REI ETUTOR Buying Properties “Subject To”

Defining “Subject To” REI eTutor What does it mean when you buy a property “Subject To”?  Various meanings: “Subject to” an inspection; “Subject to” financing approval; subject to etc.  We are interested in buying properties “subject to” existing financing. What happens to the existing mortgage?  The existing mortgage remains unchanged.  The title is transferred to the buyer’s name.  The loan remains in the seller’s name. Do you have to file any documents with the mortgage company? Do you have to be approved to takeover the existing mortgage?  No. You are buying the property “subject to” not assuming the mortgage.

Due-On-Sale Clause REI eTutor What is the Due-On-Sale clause?  A clause that states the mortgage balance must be paid in full upon the conveyance of ownership. Is this clause enforced?  Rarely. We have never seen the clause enforced or heard of it ever being enforced to date.  Mortgage companies would be foolish to call a performing mortgage due simply because of a change in ownership.  For FHA insured loans, the lender must receive HUD approval to foreclosure on the property and enforce the due-on-sale clause Is “Subject To” buying legal?  Yes! The due-on-sale clause is not a law.

Contract Tips REI eTutor Always have your sales contract reviewed by an attorney.  Trying to keep your expenses down? Go to your local office supply store and see if they have any local real estate contracts for use.  Can also contact a local realtor for a “sample” sales contract. Make sure the contract you use has a “subject to” option for financing.  If this option is not available, write “subject to existing financing” in “other” section of contract.

Contract Tips REI eTutor Spell out the existing mortgage terms in the contract.  If no space in the main portion of the contract include in an addendum. Example:  The buyer is purchasing the property subject to the existing financing with monthly payments of $1, which includes taxes and insurance. The mortgage is a 30 year mortgage with 23 years remaining and a current balance of $114,846. Include a full disclosure in the contract explaining how the property is being purchased and the “due-on-sale” clause.

Potential Deals REI eTutor Are All Properties Potentially “Subject To” Deals No! There are certain things a buyer should look for: Always examine the mortgage documents  Original loan term and number of years remaining  Interest Rate  Adjustable or Fixed  Monthly Payment Amount  Does the mortgage payment include taxes and insurance?  Is there PMI? Equity  Ideal is for the mortgage balance to be 75% to 80% below market value

Potential Deals REI eTutor Condition of the property?  Does the property need immediate repairs?  Cosmetic, Roof, A/C, Structural  Possible future repairs?  Kitchen & Bath Updates, Flooring, Roof, Exterior  Code enforcement issues?  Overgrown landscaping, illegal additions, electrical meters Neighborhood  Any proposed zoning changes?  Number of vacant houses in the neighborhood.  Overall curb appeal

Exit Strategy REI eTutor What is your exit strategy?  Fix (if needed) and Flip  Repairs Needed  Holding Time  Selling Costs  Lease Purchase  Cash Flow  Appreciation Rate  Buy and Hold  Cash Flow  Vacancy Rate  Replacement Reserves Always know your exit strategy before making an offer.

Psychology of the Seller REI eTutor Why Would Someone Sell a Property “Subject To”? As an investor you are offering an immediate solution for the seller’s problem. The average person values their credit rating. Motivation attributable to: Loss of a job Increase in cost of living Immediate property expenses (repairs, updates, etc.) Mortgage balance is higher than the house’s value Little to no equity

“Subject To” Example REI eTutor Example: Fact Pattern A mother passes away and leaves the house to her son. The son has two options, keep the house or sell it. Son decides it is easier to sell the house than keep the house as a rental property.  Does not want to be a landlord managing repairs and chasing tenants for rent money.

“Subject To” Example REI eTutor What is his motivation to sell the house “subject to”?  Does not want to spend the next 3 to 6 months trying to sell the house retail on the MLS.  Does not have the extra money available to pay the utilities, mortgage, and any repairs that arise while the house is being marketed. What about any equity in the house?  Seller is willing to sacrifice profit for the immediate removal of responsibility. Negotiation Tip: Remind the seller of the 6% commission they would lose plus holding costs if they sell the home on the MLS.

“Subject To” Example REI eTutor Why would an investor be interested in this property? In this example: Property does not need any immediate repairs. Solid rental market with a limited supply.  Positive cash flow estimated at $300 to $500 per month. Market is appreciating

“Subject To” Example REI eTutor Investor’s Exit Strategy Increasing values + Positive Cash Flow = Lease Option Opportunity!

“Subject To” Example REI eTutor Deal Specifics Investor agreed to purchaser the property “subject to” the existing financing with the mortgage being paid off in five years or less. Property marketed to potential buyers as a 2 year lease-purchase with $6,000 nonrefundable down and the tenant responsible for all repairs less than $500. Lease-purchase sales price advertised as 5% below market value.

“Subject To” Example REI eTutor Deal Specifics Continued Profit is the positive monthly cash flow and the spread between the sales price and the mortgage balance at the time of sale. Investor looks like a hero!  Mortgage is paid off 3 years earlier than contractual agreement.

“Subject To” Example REI eTutor What if the lease-option buyer does not qualify? $6,000 nonrefundable deposit = Profit 3 years left on original sales contract Advertise for new 2 year lease-option buyer Worst Case Scenario If close to 5 year mark with no lease-option buyer then market to retail buyers. Price reasonably or at a discount to sell in 90 days or less.

Money Making Secret Revealed REI eTutor Interested in learning how investors are continuing to buy properties “subject to” in a declining market? Want to know how to work with homeowners who have zero equity or are even upside down? Despite what others may say, you can make Large Profits buying properties such as this that no one else wants.

Money Making Secret Revealed REI eTutor How is this possible? Think long term – Buy and Hold Focus on cash flows, not on current market value/mortgage balance

Money Making Secret Revealed REI eTutor Example: Homeowner has a house worth $50,000 Mortgage balance is $65,000 Mortgage payment, including taxes and insurance is $600 a month. Most investors would walk away from this property Why? No equity – Upside down $15,000

Money Making Secret Revealed REI eTutor Additional Research = Potential Profit Homeowner is 8 years into a 30 year mortgage  Based on amortization schedule more money is paid towards the principal than interest. Comparable rental rates are $850 to $950 per month, tenant pays utilities.  Annual net cash flow, not including reserves is $3,000 to $4,200 Taxes are stable Property insurance rates have been decreasing slightly.

Money Making Secret Revealed REI eTutor Exit Strategy – Buy and Hold Why? You purchased a rental property with positive cash flow, put no money down, and did not have to qualify for financing. Each month you are closer to a larger profit  Mortgage balance decreases  Another month of positive cash flows Real estate is cyclical

Conclusion REI eTutor REMEMBER Every Offer Does Not Result In A Deal But Every Deal Is The Result Of An Offer