Hot Sheet for Buying Subject 2
Buying
A Property "Subject To"
The first type of seller
financing we're going to cover is taking over a property "Subject
To".
· "Subject
To" means that you are taking title to a property without assuming the
loan into your own name.
· In other words, you
are taking title to the property "Subject To" the existing financing.
· This is also
commonly referred to as "Getting The Deed".
Sellers Who Will Walk Away
You may wonder why
someone would deed you their house while the property still has a loan against
it in their name.
Taking a property
"Subject To" the mortgage is usually done when
· a homeowner is facing foreclosure or is
· highly motivated for some other reason.
· It is especially
easy to accomplish if the seller is already behind on their mortgage payments
and facing foreclosure.
Many owners in
foreclosure are ready to walk away and most likely already have one foot out
the door, ready to abandon the property.
This type of seller either has no concern for their
credit, or they are concerned enough for their credit that they will do
whatever it takes to get somebody else to make the mortgage payments for them.
· Sometimes their
motivation to get rid of their house exceeds their common sense or reason of
logic, and they are willing to do just about anything to get rid of their
problem.
· Some owners want
to get rid of their house and whatever it takes, is what it takes.
The seller's main concern may not be whose name the loan is in but
rather who is making the payment on that loan.
· Many sellers will
be very happy that you solved their problem and gave them debt relief.
· The fact that
you will be helping to save their credit may also mean a great deal to the
seller.
· They may feel
that without you, they have no other solution and will ultimately lose the
property in foreclosure anyway.
· The
"Subject To" solution gives them a way out of the property and a
feeling that they did not just give up and totally abandon their
responsibilities.
By you taking over, they
have continued to fulfill their responsibilities and have been given a sense of
closure.
When the seller deeds you the house, the loan will
still remain in their name and on their credit.
· Because of this,
some sellers will be concerned about you not making the monthly payment on time
and they may be concerned about their credit rating.
· However, some
sellers are in the position that if you don't do something to solve their
problem, they are going to lose the house to the bank which will affect their
credit rating anyway.
Due-On-Sale Clauses
Sure, it's not to hard to
find seller's who are facing foreclosure and who will deed you their house if
you will save their credit and make their mortgage payments for them, but what
about the due-on-sale clause?
Even though most people
think that you have to, you do not have to payoff that debt to be able to
transfer the title of the house.
So the fact that you
cannot deed a house without the buyer assuming the loan is a misconception.
A mortgage or loan is a
lien against the property and that is all. It
does not prevent the transfer of the title to the property.
All you have to do to transfer a property is have the
seller sign a quitclaim deed, deeding the house to you.
· At the point
that the seller hands you that deed, you own the house.
· However, the
mortgage still remains as a lien on the property.
Banks Must Choose To Even Care
Basically, a due-on-sale
clause means that if the property
transfers ownership without
the bank's consent or without someone
formally assuming the loan, the bank has the right to call the entire loan due.
· This does not
mean that the bank must or will call the loan due, the clause only states that
the bank can if they choose to.
· Many times, this
clause scares sellers, buyers and real estate agents into believing that if a
seller transfers the ownership of the property (without the buyer assuming that
loan) that the bank will call that loan due.
· The fact is, and
the good news is, banks are not in the business of owning houses, especially
when the payments are being made on the loan.
Banks Avoid Liability
Taking a house back is a
very big liability and expense for a bank. It becomes a "non- performing
asset" on their books and causes regulatory problems with the federal *
government in relation to how much money they are allowed to lend out on other
loans. According to government standards, the ratio of money they can lend out
is calculated against the amount of non-performing assets the bank has. The
higher the amount of non-performing assets, the lower the amount of money the
bank is allowed to lend out.
Banks want to own loans
that have payments coming in on a regular basis. Because of this, the last thing a bank wants to do is call a loan due
when somebody is making the payments on the loan.
· By calling the loan
due, the bank would be turning a performing asset into a non-performing asset
and this is clearly not to their benefit.
You Don't Have To Qualify To Assume Loans
You won't need to qualify
to assume any loans. It is no easier to have someone qualify to assume a loan
than to actually go out and get a new loan. The qualification process is
exactly the same.
So when dealing with
seller financing, you don't want to be
structuring deals that require your end-buyer or yourself, to have to qualify
to assume the loan.
