In real estate, folks are always looking how to structure deals and how to buying properties with little to no money down. While there happen to be many ways to take risk out of real estate, the best without a doubt is through the “option to purchase” contract, however a close second would be buying a property “subject to”.
Buying properties “subject to” allow investors to purchase a property with little to no money down, which give folks without the liquidity the opportunity to buy real estate and get into real estate investing.
There are many different ways to buy home. Most folks have heard about buying on contract, lease options or paying cash without the need for financing. The one way that is not necessarily new but is starting to gain much attention is buying homes “subject to”. Buying properties “subject to” scares some folks as it sounds complicated and some folks even think it’s illegal, but in reality it is one of the safest, easiest and many times one of the most profitable ways to purchase real estate.
Buying properties “subject to” – what does this mean?
So, what does buying a property “subject to” mean? When purchasing a home “subject to” it literally means subject to the existing mortgage that is already in place on the property. So, the terms of the note that were initially agreed upon with the lender remain the same. That would include the name the loan was purchased in. So, as the buyer you are not assuming the loan, the terms that you create with the seller are between the buyer and seller as long as everything is followed to the very last detail as when the loan was initiated.
The most common question asked by the investors is most always has to do with the ‘due on sale’ clause. This one concern often times keeps numerous investors from purchasing properties using the “subject to” method. The “due on sale” clause states that the lender has the right to call the entire note due if any of the terms of the initial agreement are not met, such as payments being paid or transfer of the deed without paying off the original loan. With this being said, it is very important to understand that the job of a lender is to collect payments and nothing more. They loan out money at a higher interest rate then they are paying and create their cash flow from the difference on that spread. If a loan were at 7% or 8%, why would a lender call that loan due to have it financed at a lower interest rate? They would be cutting their own profit. Do you think a lender really cares who is making the payments on that loan, of course not, however if the payments were not being made, and it was a non-performing note, they have the right to foreclose on that property and they will if payments are not being made. A lending institution does not want to call a loan due or foreclose on a property if they don’t have to as it is not in their best interest to do so.
I want to be certain that investors understand the legal difference between buying a home “subject to” and assuming the loan. When a property owner sells his home “subject to” the existing mortgage, the buyer must make the payments on the mortgage or lose the property by foreclosure. However, the foreclosure will never show up on the buyer’s credit record because the buyer was not legally obligated to make the mortgage payments on that existing loan. Such a foreclosure on a “subject to” mortgage will adversely affect to seller’s credit record, not the buyer’s. I am not suggesting that you go out and purchase a lot of homes and never make the payments. Remember, you are not legally obligated to make those payments. But you ARE morally obligated. If you are interested in investing in properties through this strategy, you better make those loan payments as you won’t find many more of these deals if you are not making payments, not to mention it is not in your best interest either.
Why would someone deed you his or her house? The two main reasons are “time” and “debt relief.” If someone is being transferred, divorcing, buying a new home, or financially strapped, you have the ability to buy now and let the seller mover forward. You can offer that seller instant debt relief and help them out of whatever predicament they find themesleve. At the same time, you can help a buyer who does not, for some reason, have perfect credit and cannot purchase a home using conventional methods.
There are many different ways to make money when buying a property “subject to”, the most common are the following. The buyer can actually get paid to buy the property from the seller, remember seller is desperate to get out of their predicament; Investor collects non-refundable option consideration from final buyer; investor collects the difference between monthly mortgage payments and the monthly lease payment investor is charging to his or her tenant; tax benefits, such as depreciation and interest deductions and of course the profit when you sell, the difference between what property was bought for and what it ultimately sells for.
Most people do not realize that by purchasing homes “subject to” they are in total control. You own the home; they own the loan. You have the deed to that property. What happens at closing if you have lease optioned a property or purchased a property on contract and the seller decides they do not want to sell you the home, or they cannot convey clear title? For starters, it will take legal action against your seller, which takes time. In that period of time, you could lose your tenant/buyer who was going to refinance the home and is now instead probably suing you. When you have the deed to that property, there is no question who is selling it because you own the property.
Purchasing homes “subject to” is a creative, fast, and financially rewarding way to buy homes. It gives you instant ownership, yet you are not legally bound with a lot of loans in your personal name. Personally, I believe with this method of buying homes, one can gain financial freedom with little risk and great rewards. It takes little money to get started buying homes “subject to,” and remember, when you are able to buy homes with great terms, you can pass on great terms to your tenant/buyer, making it easier and quicker to fill homes, and with a greater financial reward to you. It is becoming exceedingly difficult to get approved for traditional loans and therefore to start buying real estate of your own. Buying properties “subject to” gives the new investor or investors without a great amount of liquidity the ability to buy properties with little money down and minimal risk which is always what investors should be looking to accomplish. If you have not looked into “subject to” deals, I strongly recommend that you do so as these type of deals can be extremely rewarding and well worth the effort. With that being said, you will need to be able to educated sellers on this type of deal if you ever hope in making it work so do your research and start pitching this avenue to your highly motivated sellers.