Estimated reading time: 4 minutes
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.