Investment Properties Purchased Subject-To

One of the things that disturbs me about our Real Estate industry is the amount of inaccurate or incomplete information attainable to investors.

Some myths block what otherwise would be a terrific deal while others would have you believe that a bad deal is actually terrific. Here is an example, we encourage purchasing homes “subject-to” the existing mortgage as an option offinancing the purchase of an investment property.

This means that title to the property is transferred to the purchaser, but the loan remains in the original borrower's name with payments made by the purchaser. Unfortunately, many myths exist around this method that could rob you of your profits.

This is an excellent method to purchase wholesale investment propertieswith out using little or none of your own money.

I personally aquire Chicago Wholsale Deals and invetment real estatethis way. This is a great exit stratagy for your wholesale propertiesas well.

Here are a few thoughts about what some folks believe and what they might want you to believe as well.  For example,

 First: Buying A House “Subject-To” The Existing Mortgage Is Illegal. Wrong! When you purchase a home "subject to" it means subject tothe terms of the currently existing note in the name of the seller. 

Keep in mind, most mortgages have a “due-on-sale” clause which says that if the house is sold without paying off the mortgage, the lender has the “right” to call the whole loan due.  Read this again, they have a “right” – not an “obligation”. It's their (the bank’s) choice. Several attorneys who represent lenders were asked if they had ever heard of a bank calling a loan due because of a sale.  In most instances they said not as long as the payments were made on time. Why? Because banks are not in the business of foreclosing on properties to take possession of the real estate.  They are in the money business. Please understand that the job of a lender is to collect payments. 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 they call the loan due, and it goes into foreclosure, they have a non-performing loan on the books (which requires them to have to increase their reserves), they incur additional costs, and they’re stuck with a property they do not want. Both are circumstances they would have to accountable to with their board.  Not a pleasant circumstance for that branch manager.  The alternative,  they can just accept the payments from the new owner. which one makes more sense?  Second:  Buying a house “Subject-To” Is Complicated And Requires a enormous amount of Paperwork. The reality is that all you have to do is write it into a contact, a “Purchase and Sales Agreement.” Just write it in right next to the Purchase Price. The contract should say something like this: Total Purchase Price to be paid by Buyer is XXX, payable as follows: “subject-to” existing first mortgage with a balance of approximately XXX, and monthly PITI payments of XXX; the remainder of Seller’s equity to be paid in cash at closing

That’s all there is to it and you’re done, it’s that simple.  The Seller and Buyer have now agreed that their house will be bought “subject-to” the seller’s  existing mortgage. The buyer must, as a precaution, have the Seller sign a disclaimer that they know that the loan has a due-on-sale clause, and that the Buyer makes no promise as to when the loan will be paid in full, or how long it will remain in their name.

Buyers should also prepare a letter from the Seller informing the bank that all future correspondence should be forwarded to the Buyer, and that the Buyer has the right to act for the Seller in every way regarding the loan so they'll disclose loan information to the Buyer in the future.  Now isn’t that simple. After closing, the Buyer just starts making the payments. We the Buyers don't hide our identity. We send in our own checks, and the house insurance is in the Buyers name.

Now you’re ready to try this strategy.  Make sure you consult with a qualified attorney as your circumstances warrant.