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.
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