Hybrid Deals & Equity Carry
2 min read
What is a Hybrid Deal?
A hybrid deal combines two creative finance strategies:
- Subject-To: The buyer takes over the existing mortgage payments
- Seller Financing: The seller finances their equity as a second note
This is also called "Equity Carry" because the seller "carries" their equity as a note while the buyer takes over the mortgage.
Common Confusion
A hybrid deal is NOT the same as refinancing. The original mortgage stays in the seller's name. The buyer takes over payments but does not replace the loan.
When Hybrid Deals Make Sense
Hybrid deals work well when:
- The seller has an existing mortgage (can't do pure seller financing)
- The seller has meaningful equity (more than just mortgage balance)
- The seller wants some cash now and payments over time
- The buyer can't qualify for traditional financing but has income
Real Example: How It Works
The Situation:
- Home Value: $300,000
- Mortgage Balance: $180,000
- Seller's Equity: $120,000
- Existing Mortgage Payment: $1,400/month
The Hybrid Structure:
- Down Payment to Seller: $20,000 (cash at closing)
- Subject-To: Buyer takes over $180,000 mortgage, pays $1,400/month
- Seller's Second Note: $100,000, paid via down payment + balloon at end of term
Result:
- Seller gets: $20,000 cash + $400/month income + remaining balance at balloon
- Buyer pays: $1,400 + $400 = $1,800/month total
- Buyer controls: $300,000 property with $20,000 down
First Position vs Second Position
In a hybrid deal, the seller's note is typically in second position:
- First Position (the existing mortgage)
- Gets paid first if there's a default. Has priority. Lower risk for the bank.
- Second Position (the seller's note)
- Gets paid after first position is satisfied. Higher risk, which is why sellers often want higher interest or down payments.
Protections for Sellers in Second Position
Being in second position carries more risk, but sellers can protect themselves:
- Larger down payment - More buyer skin in the game
- Balloon payment structure - Seller's equity paid via down payment + balloon
- Deed-in-lieu clause - Property returns to seller on default
- Payment monitoring - Right to be notified if first mortgage payments are missed
- Cure rights - Ability to step in and make first mortgage payments if needed
Benefits for Everyone
For Sellers:
- Get some cash now (down payment)
- Monthly income from second note
- Full price for the property
- Existing mortgage stays current
For Buyers:
- Control property with less cash
- Take over existing low rate
- No bank qualification needed
- Time to build credit for refinance
Why Investors Love Hybrid Deals: Interest Rate Arbitrage
One of the biggest advantages for investors in hybrid deals is interest rate arbitrage.
Here's the magic: If the seller has an existing mortgage from a few years ago with a low interest rate (3-4%), the investor takes over those payments at that same low rate. With today's rates at 7%+, this means the investor is essentially borrowing money at half the current market rate.
Rate Arbitrage Example:
- Seller's 2021 Mortgage: $200,000 at 3.25% = $870/month
- Same Loan Today (2024): $200,000 at 7.5% = $1,398/month
- Monthly Savings: $528/month
- Annual Savings: $6,336/year
By taking over the existing mortgage Subject-To, the investor keeps that favorable rate. This dramatically improves cashflow and makes deals work that wouldn't pencil at today's rates.
This is why investors actively seek out properties with existing low-rate mortgages. The seller's "old" mortgage becomes a valuable asset in the deal.
Related: Equity Carry with DSCR Financing
If you have high equity (40%+) and want an even larger upfront payment, consider Equity Carry with DSCR Financing. In this structure, the buyer gets an actual bank loan to pay you 35% of the purchase price at closing, then you carry the remaining 65%.
Mutual Protections
It is natural for both sides to want protection in these deals. Sellers often worry that a buyer might stop paying. Buyers worry that a seller might change their mind later.
Clean deals protect both sides by using clear written agreements and neutral third-party tracking for all payments. We use documented default rules so everyone knows what happens if something goes wrong. This structure ensures that both parties are safe and the deal remains fair over time.