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Buying Foreclosures - Subject To & Lease Options
When you are considering buying pre-foreclosures (that's what they are called before the auction) you have to have some money to bring the loan current, give moving money to the seller, pay closing costs and make payments for a few months while you find your buyer. If it's a fixer, you need rehab money. But whatever you do, don't miss a payment.
Actually, I have done Subject To financing many, many times with both pre-foreclosures and simply "off market" properties where the owner is current.
For instance, one house I bought Subject To, for $100 plus taking over the existing loan. The loan was current, not a pre-foreclosure but they had just refinanced, so there was no equity to speak of. They got a big chunk of money out of their refinance.
Then I put together and sold the property on a lease option for $50,000 more than what I bought it for, where I got a $25,000 down as an option fee, with the rest, $25,000 more to be paid when the option is exercised. I gave them a payment at 8% interest which gives me a positive cash flow of $900 per month.
When they exercise the option I'll get the rest of the $25,000 they owe me from converting the option to a purchase, plus any paydown on the mortgage is mine to keep.
Meanwhile I get the tax write offs, too. And they take care of all Cap Ex. If the AC breaks for instance, they pay to have it repaired, etc.
Since appreciation has gone up they get the appreciation, if & when they exercise the option. Which is fine with me. I got $25,000 on signing the option and I'm into it for $100. And, I'm totally "Hands Off".
But why would my buyer do this? Why would they give me a ton of money and not own the property until they exercise the option? Their credit report, while not nasty, wasn't good enough to qualify for a loan so they have used the time to straighten out their credit. I let them treat it as their home. They can paint the walls any color they want. They get the appreciation.
I do this in Arizona & Texas mainly but I will also do it in Ohio and Indiana in the right properties. Some of the properties get only $500 positive cash flow but I've gotten much, much higher. It works for both sides, I don't pay realtor fees when I buy and I don't pay realtor fees when I sell.
Seriously friends, this is not rocket science and isn't that hard to learn.
Youve done deals in IN? What cities?
Quote from @Kerry Noble Jr:
Youve done deals in IN? What cities?
I meant that I am open to doing it in Ohio & Indiana. Sorry, didn't mean to confuse you. It works best on properties that don't have a lot of equity but the seller still wants to sell.
How can you get fire insurance? Only loans that are assumable (a VA to a veteran) could work. Lenders don't allow you to "take over the loan" and in this downward climate ?
Quote from @Caroline Gerardo:
How can you get fire insurance? Only loans that are assumable (a VA to a veteran) could work. Lenders don't allow you to "take over the loan" and in this downward climate ?
My insurance agent takes care of that for me. I met him years ago at our REIA and I think he does something like having the seller and my LLC as additionally insured. I've never been a pro at understanding insurance so I leave it to him. Insurance hurts my head with all of the clauses and excepions and if/ands & buts. Insurance is kind of like cotton candy, it looks good until you want it then it compresses to a tiny unrecognizable blob. And to get the blob you have to sue them. You can see how annoyed I am about insurance. ;-)
If you have a claim it won't be covered. Seller might get 100% of proceeds or adjuster may consider policy invalid.
I was hoping you had a magic solution.
Quote from @Account Closed:
Quote from @Kerry Noble Jr:
Youve done deals in IN? What cities?
I meant that I am open to doing it in Ohio & Indiana. Sorry, didn't mean to confuse you. It works best on properties that don't have a lot of equity but the seller still wants to sell.
Got you! Yep I've been targeting preforeclosures as of late. I've study a lot about sub to.....from books and podcasts (William tingle and flipping houses for rookies) just haven't done one yet.
Quote from @Kerry Noble Jr:
Quote from @Account Closed:
Quote from @Kerry Noble Jr:
Youve done deals in IN? What cities?
I meant that I am open to doing it in Ohio & Indiana. Sorry, didn't mean to confuse you. It works best on properties that don't have a lot of equity but the seller still wants to sell.
Got you! Yep I've been targeting preforeclosures as of late. I've study a lot about sub to.....from books and podcasts (William tingle and flipping houses for rookies) just haven't done one yet.
I think preforeclosures will start becoming more numerous in the next 6 months, right now they are relatively few. Subject To can be done in any market. The trick is to know what can come back and bite you.
Quote from @Account Closed:
Quote from @Kerry Noble Jr:
Quote from @Account Closed:
Quote from @Kerry Noble Jr:
Youve done deals in IN? What cities?
I meant that I am open to doing it in Ohio & Indiana. Sorry, didn't mean to confuse you. It works best on properties that don't have a lot of equity but the seller still wants to sell.
Got you! Yep I've been targeting preforeclosures as of late. I've study a lot about sub to.....from books and podcasts (William tingle and flipping houses for rookies) just haven't done one yet.
