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Real Estate Investing ‘Subject To’ The Existing Mortgage. Here’s a Video On Investing ‘Subject To’ For Real Estate Investors…
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Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I’ve got a quick video on investing subject to the existing mortgage..
To fully understand Subject To investments, we need to first break the process down into two components, the title and the financing. Many investors think they are related in this type of transaction, but that’s a common misconception.
In a ‘subject to’ transaction, the seller will Deed the title over to the new buyer, making the buyer the new owner of the property, but the loan remains in the sellers name. The buyer will then make payments on the mortgage in place of the seller.
It’s important to understand that a loan does not indicate ownership of a home, the deed does. The property itself is a collateral asset to lenders in case payments are not made by the borrower.
There is risk on both sides, for the seller, their credit is on the line, and for the buyer, they could potentially lose the property if not managed correctly, or if the Bank executes the “Due On Sale” clause which we will discuss later in this video.
In most situations, buyers/investors will keep the property for themselves as a cashflow investment or a potential Lease Option.
Simply, Subject To’s create a way for investors to own property with little or no money out of pocket, or using their own credit.
Why would a seller agree to sell you their home using their existing mortgage?
They must be Motivated in order for this strategy to work well
– They want to stop making payments because they want to move
– They are getting transfered to another city, which is paying less
– They were given the house and now have 2 mortgages
– The house was purchased under a dual income home, divorce, now single income
*There many situations that can create a motivated seller, and its not just because they are behind on payments.
“Due on Sale” Clause
(25 years ago and prior it was not uncommon for ownership of a residential property to change with the financing staying in place.)
DOS clause – Varies by lender documents – conventional, FHA, VA
– Most contracts state – The Loan balance MAY be called due in full upon sale or transfer of ownership of the property. This is one of the ways lenders protect themselves.
In addition to qualifying the initial borrower, the lender required the borrower to pledge the property as additional collateral for the loan.
– But, in most cases, but not always, as long as payments are being made ON-TIME, lenders usually won’t care. Even if payments are made in the name of someone who is NOT on the original loan. But it’s still the banks choice.
– Once again, this is a risk you need to be aware of, and its important your seller is made aware of this too. The risks of this type transaction vary by state and by lender.
Important Tips:
When you make payments, be sure to make them directly to the lender, and NOT to the seller. Reason why, you can’t guarantee that the seller will make payments for you, and if they foreclose, YOU lose the property and your money. If the seller asks that checks are mailed to the seller, then ensure the payee is the lender, NOT the seller. And make sure you have a way to verify each month that the payment has been made.
Make sure the seller signs documents stating their understanding of this situation. You could even go so far as to videotape their understanding. Do not make any promises about when the seller’s loan will be paid off.
The regulations behind ‘subject to investing’ varies per state, so it’s important that you verify that this is a viable investment option for you. Although this is a “no money down” strategy, that doesn’t involve the use of your credit, there are still risks. It’s important you educate yourself on these potential risks before using this strategy.
Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you’ll be automatically notified when we upload more quick video tips for you. Take care and good investing.
