'Subject To' Investing for the Beginner
Where the term ‘Subject To’ came from is a mystery to me. Whoever thought of this method of investing should be immortalized in the Real Estate Investing Hall of Fame, should there ever be one.
When you purchase a property ‘Subject To’ the existing loan stays in your seller’s name. In other words, the seller leaves his current loan on his property in place and makes it available for you and then your buyers’ use. You become the owner of the property when the seller signs the Grant Bargain & Sale Deed or other State specific device to transfer property.
You usually give the seller of the property at least token money, what I refer to as ‘U-Haul’ money or moving out money for their equity. When you sell the property, you can offer No Qualifying Loans to your buyers. This makes the house attractive in your prospective buyer’s eyes. Selling ‘No Qualifying’ to someone does not necessarily mean your buyer has bad credit. It could mean he/she is new to the area and some lenders want two years residency before granting a loan. Because you are selling to Non Qualifying buyers you should get $6K to $12K down on houses worth $100K to $150K. Remember you are the owner so you can even advertise Owner Financing. You can raise the interest rate; let’s say it is 7%, make it 9% this will add an additional $200 per month in your pocket. Then you might increase the value of the house 10% to 20% so when the time comes for your buyer to refinance, usually in approximately 2 years, this could give you an additional $10K, $20K, $30K etc. once the house is actually refinanced. The average profit on one deal of this kind would be close to $28K for your investment of around $1K.
Before 1988, 1989 there were loans, FHA – VA, that were fully assumable with out qualifying; no credit check required. Today almost all loans include a Due on Sale (DOS) clause whereby the lender can call the note due and payable upon transfer of the property to someone else.
However, it is my belief that if the loan is kept current then no ‘flag’ is thrown to trigger this clause. I have personally never had a loan called on my properties nor known anyone else that has. It is not illegal to take over or, I should say, become responsible for someone else’s loan. I felt this area of ‘Subject To’ should be covered, as it is a risk inherent with ‘Subject To’ investing, but certainly one that has not concerned me. However, you should be prepared to address this situation should the need arise by re-financing or building your Trust Account up, which I will discuss below. There are risks in all forms of real estate investing if not done properly. ‘Subject To’ is no different.
I use a Loan Servicing Company (LSC) to collect my buyers’ payments and to disperse these funds to the lenders. This is also an excellent way to address the objection from a seller, “how do I know my payments will be made, so my credit is not affected.” Set up a trust account at the LSC where you leave extra money to make payments should your buyer or buyers fail to do so; usually one to three months of mortgage payments taken out of what you get as a down payment on the property. The LSC sends out year-end statements to your buyers that they use for interest deductions on their income tax. The LSC eliminates your having to take care of accounting and mailings that take away from your productive time of buying and selling houses. The LSC also keeps a record of how your buyer is timely paying the mortgage, this plays an important role when the time comes for him to refinance. Lenders rely heavily upon this record in making a decision to loan money. I stress to my buyers how important it is to make their payment on time. Even buyers that have had credit problems in the past have been able to get a new loan because they have made their payments on time to the LSC.
When you first start doing ‘Subject To’ investing, you will be ‘Subject To’ receiving large amounts of money. If you are not accustomed to this type of money being available to you, then my advice would be, instead of buying the new Mercedes, let your Trust Account build up to a comfortable level then budget your money on a monthly basis. Then buy the Mercedes or 'Beamer' for the younger set.
You may possess all the knowledge in the world about real estate investing, which is absolutely useless unless you ‘apply’ the knowledge learned.
This is a small effort on my part to give you a better understanding of ‘Subject To’ investing.
John $Cash$ Locke
lc here again (and the owner of this login is getting pissed so it may be my last post unless you guys demand a response). pardon the delay. just got back from dinner.
the cashman's reply, unfortunately, is unresponsive. sure, he does not use the same terms, but that's a distinction without a difference. the form of the question is irrelevant, the issues remain.
what amount of U-Haul money would be a sufficient incentive for a homeowner to move out of his/her house? (to answer that question, i'd encourage the reader to put himself/herself in the homeowner's shoes for a minute) and if title to the house will continue to remain in the homeowner's (as opposed to your) name, what are you really getting in exchange for the U-Haul money? some might say you're entitled to a legal right at that point. but without a written contract embodying that right (which is commonly referred to as an "options contract" or an "option" for short), you have nothing (go consult a lawyer on this point).