I think preforeclosures will start becoming more numerous in the next 6 months, right now they are relatively few. Subject To can be done in any market. The trick is to know what can come back and bite you.
got it. Thank you for your help.
Quote from @Caroline Gerardo:I'm not sure why that would be. I own the property, title has transferred into my name and is recorded. We're insuring the property not the loan.
If you have a claim it won't be covered. Seller might get 100% of proceeds or adjuster may consider policy invalid.
I was hoping you had a magic solution.
Besides, the agent is a well known agent in our REIA and I really doubt he'd take our money and not provide the proper solution.
@Account Closed You just described my favorite way to do deals. Here in Canada we've got the perfect market conditions for these types of deals going on right now. Many secondary markets saw well over 60% appreciation in the last 2 years as people fled the big cities for more space while under lockdown. Now those markets are tanking and those same people need to move back to Toronto, Vancouver etc. because their remote work is coming to an end. Some of them have no equity or are underwater but have interest rates that put their payments below the currently exploding rent rates.
At the same time rapidly rising interest rates on new mortgages along with tightening lending policies is making it nearly impossible for many buyers to qualify.
The federal government has also announced a rent to own program which isn't large enough to make much of a dent in demand for alternative financing. But does lend a ton of credibility to the concept in the minds of prospective tenant-buyers.
You can probably guess why I'm more excited about investing than I have been the last few years :)
Quote from @Doug Pretorius:
@Account Closed You just described my favorite way to do deals. Here in Canada we've got the perfect market conditions for these types of deals going on right now. Many secondary markets saw well over 60% appreciation in the last 2 years as people fled the big cities for more space while under lockdown. Now those markets are tanking and those same people need to move back to Toronto, Vancouver etc. because their remote work is coming to an end. Some of them have no equity or are underwater but have interest rates that put their payments below the currently exploding rent rates.
At the same time rapidly rising interest rates on new mortgages along with tightening lending policies is making it nearly impossible for many buyers to qualify.
The federal government has also announced a rent to own program which isn't large enough to make much of a dent in demand for alternative financing. But does lend a ton of credibility to the concept in the minds of prospective tenant-buyers.
You can probably guess why I'm more excited about investing than I have been the last few years :)
@Doug Pretorius: My bro-in-law is a developer in Vancouver. I've tried to explain to him what I do and he looks at me like I'm from Tuktoyaktuk.
He did say something that I've never really understood. He said you have 5 year mortgages and have to refi ever 5 years, if I understood him correctly.
How does that work? When there are downturns in the economy and a bunch of people have to refi but they are no longer working, is there a fallback or are they forced to sell or go into foreclosure?
@Account Closed Yeah that's pretty much accurate. We can get mortgages with a fixed interest rate for the entire amortization period, but no one does it because the interest rate is crazy. So most people do one of two things:
1. They get a variable rate mortgage which floats with the prime rate.
2. Or they get a fixed rate mortgage which has to be renewed (not exactly the same as a refi) every 5 years.
There are lots of variations on this theme. For example you can choose to "lock in" a rate for 1 year, 2, 3, 4, 5 etc. You can switch between any of these and a variable rate at any time if you have an open mortgage, otherwise you can switch when the renewal date comes up if you have a closed mortgage or you can pay a penalty and switch any time.
And to make things more complicated and silly. With the recent huge appreciation we've seen across the country there are now closed variable mortgages. Where your payment stays the same but your amortization floats with the interest rate. Some people have reported that their amortization on these has shot up from 25 years to 60 years.
All of this effects sub2 deals in 2 ways. 1) If you're offering the T/B a fixed payment you have to do them for shorter terms or have their payment float with the underlying payment. 2) The seller can't renew the mortgage once they move out of the property unless they switch to a commercial loan which they would never agree to in a sub2 deal. So that also means these deals are fairly short-lived before someone (you or the T/B) has to refi it out of the seller's name.
As for downturns in the economy. There's no fallback plan. People have to find a way to pay the new higher payment, or they have to sell, probably at a loss.
@Account Closed I read what you said differently. In a lease option or wrap many do not change the title and don't get title insurance. If you are sole owner then yes you can get hazard insurance. If you are in and out fast the lender might not catch the change/ mismatch.
Quote from @Caroline Gerardo:
@Account Closed I read what you said differently. In a lease option or wrap many do not change the title and don't get title insurance. If you are sole owner then yes you can get hazard insurance. If you are in and out fast the lender might not catch the change/ mismatch.
@Caroline Gerardo: You are correct. In both a Lease Option to buy or a Wrap to sell you don't own the property and that comes with complications of it's own, but can still be profitable. I haven't bought on a Wrap in a while and I will no longer sell on a Wrap unless it's the only choice left.