The biggest
misconception out there is that you must qualify to assume the loan and if you
don't, that you are breaking some type of law and this simply is not the case.
Is this unethical or illegal? No.
· The seller of
the property knows that the loan has a due-on-sale clause and you as the buyer
know that the loan has a due-on-sale clause.
· The seller is
willing to deed you the house because it will give them the debt relief that
they need and you as the buyer are willing to accept the property knowing that
the property has a loan on it.
· After all, if
the seller is facing foreclosure, you are actually doing the bank a favor by
saving the bank from having to foreclose, which could cost them a lot of money.
When dealing with the bank, you're simply going to
mail in the payment for the seller.
· The bank that
has the loan has two choices. They can either accept your payments or they can
call the loan due.
· As we stated,
banks are in the business of accepting payments, not taking back houses which
are considered non-performing assets that effect their balance sheet and stock
prices.
· You simply write
a check made payable to the bank and put the loan number on the check.
· If the seller
has a coupon book, you can get it from them and put a payment coupon with the
check.
· If you don't
have the coupon book, that is ok, the bank will still process the payment as
long as the loan number is on the check.
· Most banks have
a processing company processing the payments as they come in and very rarely is
anyone checking to make sure the name on the check matches the name of the
owner or the name on the loan.
· Also, most banks
are not actively checking to see if there have been any transfers of title.
· Banks usually find out about a transfer in title
through insurance notices when the insurance is changed to the new owners name.
You'll learn in this course later
how to properly handle the insurance so as to not raise any unnecessary flags.
· Just remember,
not only does the bank have to find out about a transfer, they also have to
care that you didn't formally qualify to assume the loan.
By the way, some investors use land trusts to either
circumvent or hide the due-on-sale clause violation, by hiding the title
transfer. We'll go over that strategy in more detail in the Money Section and
Agreements Section.
Realize also, if you plan to quickly resell the property,
you won't be making payments to the bank very long before you payoff the loan
anyway.
Finally, if you don't
feel comfortable with taking over a house without formally assuming the loan,
there are several things you can do. The first thing is to "get over
it". That's right, stop worrying about taking a little risk. The best way
to do this is to talk to other investors who have taken over properties "Subject
To". Most will tell you that they rarely ever had a problem, if at all.
Remember, the most you have to lose is what you have
invested.
If you bought the
property with nothing down, you should have just about nothing to lose. Also,
if the seller was facing foreclosure, they won't be any worse off either.
You'll always be making it very clear to the seller that there is a slim chance
the bank might get their tail feathers ruffled. If the seller is willing to
take that chance, you should be willing to take that chance as well, if you are
willing to lose what you have invested. Again, that should be almost nothing.
If you still feel
uncomfortable, you can look at Lease
Optioning the property.
When you Lease Option a
house, the seller is not actually going to deed you the house. Therefore the
bank cannot call the loan due because the property has not yet transferred.
We'll be covering this technique in just a few minutes.
Types Of Property To Invest
In
As for the types of
properties you should invest in, every type of property can be bought
"Subject To" the existing financing. Although most investors look for
middle to upper priced properties in nice areas to retail, some investors also
buy lower end properties "Subject To" and keep them as rentals. It's
just a matter of whether or not the numbers work for you and your financial
goals.
________________________________________________________________________________ Summary:
Advantages Of
Buying "Subject To"
Taking over property
"Subject To" has several advantages that are especially nice if you
are a beginner or have limited funds and/or limited credit. Mainly, you have
the ability to own nice houses without having to come up with a large down
payment or having to qualify for a loan, and the closing costs are minimal.
You also have multiple
exit strategies. For instance, you could keep the property for yourself as a
rental, or you could fix it up and retail it. You can even pass the no
qualifying deal onto your new buyer.
Disadvantages Of
Buying "Subject To"
As for the disadvantages
of buying "Subject To", as we said earlier, you always have the
due-on-sale clause issue. However, as you go through this system, you'llleam more ways to get around this issue as well as
limit your liability.
The due-on-sale clause also will limit your ability to resell the property without paying off the loan. This is because many homebuyers will be reluctant to invest money and move into a property when there is a chance that the bank may call the loan due, even if the chance is a slim one.
