Lead With Seller Financing
Before you compare creative structures, anchor on this: seller financing is the default. It is the cleanest, simplest, most scalable approach for acquiring free-and-clear properties. If you walk into a creative deal and the property has no existing mortgage, you should be structuring a seller-financed note - full stop.
Sub2 and wraps are tools for specific situations, not alternatives to seller financing. Using them when seller financing would work is adding complexity for no reason.
Seller Financing - The Standard
How it works: Seller owns the property free and clear (or is willing to pay off the existing loan from closing proceeds). You buy it. The seller carries a promissory note. You get the deed. Simple.
Best for:
- Free-and-clear properties (no existing mortgage)
- Sellers motivated by installment-sale tax treatment
- Deals where you want clean title from day one
- Any situation where you plan to DSCR refi within 5-7 years
Typical terms: 0-20% down, 4-7% interest, 5-30 year amortization, balloon in 5-10 years.
The win: Clean title. No due-on-sale risk. Easiest to refinance later. Sellers understand it.
Subject-To - The Low-Rate Loan Preservation Play
How it works: The seller has an existing mortgage. Instead of paying it off, you take the deed and keep the existing loan alive. You make the payments. The loan stays in the seller's name.
When it makes sense: The existing loan rate is materially below market (2%+ spread). If the seller locked a 30-year at 3.0% in 2021 and you're buying in a 7.5% rate environment, that 4.5% spread on a $200,000 balance saves you $750/mo. That is worth the structure's complexity.
When it doesn't make sense: The existing rate is 6.5%+. There is no rate advantage. Negotiate seller financing instead.
The risks:
- Due-on-sale clause (lender can call the loan)
- Seller's credit is on the line if you miss payments
- Harder to refi with online DSCR lenders if the deed situation is murky
Frequency: About 10% of creative deals. Not more.
Wrap-Around Mortgage - The Seller Spread Play
How it works: The seller has an existing mortgage with equity above it. They carry a new seller-financed note (the "wrap") that includes the underlying loan balance. You pay the wrap note. The seller forwards the underlying payment and keeps the spread.
Example:
- Seller has $150,000 loan at 4.5%
- Seller's equity: $100,000
- You get a $250,000 wrap note at 6.5%
- Seller collects 6.5% on $250,000 and pays out 4.5% on $150,000
- Seller's net yield: high. Your cost: 6.5% on the full amount.
Best for: Sellers who have equity, want monthly income, and prefer not to pay off their underlying loan at closing (sometimes for tax or cash-flow reasons).
Biggest risk: If the seller stops forwarding the underlying payment, you have a problem. Use a loan servicer to pay the underlying directly and the seller's spread separately. This eliminates the risk.
Frequency: About 5-7% of creative deals.
The Decision Matrix
| Question | Seller Financing | Sub2 | Wrap |
|---|---|---|---|
| Property free and clear? | Best fit | N/A | N/A |
| Existing low-rate loan? | Possible (pay it off) | Best fit | Option |
| Seller wants monthly income? | Yes | No | Yes |
| You want clean title? | Yes | Yes (deed transfers) | Yes (deed transfers) |
| DSCR refi compatibility? | High | Medium | Medium |
| Complexity for seller? | Low | High | Medium |
The 80/10/5 Rule for Creative Deals
If you close 20 creative deals this year:
- 16 should be straight seller financing
- 2 should be sub2 (where a low-rate legacy loan exists)
- 1 should be a wrap (where the seller has equity and prefers monthly income)
- 1 is something exotic - novation, gator, assignment
Operators who try to run everything as sub2 or wraps are overcomplicating deals that could be simple seller-carry notes. The complexity does not add returns. It adds friction, legal risk, and refi complications.
Learn seller financing first. Learn it deeply. Then add sub2 and wraps to your toolkit for the specific 20% of deals where they genuinely fit.