Selling on a Wrap I lose control to the person I've sold to and the person I did the Subject To with to buy the property has no protection. On a Subject To I am the protection for them to be sure they are being taken care of and the Wrap takes me out of the picture. That is not acceptable. I know you already know that but I state this for those who will read it later.
Typically I buy Subject To outright or Subject To with a owner carry back (Or I add a private investor at a good interest rate) or I buy Owner Financing and sell on a lease option. I get the option fee of usually 10% and bump up the sales price to make it worthwhile. In an appreciating market that isn't hard to do. However in a depreciating market, like now in Scottsdale/Phoenix it gets tricky.
Quote from @Doug Pretorius:I'll have to read this a couple of times to fully get it. But, I can see a reckoning coming if rates go up substantially again
@Account Closed Yeah that's pretty much accurate. We can get mortgages with a fixed interest rate for the entire amortization period, but no one does it because the interest rate is crazy. So most people do one of two things:
1. They get a variable rate mortgage which floats with the prime rate.
2. Or they get a fixed rate mortgage which has to be renewed (not exactly the same as a refi) every 5 years.There are lots of variations on this theme. For example you can choose to "lock in" a rate for 1 year, 2, 3, 4, 5 etc. You can switch between any of these and a variable rate at any time if you have an open mortgage, otherwise you can switch when the renewal date comes up if you have a closed mortgage or you can pay a penalty and switch any time.
And to make things more complicated and silly. With the recent huge appreciation we've seen across the country there are now closed variable mortgages. Where your payment stays the same but your amortization floats with the interest rate. Some people have reported that their amortization on these has shot up from 25 years to 60 years.
All of this effects sub2 deals in 2 ways. 1) If you're offering the T/B a fixed payment you have to do them for shorter terms or have their payment float with the underlying payment. 2) The seller can't renew the mortgage once they move out of the property unless they switch to a commercial loan which they would never agree to in a sub2 deal. So that also means these deals are fairly short-lived before someone (you or the T/B) has to refi it out of the seller's name.
As for downturns in the economy. There's no fallback plan. People have to find a way to pay the new higher payment, or they have to sell, probably at a loss.
@Account Closed Yeah things aren't looking good for people who bought in the last 3 years. The national average price has already fallen 22% between the peak in February to August. The Bank of Canada's bank rate rose from 0.25% last November to 4% on Sep 6th with another 75 basis point increase all but guaranteed at their Oct 25th meeting.
Despite this sharp rise in rates inflation is still running hot at 7.7%. Correct me if I'm wrong but I heard the US CPI numbers came in higher than expected which means higher rates for the US which in turn means Canada has to raise rates more as well.
The fallout is going to be unbelievable in parts of Canada where the local job market is weak. Places like the Maritime Provinces saw 3x price increases as people left downtown Toronto and Vancouver during the pandemic thinking remote work was going to be permanent. Now they're being recalled to their downtown offices and they're panic selling and no locals can afford the prices they paid especially with interest rate going up the way they are.
Sorry for the info dump :)
Quote from @Account Closed:
When you are considering buying pre-foreclosures (that's what they are called before the auction) you have to have some money to bring the loan current, give moving money to the seller, pay closing costs and make payments for a few months while you find your buyer. If it's a fixer, you need rehab money. But whatever you do, don't miss a payment.
Actually, I have done Subject To financing many, many times with both pre-foreclosures and simply "off market" properties where the owner is current.
For instance, one house I bought Subject To, for $100 plus taking over the existing loan. The loan was current, not a pre-foreclosure but they had just refinanced, so there was no equity to speak of. They got a big chunk of money out of their refinance.
Then I put together and sold the property on a lease option for $50,000 more than what I bought it for, where I got a $25,000 down as an option fee, with the rest, $25,000 more to be paid when the option is exercised. I gave them a payment at 8% interest which gives me a positive cash flow of $900 per month.
When they exercise the option I'll get the rest of the $25,000 they owe me from converting the option to a purchase, plus any paydown on the mortgage is mine to keep.
Meanwhile I get the tax write offs, too. And they take care of all Cap Ex. If the AC breaks for instance, they pay to have it repaired, etc.
Since appreciation has gone up they get the appreciation, if & when they exercise the option. Which is fine with me. I got $25,000 on signing the option and I'm into it for $100. And, I'm totally "Hands Off".But why would my buyer do this? Why would they give me a ton of money and not own the property until they exercise the option? Their credit report, while not nasty, wasn't good enough to qualify for a loan so they have used the time to straighten out their credit. I let them treat it as their home. They can paint the walls any color they want. They get the appreciation.
