David 's Blog

Does creative financing still exist or are there ways to purchase homes in Phoenix without traditional financing these days?  If you're like me, you're probably saying, "No way".  If so, read on. 

Recently, I had the privilege of speaking with a real estate investor, by the name of Nick Johnson, that specializes in Short Sales and "Subject To" purchases.  Nick and I got introduced through a mutual friend, Matt Rosen @entrepreneurHI, from Twitter.  I learned a lot about Nick after talking with him for only an hour on the phone.  I learned all about his high regard for his family, his unparalleled ethics and his business philosophy.  Additionally, I also learned he is also the author of the eBook, "Subject2".    

While most of us in the Phoenix area and beyond are all too accustomed with the term Short Sale, "Subject To" was not a practice in which I was all too familiar.  Being the type of individual that prides myself on keeping current with what is available in today's marketplace, I immediately had to do some investigative research.   I figured that I would share a little overview of what I discovered. 

"Subject To", also referred to as "Subject 2" or "Sub2", is a form of creative financing in which the seller deeds the property to the buyer while keeping the existing mortgage note fully intact.  The buyer, typically a real estate investor, simply makes the mortgage payments on the existing mortgage.  These transactions can provide an array of benefits for both the buyers and sellers.

 The buyers do not need to go through the headache (I know all about this) of getting qualified for a new mortgage note.  There is no credit, income or asset verification required.  The investors own the property, but do not assume the loan.  This leaves personally liability on the sellers.  Typically, the main advantage for buyers in these transactions is acquiring a property at a much lower interest rate than if they were to purchase the property outright.

It may seem unbelievable to most of us that a homeowner would deed over their property to another individual, but there are many reasons that sellers find this a great option.  The primary reason that many sellers opt for Sub2 financing is to obtain debt relief.  Some are facing foreclosure and unable to sell their property due to lack of equity.  Owning a property that is "underwater" is a concept that many Arizona homeowners can relate all too well.  Others simply want a fast sale.  They may be moving, transferring jobs, getting married, divorced or a whole list of various scenarios.  

Subject2 contracts should be implemented by a knowledgeable real estate professional.  We've all witnessed the dangers of working with someone who claims to be an expert but has no more expertise than you or me.  A sub2 contract is essentially the same as a standard state approved contract.  The only difference is the 'sub2′ addendum states the terms of the existing loan. 

In today's credit climate, we all know someone who may be struggling to qualify for a loan or continue making their monthly mortgage payments.  I would encourage you, no matter what your preconceived ideas of traditional financing are, to have them contact me before it's too late.  There are many times that I may not be able to help them but I can guide them in the right direction.  Don't let them become just another statistic.

So you've decided that you want to buy a home in Phoenix, AZ.  Besides the many advantages to living in the Valley, interest rates reaching all-time lows coupled with the recent plunge in home prices make Phoenix a very affordable and attractive option.   Nowadays, it is actually cheaper to purchase a home in the Phoenix area than rent.  The only down side to this scenario is that you're short on cash for a down payment.  Unfortunately, you cannot get a gift from your family, you've already tapped out your 401K, you are not eligible for a VA loan, you make too much money to qualify for down payment assistance, and you have no desire to live in a rural area.  So, the question is..... What can you do without a down payment???  Meet the qualifications for the $100 Down Payment HUD Home Program.

Let's take a trip back in time and describe why the availability to finance a home with the $100 Down Payment HUD Home Program arose.  During the housing boom, many of the homes in Phoenix were financed with Conventional loans.  Prior to the run-up in home prices, many first-time homebuyers used FHA loans to purchase housing.  Once home prices started rising at unsustainable levels; homeowners began to refinance their FHA loans into Conventional loans to pull cash out, remove mortgage insurance, and lower their monthly obligations.  Once these homes, now with Conventional financing, went into foreclosure, the banks began to sell their inventory at a discounted price.  At the beginning of 2007, many of the new homebuyers were forced to use a FHA loan due to inability to finance their purchases with Conventional mortgages in Phoenix.  These homebuyers were unknowingly still buying homes at inflated home prices.  Sadly, many of these homes purchased in 2007 and 2008 with FHA loans are currently going into foreclosure.  In most cases, the current values of these homes are significantly less than what is owed.  The $100 Down Payment HUD Home Program is a result of a FHA borrower foreclosing and HUD repossessing the home that is now for sale.    

So Who Qualifies? 

 Now that you've been able to determine you may be able to qualify, here is an outline of the next steps you need to take.

Step 1 - Get pre-qualified for the $100 downpayment HUD Homes Program

Step 2 - Choose search area and type of home (i.e. North Phoenix - 3 bedroom, 2 bath with 1,500 square feet or more)

Step 3 - Create a login and password at our customized database to search homes

Step 4 - Contact us to match you with one of our Realtor partners that can assist you with viewing the homes you are intrested in.  Please note, not all Realtors are trained and educated for HUD homes.  It's very important to work with one of our preferred partners that has experience with HUD homes.

Step 5 - Submit an offer, get acceptance and go through the loan process.

Step 6 - Close on your purchase using an FHA-insured loan.

It can be a very simple process but the first step is to get pre-qualified.

If we believe foreclosure is in our clients best interest, should we propose this as an option and recommend they seek legal counsel?

This morning I was thinking about the many clients I have who are underwater 50-70% in negative equity.  The more I thought about the reality of those clients getting back to the break-even point, where their home is worth what they paid for it, the more I questioned what my advice to them should be.  In Arizona, our foreclosure laws are extremely favored toward homeowners.  I'm not going to pretend to be an expert and give you all the scenarios but, often times, the borrower can walk away without any recourse, or deficiency.    

This brought me to think about the letters behind my name, CMPS.  I am a Certified Mortgage Planning Specialist, and have been since January 2007.  What is CMPS you ask?  CMPS is a training, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. The CMPS Institute was formed as a joint effort by leaders in the mortgage and financial planning industries to raise professional standards among mortgage professionals and integrate sound financial planning advice into the mortgage process.   Note the last sentence, sound financial planning advice.  This leads me to my question.

What would your advice be to a borrower owes $220,000 on a home that's worth $70,000?  Should they continue to pay their mortgage if they have suffered income loss but still have assets?  What if they were advised by legal counsel there is no recourse if they walk away versus do a short sale, where there may be recourse?  One could argue that bad economic advice would be to continue paying on an asset that could take more than 20 years to see the original purchase value versus fixing your credit after foreclosure, which could only take 3-5 years.  The average appreciation rate for Arizona is 5.73025% for a 30 year period.  The 5 and 10 year averages are the same, depending on the years you start and stop. 

Lenders have loss-mitigation departments, which are staffed and have legal counsel.  Why shouldn't a borrower mitigate their own losses too?  Sometimes it's really just a business decision that one faces.  Many business contracts have been broken by the politicians, the people who run these banks and the banks themselves.  Is it immoral?  Is it unethical?  Are we outraged to hear about it??  What do you think?