Key Takeaways
- Every subject-to needs due-on-sale contingency plan.
- Seller counterparty risk mitigated by documentation and servicing.
- Risk scoring matrix (30-point) provides objective evaluation.
- Scores above 20 indicate restructure or decline.
Specialized risk assessment tools for evaluating creative financing risks.
Due-on-Sale Risk Assessment
Evaluate lender type, loan type, payment history, market conditions. Build contingency plan: refinancing capacity within 90 days, alternative financing, worst-case sale scenario.
Seller Counterparty Risk
Risks: bankruptcy, death, adding liens, failing to make underlying payments. Mitigate through documentation, title insurance, recorded liens, servicing arrangements.
Risk Scoring Matrix (30-point)
Score 1-5 each: due-on-sale probability, seller reliability, cash flow margin, exit strategy viability, legal certainty, market risk. Under 15: acceptable. 15-20: needs mitigation. Above 20: restructure or decline.
| Factor | Score 1 | Score 3 | Score 5 |
|---|---|---|---|
| Due-on-Sale | Government/exempt | Conventional/current | Jumbo/recent transfer |
| Seller Reliability | Stable, local | Distant, moderate | Distressed, unresponsive |
| Cash Flow | > $300/mo buffer | $100-$300 | < $100 |
| Exit Strategy | 3+ options | 2 options | 1 option |
| Legal | Attorney-reviewed | Template docs | No review |
| Market | Stable/growing | Uncertain | Declining |
Risk scoring matrix
Go / No-Go Decision Framework
Go Indicators
- ✓Every subject-to needs due-on-sale contingency plan.
- ✓Seller counterparty risk mitigated by documentation and servicing.
No-Go Indicators
- ✗Proceeding with creative deals without a formal risk scoring assessment: Unidentified risks lead to losses that could have been avoided with systematic evaluation
- ✗Ignoring seller reliability risk because the property economics look attractive: Seller bankruptcy, unresponsiveness, or lien additions can destroy deal economics
Sources
Common Mistakes to Avoid
Proceeding with creative deals without a formal risk scoring assessment
Consequence: Unidentified risks lead to losses that could have been avoided with systematic evaluation
Correction: Score every creative deal on the 30-point matrix before committing. Make it a required step in your process.
Ignoring seller reliability risk because the property economics look attractive
Consequence: Seller bankruptcy, unresponsiveness, or lien additions can destroy deal economics
Correction: Evaluate seller reliability independently of property economics. A great deal with an unreliable seller is a bad deal.
Test Your Knowledge
1.What is the recommended action when a creative deal scores above 20 on the 30-point risk matrix?
2.What is the primary mitigation for seller counterparty risk?
3.What should be included in every subject-to due-on-sale contingency plan?