Creative Financing in a High-Rate Environment: Michael Hyun’s Journey to Homeownership

In 2023, the landscape of homeownership shifted dramatically as mortgage rates soared above 7%, leaving many prospective buyers feeling disheartened. However, Michael Hyun and his spouse, Eileen, found a way to navigate this challenging environment through creative financing strategies. By employing a method known as "subject-to," they were able to take over a mortgage with a significantly lower interest rate, showcasing how innovative approaches can lead to successful home purchases even in tough economic times.

The Financial Landscape of 2022

Before diving into their 2023 home-buying experience, it’s essential to understand the financial backdrop that Michael and Eileen faced in 2022. With a combined income of $422,000, they were understandably concerned about their tax liability. Fortunately, Eileen’s profession as a real estate agent qualified her as a real estate professional under tax law. This designation allowed them to leverage their real estate investments to significantly reduce their federal tax obligations, effectively lowering their tax bill by 99%.

In a previous interview with Business Insider, Michael elaborated on how non-real estate professionals could also benefit from similar strategies, emphasizing the importance of understanding tax laws and utilizing available provisions to one’s advantage.

The Challenge of High Mortgage Rates

As 2023 rolled around, Michael and Eileen were eager to continue their property investments to replicate the tax benefits they had enjoyed in the previous year. However, the high mortgage rates posed a significant barrier. With rates exceeding 7%, the prospect of homeownership became increasingly unaffordable, even if they planned to rent out the property for cash flow.

Despite shopping around at various banks and mortgage brokers, they found little difference in the rates offered. It was at this juncture that Michael turned to creative financing, inspired by real estate investor Pace Morby, whose insights he had been following on social media. Through Morby’s community, Michael discovered the concept of wholesaling, where middlemen purchase properties under contract and sell those contracts to buyers.

The Wholesaling Connection

Michael’s exploration into wholesaling opened up new avenues for property acquisition. "Wholesalers basically post their deals there," he explained. "And if you like them, then you’ll email the wholesaler, and they will basically get you to buy their contracts." This method allowed Michael to find properties that could be purchased using the subject-to financing method.

The Subject-To Method Explained

The subject-to method involves taking over the ownership of a property along with the existing mortgage. In Michael’s case, he identified a newly built single-family home in Texas, priced at $475,000. The homeowner, facing financial difficulties, was behind on payments and opted to sell the property to Michael rather than face foreclosure.

The existing mortgage had a balance of $368,486 at a remarkably low interest rate of 2.75%. This arrangement meant that Michael’s total monthly payment would be $2,844, a figure that would have been untenable had he secured a mortgage at the prevailing market rates.

Financial Mechanics of the Purchase

To facilitate the purchase, Michael paid the seller $16,735 in cash and utilized carry-back financing for the remainder. This financing method allows the seller to finance the gap by accepting monthly payments until the owed amount is settled. Michael noted that without the favorable financing terms provided by the subject-to method, the property would not have generated positive cash flow, making it an unviable investment.

Navigating Risks: The Due-On-Sale Clause

While the subject-to method presented a unique opportunity, it also came with inherent risks. The most significant of these is the due-on-sale clause, a provision in the mortgage contract that grants the lender the right to call in the loan if the property title is transferred. Although this clause is not commonly enforced, it poses a potential threat to buyers like Michael.

To mitigate this risk, Michael consulted with an attorney to transfer the title to a land trust or a living trust. While this step is not mandatory, it provides an additional layer of protection against the enforcement of the due-on-sale clause, ensuring that the mortgage remains intact despite the change in ownership.

Conclusion: A New Path to Homeownership

Michael Hyun’s journey to homeownership in 2023 serves as a compelling example of how creative financing can unlock opportunities in a challenging market. By leveraging the subject-to method and navigating the complexities of real estate transactions, he and Eileen were able to secure a property that would have otherwise been out of reach due to high mortgage rates.

Their story highlights the importance of adaptability and resourcefulness in the face of financial challenges. As the real estate landscape continues to evolve, innovative strategies like those employed by Michael and Eileen will likely become increasingly vital for aspiring homeowners navigating the complexities of the market.