payment, interest rate, and term. The seller carries a promissory note secured by a deed of trust or mortgage. You get the deed at closing.
Best for: Free-and-clear sellers, estate sales, retired landlords, long-term holds being sold by original owners.
Typical terms: 0-20% down, 4-7% interest, 5-30 year amortization, balloon in 5-10 years.
A retired couple selling a 4-unit they own free and clear at $400,000 may prefer $0 down and a $2,000/mo note over a lump-sum taxable event. Learn to present this option. The installment-sale tax benefit alone closes deals.
2. Subject-To - When There Is a Low-Rate Loan Worth Keeping
You take over an existing mortgage by taking the deed. The loan stays in the seller's name. This is the right move only when the existing rate is 2%+ below today's market.
A 3.5% legacy mortgage on a $250,000 balance saves you $400-500/month vs. new financing. That is real money. But if the existing rate is 7%, there is no benefit - negotiate seller financing instead.
Biggest risk: Due-on-sale clause. Mitigate with insurance, prompt recording, and a loan servicer.
3. Wrap-Around Mortgage - Sub2's Close Cousin
The seller carries a new note that "wraps around" their existing loan. The seller collects your payment, forwards their underlying payment, and keeps the spread.
Example: Seller has a $150,000 loan at 4%. You get a $250,000 wrap note at 6%. The seller earns 6% on their $100,000 equity and 2% on the underlying $150,000.
Wraps are more complex and require a cooperative seller who will reliably forward the underlying payment. Use a professional loan servicer to handle this.
4. Novation Agreement - Replacing the Loan Terms
A novation substitutes a new obligation for an old one. In real estate, you often see this when a buyer takes over an existing contract and novates (replaces) the original buyer's position.
Less common in direct acquisitions. More useful in wholesale assignments or when assuming an FHA/VA loan.
5. Gator Lending - Gap Funding for Deals That Need It
Gator lending is short-term gap capital - a private lender (the "gator") funds the down payment or earnest money while you structure the primary acquisition. The gator gets repaid quickly, often within 30-90 days.
This is not a primary acquisition strategy. It is a tool to solve a capital gap when the seller insists on some money down and you do not have it liquid.
Woosung lets you model multi-tranche capital stacks - useful for gator + seller-finance combinations where you need to see true yield and payoff timing.
The 80/20 Rule for Creative Deals
| Structure | Use Case | Frequency |
|---|---|---|
| Seller financing | Free-and-clear seller | 80% |
| Subject-to | Low-rate existing loan | 10% |
| Wrap-around | Seller has existing loan, wants spread | 5% |
| Novation | Contract assignment | 3% |
| Gator lending | Solve down payment gap | 2% |
What To Do With This
Start with seller financing. Learn the four pillars (price, down, rate, term). Build a pipeline of free-and-clear leads. After you close five seller-financed deals, you will have the pattern recognition to know when sub2 or a wrap is genuinely better.
The operators who confuse themselves early are the ones who jump straight to complex structures before they understand a simple promissory note. Do not be that person.