Subject To Vs. Lease Option

[Aaron Lathan]

Hi,

I'm new to investing and like most things starting out I don't have capital.  An old mentor of mine once told me that if you can't make money without money then even if you have money you'll probably go broke.  He wasn't into real estate so I couldn't really use him for reference.  I've been looking for ways to creatively and legally build capital for the next couple years so that I can begin to have down payments on multifamily long term rentals.  Some way or another whether by coincidence or divine intervention I came across a youtube video discussing "zero down" deals in which none of my personal money or credit is at stake.  The two terms I heard over and over for the next 7 hours (I was super intrigued and lost all at once) were Lease Options and Subject to existing mortgage deals.  Good videos that I found talked about one of the categories but never talked about both Lease option and Subject to deals in the same videos.  Some decent videos I found seemed to blend the two too much and confused me as to what was what.  Can anyone give me a crash course on Subject to Vs. Lease Options as an investor?  Thanks for sticking around this long.  I'm appreciative of any help the community can give me.  

[Gary Van Horn]

The two get confused by many people. Buying subject to the existing mortgage has been around a long time. It is often coupled with an exit strategy of selling under a lease option. The reason for the coupling is the property has no or very little equity and is not a "deal" as you commonly hear the term used. You will only be successful on a "subject to" buy if you have a very motivated seller who needs to move on because, they will stay on the Mortgage as the primary obligee ,while you have promised in your contract with them to pay their mortgage. This is their "least worst option" (with apologies to Phil Grove). They really don't have any other choice as the property simply isn't "sellable". The advantage to the investor is that they have no skin in the game and have control over the property. Usually, the property really can't be "sold" as the mortgage payoff & closing costs exceed the current ARV. The only really viable exit strategy is to find someone who currently can't qualify for their own mortgage and lease the property to them on terms that pay the existing mortgage and if possible add some cash flow for you. Also you take an upfront payment for the option, which gives you the cushion if the lease doesn't work out. That's the gist of it. Don't try it without proper legal counsel, as the uninitiated can get burned, if the paperwork isn't properly done. It is a strategy I employ and is very viable in the current market.