Do you “subject to”?
In other words do you purchase houses subject to the existing mortgage as a method for financing the deal?
If not, you really need to be.
If so, you need to be doing it correctly.
Subject to financing is an incredible way to partially (even fully) fund the purchase of a property.
Unfortunately, it has been much maligned because of the unethical practices of some investors and because of so much misinformation.
So let’s discuss how to correctly create subject to financing.
Whenever the existing mortgage is with a bank and the balance represents a significant portion of the price you can pay for the property you should immediately think about purchasing the house subject to the mortgage.
With a subject to transaction the ownership to the property transfers to the buyer and the loan remains in the name of the seller.
This is not assuming the loan. It is merely taking over the payments.
If you haven’t done one of these, your first thought is probably: “Who in their right mind would ever agree to this?”
I know; that was my first thought too.
But now after having done scores of these over the years I realize that a motivated seller is more than willing because the prospect of keeping the house is far more frightening.
They just want out.
That is also the reason why it is easy for the shady investor to take advantage of the seller.
The first step is full disclosure to the seller. There are a few points that they need to understand:
Their name will remain on the loan which means they are still legally responsible.
- There is no guarantee when the loan will be paid off and their responsibility ends. The loan could mature in their name.
- The bank has a due-on-sale clause meaning that they have the option to call the loan due if the property is sold without paying off the loan.
- The bank needs to be notified of this transaction.
Whew! Sounds scary, I know. Before I ever pull out the Disclosure and ask the Seller to sign, I go through each of these items and fully explain why they don’t need to be concerned. Even the due-on-sale is of no concern because the bank has the option not the obligation to call the loan due.
They never call a performing loan because it doesn’t make financial sense. I’ll save you the long explanation here, but basically for a bank to call a $100,000 loan means losing at least $4.4 Million in lending capacity. They just can not justify it.
The key to a good subject to is full disclosure. Be sure the seller fully understands the transaction. Their main concern is that you will be making the payments and that should be an easy objection to overcome.
If you are currently using the subject to strategy and hiding the transaction from the bank through a Land Trust transfer or some other means STOP immediately.
In fact, notify the bank of your intention to purchase subject to the existing mortgage. Do not ask for permission because they will never grant it in writing. Simply inform them of your intention to close and how they can reach you if they do not want the sale to occur.
Hiding the transfer from the bank can actually be interpreted as fraud. And there is no need. The only concern for the bank is that the payments are made on time.
You’ll find many ways to utilize subject to financing in your investing. I have used it as a great way to finance the purchase of rehabs without having to go to a hard money lender and filling in the remainder of the funding with private lenders.
Subject to for rentals is ideal because you have long term financing built in from the beginning without those mortgages showing up on your personal credit report. The sellers’ credit is positively affected with the on-time payments each month.
I also use this technique as a way to quickly flip pretty houses I acquire to owner occupants. You’ll have a line of buyers when you provide the financing. I teach this complete technique and how to properly set up a subject to deal in my course: Wholesale Pretty Houses.
Click here now to watch a short video on this strategy
Not only will you learn how to create rapid flips of nice houses to the open market, you also learn the full subject to technique along with all the forms you need.
As always, let me know if you have any questions.
Expect abundance,
Lou Castillo