now, if you do get a written contract properly reflecting your right, consider what that right might be. it is nothing more than an equitable title (not legal title) to the property, which gives you a (hopefully exclusive) right to close the deal on pre-specified terms. this means in order to turn a profit, you must sell the property/house at a better price than the pre-specified terms that you've negotiated. now can any of you imagine a homeowner that'd be willing to give you these exclusive rights unbounded by time? if you do, i have a nice little bridge in georgia for sale...
if not, then you'd have to turn the property around within the limited options period in order for the system to work...note that the homeowner is not in the business of giving money away, so the pre-specified deal that you negotiated would probably not be too outrageously favorable.
in case it's not abundantly clear by now. i'm pretty direct with my opinions. but i also do not mind others being direct with me. if there's a defect in my analysis, everyone (including master locke the cashman) feel free to point it out. but dwelling on terms like "options" and "limited periods" do not enhance credibility.
There are going to be positives and negatives to both sides. Let's take a look at this point. Family A moves into a house stays a year now has to move out. Do they want to take a 5000 loss to pay a REALTOR? Probably not, that is why they will sell by owner. Subto is very creative strategy that works in this place.
I think people are sometimes caught between a rock and a hard place sometimes and make a decision to sell this way even if they are on a loan for a couple more years.
P.S. Why are you loggin on under somebody elses account??
Joel,
I think I have answered LC questions. You have to wonder when someone does not give their name or use anothers name in their posts if they have something to hide or an ulterior motive.
John $Cash$ Locke
LC,
I purchase my properties Subject To the existing financing.
I get the deed from the sellers with no specified time period when the loan goes out of their name. This gives me ownership of the property.
I sell the property under Contract for Deed to my buyer, when he fulfils the terms of the Contract then he gets the Deed. This is done when he re-finances the property usually in two years from the date of his Contract with me.
As far as why would anyone would do this I would recommend you ask the hundreds of thousands of sellers who did this. It usually has to do with, divorce, transfer of job, behind in payments, just want out. etc. I could go into how you buy properties for 'U-Haul' money but it is a method that I teach my students, who by the way are doing it every day, so it is not something that I will share with you since they have invested in learning how to do it.
My point of you saying 'options', etc. has to do with a Lease/Option of the property which I have said many times do not use this method when purchasing a house. You are right if you purchase this way you are going down a bad real estate road. No need for me to consult an Attorney I do not buy this way, I think you were confused on how the Subject To method works.
John $Cash$ Locke
How does one find a LSC? And what qualities are there in a good LSC?
J,
Is the due on Sale clause something to worry about before getting into this line of investing?
It seems like the investor can get stuck paying alot of money before he/she sees any returns.
Where can I find more info on subject to's?
i'm browsing under someone else's login but had to respond to what john$locke had to say. am i the only one that has trouble digesting what he had to say? why would the seller of a home leave a home if title has not been transferred? and how would this "system" work if the seller refuses to leave?
let's say you can work this issue out, but others remain. why would anyone selling his/her home be willing to sell the house "subject to"? the homeowner bears the entire risk in the scenario that locke described and that makes no sense. most sellers want to walk away from the sale without having to worry about the home anymore, but locke's system seems to assume the converse.
assuming that a homeowner is willing to settle for something less than a complete sale, it seems logical that this situation would only arise if the homeowner is receiving something of value (put yourself in the homeowner's shoes, would you accept a few bucks for the right that you're giving up?). but if the buyer (i.e., you) is giving up something of value, then the system seems to break down. how are you supposed to afford the option? and with no transfer of title, what do you have to protect you from simply losing the cash?
a contract is probably the answer. but in order for a contract to be enforceable, it's generally the rule that its terms have to be definite. one of those terms is the contract period. if you only have a limited period of time to find another buyer before the option period expires, then you bear the entire risk of the transaction (i.e., you could have paid good money for a limited option and still not have found a buyer for the right price within the specified time).
sounds like a sure fire way to lose money. am i missing something? you out there master john$cash$locke$$$?
call me lc
John,
In your opinion what makes Lease Options a bad real estate road?
Alan