Subject-To Purchase Profit Model
Buying Property “Subject-to” with No Banks and No Credit
Buying Homes “Subject-to” Avoids the Rising Cost & Risk of New Mortgage Loans…
Especially in today’s market when mortgage loans are so hard to get!
The “Subject-to” Profit Model is a powerful technique for buying property without having to use banks or any other type of financing, and it may not even matter what is owed on the property. That’s right, even if the deal is upside down, the “Subject-to” Profit Model may be used to turn that underwater deal into a positive cash flow.
With the scarcity of new loans originated by lenders, using “Subject-to” has become less of a creative real estate technique and more of a necessity for buying (and selling) homes of all types.
What is a “Subject-to” Purchase and How Does it Work?
A “Subject-to” Purchase transaction occurs when you purchase a property from a homeowner without paying off the existing mortgage. Basically, you and the distressed property owner negotiate a sales price as in a traditional purchase transaction, but in this case you don’t pursue financing. Instead you just agree to take over the payments on the existing note and the seller signs the deed over to you.
The simple mechanics are as follows: After you and the seller agree on a price, the seller transfers title to you. You may have to bring in some cash to catch up any back payments or to pay misc closing and/or recording fees. The existing financing and lien structure of the property remains unchanged, but you are now the owner of record for the property. Since there is no financing in a “Subject-to” Purchase, you get cash by renting or leasing the property to tenant who pays you more than the monthly payment each month. Of course you can also assign that property to another investor for a small fee, or by selling the property to a third party in a more conventional, traditional way.
Investors also view “Subject-to” purchases as a low-risk way to “buy” equity in a property without the cost, time and credit risk of financing (i.e $6,000.00 can be used to purchase a property with $60,000.00 equity).
You don’t need to be an expert to do a “Subject-to” deal. Although it is easier if you have closed 1 or more transactions. Even though the whole transaction can be done without using escrow closing – using a title agent to check title is highly advisable.
You don’t need Credit to do a “Subject-to” deal – unless you are paying reinstatements and seller payouts with equity lines or credit card cash advances. Otherwise, a Subject-to has no effect on your personal credit.
WE do advise that you know your exit strategy before you put up a lot of cash to reinstate a defaulting loan to purchase “Subject-to” – no matter how good a deal you think it is. Are you going to rehab it and sell it retail, flip it to a rehabber or hold it long term and rent it out? Have your exit strategy mapped out in detail before committing to buy “Subject-to.” Since you do not have to use a title agent to close this type of transaction, the temptation will be to not use one to save some $$$. It’s not worth it! Spend the small amount of money to get a formal title search so you know exactly what the encumbrances are on the property you plan to own, because once you take title, those obligations become yours.
“Subject-to” deals are simple in that the strategy is to just take over payments and rent for cash flow, sell over time with a “Lease-Purchase Option” or flip for an immediate cash profit. If a seller is willing to entertain a “subject-to” deal the buyer takes over responsibility for paying the seller’s mortgages, even after they no longer own the property. Typically, the seller and/or the property are distressed; sellers are motivated, and have sufficient equity to let their properties go for far less than the retail appraised value.
“Subject-to” deals are usually done by cash-heavy investors who have targeted deeply distressed sellers & other distressed property owners such as people in foreclosure. In these distress situations, homeowners are generally more open to accepting the risk of leaving their financing in place when selling to another person. When properly structured, Subject-to deals can also be packaged and “flipped” for cash without actually taking title to a property.
In today’s world of disappearing mortgage financing, the most obvious and important benefit offered by “Subject-to” is the ability to buy properties without banks. Buyer’s can also acquire high equity properties far below market value and will have several liquidation options available to them. They can rent the property out for cash flow and tax advantages, they can rehab and resell it for a quick profit, flip it to a third party in “as-is” condition or sell it over time using a lease purchase option agreement. Like Wholesale deals, “Subject-to” makes sense for cash-heavy investors who need somewhere to put their cash long-term in exchange for beneficial tax write-offs and for cash flow from rental income. It also is a great way for people to buy and hold real-estate who have cash, but not-so-good credit.
The biggest issue with “Subject-to” purchases is that if title formally transfers to someone other than the mortgagor, the bank or other financing institution has the right to foreclose the loan if they feel they are at risk. Although it is the bank’s legal right (based on the standard mortgage agreement) to call the loan, they rarely do, as long as payments get made as agreed. Properly structuring the paperwork and using the right legal instruments can avoid “due on sale” clause issues.