Subject To

Taking over Subject To

I’ve heard of taking over the mortgage subject to the existing loans, but how does it exactly work?

There are different meanings to the phrase “subject to”, such as a clause in a real estate agreement: “subject to buyer’s inspection”, “subject to partner’s approval”.

But in this particular scenario we are referring to a low to no money down, no credit strategy. For real estate investors, the most common use of the term “subject-to” refers to purchasing a property “subject to existing financing.” With this strategy you are leaving the existing financing in place and just taking over the original owner’s payments.

One thing we need to clarify is you are not assuming a loan. First of all, there are very few loans that are assumable any more and even if you find one that is, unless it was a non-qualifying loan, you would need to use your credit and qualify to assume it. Aside from that, even if you didn’t have to qualify, the rate may be higher than you would want anyway. So for clarification, you are not assuming anything. You as the buyer simply take over payments on the sellers existing mortgage and your name does not go on the loan. It will stay in the seller’s name.

It’s a strategy that is completely legal, in fact if anyone tells you it isn’t, ask them to explain line 203 on the HUD-1 form which says “Existing Loans Taken Subject To.” Anyone can make a private contract to buy or sell a property. You will have the deed in your name and the seller will still have the loan in theirs.

That being said, with any strategy, it is important you make sure you understand the state laws where you are investing. There are also specific things you need to include to make sure you do this properly and we will list those below.

“Subject to” Candidates

What types of sellers will be the best candidates for this type of arrangement? Essentially it comes down to motivation – it works for anyone who needs a quick solution because they are having financial difficulties and can’t cover mortgage payments or they are on the verge of having financial difficulties and just want out before it ruins their credit. This is why we focus on finding motivated sellers.

This can also be a good arrangement for someone who doesn’t need all the money right now and would rather receive payments with interest as an investment overtime, such as an individual looking to retire.

Benefits to the Buyer

• There is no need to qualify or use your credit.
• Everything is negotiable, including a flexible down payment if any.
• Length, term, interest rate and payments are also negotiable.
• There are no lender fees, or points which means minimal closing costs.
• The transaction can be done quickly, in a matter of days.

Benefits to the Seller

• They may get a higher sales price or more through compound interest overtime.
• Monthly income and cash flow.
• It’s usually a much better rate of return than a fund or money market account.
• If the property is non-conforming, it’s an easy way to sell.
• The transaction can be done quickly, in a matter of days.
• Helps to build credit because the mortgage payment is being paid on time.

Seller Financing and “Subject To” Financing

Many sellers are hesitant initially to doing anything like “creative financing” or “seller financing” so you won’t want to phrase it that way. You will go through some basic qualifying questions to make sure you do in fact have a motivated seller, then a good question to ask would be, “Are you open to doing a rent to own type of scenario?”

People are more familiar with this concept and it doesn’t sound intrusive.

You can also ask, “How would you like me to take over payments so you can walk away from the burden and stress of these bills?”

You will get much better results simply by asking the right questions.

Whenever you can get seller financing, it’s some of the best money out there. Even if only 5% of owners are willing to work with you, those are the people we’re looking for. When you structure these types of deals, you really have no limitation on how many you can do. Your credit is never involved!

In addition, when people like and trust you, the higher these percentages will be, so keep that in mind and make sure you always focus on creating win-win deals. What do they need? How can you solve their problem? Not only will this help you move forward with confidence, these people we’ll sense you are there to actually help them!

Providing Options and Educating the Seller

The best way to discuss this with the seller is to provide options and educate them on the benefits. This can actually be really good for the seller especially if they don’t need all the cash right now.

As an example, something you can say is, “Would you accept an offer that would give you $1067 per month for the next 10 years?” You’ll want to show the monetary benefits so they can see the value of what they can make with compound interest overtime. It can really be a benefit to both parties. I’ll give you an example of how to do this.

First, provide options. One of the most effective ways to approach the seller is to give them 2 separate offers so they can see the difference. This way you can educate them at the same time.

For example, let’s say you had a homeowner who was willing to sell his property for 145K and his loan amount was 142K.

Here is a way you could approach the seller:

“I will give you two separate offers. The first one I will give you $145K, with $3000 cash upfront and take over your existing mortgage. The 2^nd offer I will give you $150,000 ($5,000 more than your asking price) and instead of cash, I can give you a secured note for $8000 at an interest rate of 8%.

Let me show you both offers as investments. If you were to take the $3000 and put it in a CD that gave you 5% return, it would become about $4941 in ten years. The $8,000 secured note at 8% would become $17,757.”

“That’s more than 3 times as much as the first offer for the same period of time. I hope you’ll consider the second offer because it can work a lot better for both of us.”

Remember, either way you are offering to take over the first mortgage so you can arrange a “subject to” agreement.

If after doing your research you find the property has little or no equity, another approach to introduce a subject to arrangement is to say,

“Since you don’t have any equity in your house, it wouldn’t qualify for a straight cash purchase. However, another option we have is I can take over your payments until I resell the house. I don’t know how long that will take but I will tell you that it’s when I get paid, so I’m pretty motivated to sell it as quickly as possible! In the meantime, I’ll make the payments, and take care of maintenance and yard work until I sell the house. This way you can move on without anymore hassle or stress.”

In a scenario where there is little to no equity you will be looking at other options to determine if the deal can work for you. Obviously selling the property outright would yield little profit if any. However, you may be able to rent the property for more than the existing payments to create cash flow; then sell the property in the future. In many cases, a better option is to market the home as a lease option so you can collect an option deposit as well as more in rents and a higher purchase price. This will also allow you to get better tenants/buyers in the home instead of just renters.

First you mush research comparable rents and leases in the area to make sure the numbers pencil out. Once you find this is a good option and works for your circumstances, you can set up the deal accordingly. If it doesn’t, don’t hesitate to move on to better opportunities. The point is to be aware of the options available to you and make arrangements that will work best for both you and the seller.

As you discuss your offers and how you will take over the mortgage, here are a few things you can do to make sure it is a win-win scenario for you and the seller.

• Explain that you will make payments on time and even a couple months in advance to begin with. This will repair and improve the seller’s credit.
• You will run the payments through a title company or set us a new bank account with automatic withdrawal to ensure the payments are made on time and even early. (This is a must. There are so many scams out there where investors say they will make payments but never do. Then they put renters in the home, collect rent and never make payments.   Then they wonder why the lender is calling them threatening foreclosure. By telling the sellers you are willing to make sure payments are being made, will help you establish trust with them. Just make sure you do what you tell them you are going to do.)
• You can have an attorney write everything up to make sure everyone is safe.
• Since you don’t need to qualify or use your credit, this allows you do this type of deal quickly – within a few days, thus solving their problem quickly!

A couple more points that will be helpful for you:

• As previously mentioned, there are scam artists out there that prey on people in bad circumstances so they can take advantage of them with no regard for what’s right, legal or moral. You usually hear about these cases on the news like everyone else. So you need to follow through and build trust with the seller.

In addition, have references or other documentation that can help them feel comfortable working with you. You may not need them, but have them ready. (This can include your real estate attorney, title company and applicable Business affiliations such as the Better Business Bureau or Chamber of Commerce if applicable.)

• Also, you can be flexible with terms, such as offering to buy the property subject to the existing financing, for two years, and then pay them in full at the end of the two years.

This way you could structure a lease option or if repairs were needed, you would have up to two years to fix it, lease, sell, or obtain your own financing anytime during the two years.