REI ETUTOR

Buying Properties “Subject To”

Defining “Subject To”

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What does it mean when you buy a property “Subject To”? Various meanings: “Subject to” an inspection; “Subject to” financing

approval; subject to etc. We are interested in buying properties “subject to” existing financing.

What happens to the existing mortgage? The existing mortgage remains unchanged. The title is transferred to the buyer’s name. The loan remains in the seller’s name.

Do you have to file any documents with the mortgage company? Do you have to be approved to takeover the existing mortgage? No. You are buying the property “subject to” not assuming the

mortgage.

Due-On-Sale Clause

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What is the Due-On-Sale clause? A clause that states the mortgage balance must be paid in

full upon the conveyance of ownership.Is this clause enforced?

Rarely. We have never seen the clause enforced or heard of it ever being enforced to date.

Mortgage companies would be foolish to call a performing mortgage due simply because of a change in ownership.

For FHA insured loans, the lender must receive HUD approval to foreclosure on the property and enforce the due-on-sale clause

Is “Subject To” buying legal? Yes! The due-on-sale clause is not a law.

Contract Tips

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Always have your sales contract reviewed by an attorney. Trying to keep your expenses down? Go to your local

office supply store and see if they have any local real estate contracts for use.

Can also contact a local realtor for a “sample” sales contract.

Make sure the contract you use has a “subject to” option for financing. If this option is not available, write “subject to

existing financing” in “other” section of contract.

Contract Tips

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Spell out the existing mortgage terms in the contract. If no space in the main portion of the contract include in an

addendum.

Example: The buyer is purchasing the property subject to the existing

financing with monthly payments of $1,064.37 which includes taxes and insurance. The mortgage is a 30 year mortgage with 23 years remaining and a current balance of $114,846.

Include a full disclosure in the contract explaining how the property is being purchased and the “due-on-sale” clause.

Potential Deals

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Are All Properties Potentially “Subject To” Deals

No! There are certain things a buyer should look for:Always examine the mortgage documents

Original loan term and number of years remaining Interest Rate

Adjustable or Fixed Monthly Payment Amount

Does the mortgage payment include taxes and insurance? Is there PMI?

Equity Ideal is for the mortgage balance to be 75% to 80% below

market value

Potential Deals

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Condition of the property? Does the property need immediate repairs?

Cosmetic, Roof, A/C, Structural Possible future repairs?

Kitchen & Bath Updates, Flooring, Roof, Exterior Code enforcement issues?

Overgrown landscaping, illegal additions, electrical meters

Neighborhood Any proposed zoning changes? Number of vacant houses in the neighborhood. Overall curb appeal

Exit Strategy

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What is your exit strategy? Fix (if needed) and Flip

Repairs Needed Holding Time Selling Costs

Lease Purchase Cash Flow Appreciation Rate

Buy and Hold Cash Flow Vacancy Rate Replacement Reserves

Always know your exit strategy before making an offer.

Psychology of the Seller

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Why Would Someone Sell a Property “Subject To”?As an investor you are offering an immediate

solution for the seller’s problem.The average person values their credit rating.

Motivation attributable to:Loss of a jobIncrease in cost of livingImmediate property expenses (repairs, updates, etc.)Mortgage balance is higher than the house’s valueLittle to no equity

“Subject To” Example

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Example:

Fact PatternA mother passes away and leaves the house to

her son.The son has two options, keep the house or sell

it.Son decides it is easier to sell the house than

keep the house as a rental property. Does not want to be a landlord managing repairs and

chasing tenants for rent money.

“Subject To” Example

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What is his motivation to sell the house “subject to”? Does not want to spend the next 3 to 6 months trying to sell the

house retail on the MLS. Does not have the extra money available to pay the utilities,

mortgage, and any repairs that arise while the house is being marketed.

What about any equity in the house? Seller is willing to sacrifice profit for the immediate removal of

responsibility.

Negotiation Tip: Remind the seller of the 6% commission they would lose plus holding costs if they sell the home on the MLS.

“Subject To” Example

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Why would an investor be interested in this property?

In this example:Property does not need any immediate

repairs.Solid rental market with a limited supply.

Positive cash flow estimated at $300 to $500 per month.

Market is appreciating

“Subject To” Example

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Investor’s Exit Strategy

Increasing values + Positive Cash Flow = Lease Option Opportunity!

“Subject To” Example

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Deal Specifics

Investor agreed to purchaser the property “subject to” the existing financing with the mortgage being paid off in five years or less.

Property marketed to potential buyers as a 2 year lease-purchase with $6,000 nonrefundable down and the tenant responsible for all repairs less than $500.

Lease-purchase sales price advertised as 5% below market value.

“Subject To” Example

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Deal Specifics Continued

Profit is the positive monthly cash flow and the spread between the sales price and the mortgage balance at the time of sale.

Investor looks like a hero! Mortgage is paid off 3 years earlier than contractual

agreement.

“Subject To” Example

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What if the lease-option buyer does not qualify?$6,000 nonrefundable deposit = Profit3 years left on original sales contractAdvertise for new 2 year lease-option buyer

Worst Case ScenarioIf close to 5 year mark with no lease-option

buyer then market to retail buyers.Price reasonably or at a discount to sell in 90

days or less.

Money Making Secret Revealed

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Interested in learning how investors are continuing to buy properties “subject to” in a declining market?

Want to know how to work with homeowners who have zero equity or are even upside down?

Despite what others may say, you can make Large Profits buying properties such as this that no one else wants.

Money Making Secret Revealed

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How is this possible?

Think long term – Buy and Hold

Focus on cash flows, not on current market value/mortgage balance

Money Making Secret Revealed

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Example:

Homeowner has a house worth $50,000Mortgage balance is $65,000Mortgage payment, including taxes and insurance

is $600 a month.

Most investors would walk away from this propertyWhy?No equity – Upside down $15,000

Money Making Secret Revealed

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Additional Research = Potential ProfitHomeowner is 8 years into a 30 year mortgage

Based on amortization schedule more money is paid towards the principal than interest.

Comparable rental rates are $850 to $950 per month, tenant pays utilities. Annual net cash flow, not including reserves is $3,000

to $4,200Taxes are stableProperty insurance rates have been decreasing

slightly.

Money Making Secret Revealed

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Exit Strategy – Buy and HoldWhy?You purchased a rental property with positive

cash flow, put no money down, and did not have to qualify for financing.

Each month you are closer to a larger profit Mortgage balance decreases Another month of positive cash flows

Real estate is cyclical

Conclusion

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REMEMBEREvery Offer Does Not Result In A Deal But

Every Deal Is The Result Of An Offer