I do this in Arizona & Texas mainly but I will also do it in Ohio and Indiana in the right properties. Some of the properties get only $500 positive cash flow but I've gotten much, much higher. It works for both sides, I don't pay realtor fees when I buy and I don't pay realtor fees when I sell.Seriously friends, this is not rocket science and isn't that hard to learn.
Why are you creating more competition for yourself and me? 😳
I suppose you want to share your great knowledge with a few bird dogs or JV?
Quote from @Doug Pretorius:You have great information. Inflation is worse though than what the CPI tells, odd I know. CPI was reimagined (a nice way of saying manipulated) in 1987, again in 1998, again in 2018, again in 2020. Suffice it to say it makes it very difficult to use it as a baseline. There are those of us who track that kind of thing that believe U.S. inflation is closer to 16% right now if using the 1987 CPI model.
@Account Closed Yeah things aren't looking good for people who bought in the last 3 years. The national average price has already fallen 22% between the peak in February to August. The Bank of Canada's bank rate rose from 0.25% last November to 4% on Sep 6th with another 75 basis point increase all but guaranteed at their Oct 25th meeting.
Despite this sharp rise in rates inflation is still running hot at 7.7%. Correct me if I'm wrong but I heard the US CPI numbers came in higher than expected which means higher rates for the US which in turn means Canada has to raise rates more as well.
The fallout is going to be unbelievable in parts of Canada where the local job market is weak. Places like the Maritime Provinces saw 3x price increases as people left downtown Toronto and Vancouver during the pandemic thinking remote work was going to be permanent. Now they're being recalled to their downtown offices and they're panic selling and no locals can afford the prices they paid especially with interest rate going up the way they are.
Sorry for the info dump :)
The Fed is supposed to raise rates between .75% & 1.00% this week along with another raise in October. That of course will slow the housing market even more.
Since most mortgages are 30 year mortgages here & are under 3% rates, it's a great time to find people who need to sell and use Subject To. But, we have a due on sale clause, as you probably know and so far banks aren't calling loans due. Since we have a whacky government who put foreclosures on hold for the last year or two, there is a lot of inventory I expect to hit the market around the first of the year. I can imagine what the backlog of foreclosures is.
This is the most deformed market I've seen in my 25 years of investing. There's been so much intervention in the market, so many promises made by the Govt. that can't be kept. So much money printed.
It's going to be very interesting to see how this all plays out. Both of our governments have been doing unprecedented things with money supply, interest rates, and cooking the inflation books. Things were bad before the pandemic but during and since has been almost beyond belief.
It seems to be all coming home to roost for the Canadian real estate market. It may not be quite as bad for the US because your appreciation hasn't been quite as out of hand as ours. Also we had a very mild correction from the 2008 crisis compared to you so we have further to fall to get to affordable housing prices again.
Quote from @Joe S.:
Quote from @Account Closed:
When you are considering buying pre-foreclosures (that's what they are called before the auction) you have to have some money to bring the loan current, give moving money to the seller, pay closing costs and make payments for a few months while you find your buyer. If it's a fixer, you need rehab money. But whatever you do, don't miss a payment.
Actually, I have done Subject To financing many, many times with both pre-foreclosures and simply "off market" properties where the owner is current.
For instance, one house I bought Subject To, for $100 plus taking over the existing loan. The loan was current, not a pre-foreclosure but they had just refinanced, so there was no equity to speak of. They got a big chunk of money out of their refinance.
Then I put together and sold the property on a lease option for $50,000 more than what I bought it for, where I got a $25,000 down as an option fee, with the rest, $25,000 more to be paid when the option is exercised. I gave them a payment at 8% interest which gives me a positive cash flow of $900 per month.
When they exercise the option I'll get the rest of the $25,000 they owe me from converting the option to a purchase, plus any paydown on the mortgage is mine to keep.
Meanwhile I get the tax write offs, too. And they take care of all Cap Ex. If the AC breaks for instance, they pay to have it repaired, etc.
Since appreciation has gone up they get the appreciation, if & when they exercise the option. Which is fine with me. I got $25,000 on signing the option and I'm into it for $100. And, I'm totally "Hands Off".But why would my buyer do this? Why would they give me a ton of money and not own the property until they exercise the option? Their credit report, while not nasty, wasn't good enough to qualify for a loan so they have used the time to straighten out their credit. I let them treat it as their home. They can paint the walls any color they want. They get the appreciation.
I do this in Arizona & Texas mainly but I will also do it in Ohio and Indiana in the right properties. Some of the properties get only $500 positive cash flow but I've gotten much, much higher. It works for both sides, I don't pay realtor fees when I buy and I don't pay realtor fees when I sell.Seriously friends, this is not rocket science and isn't that hard to learn.
Why are you creating more competition for yourself and me? 😳
I suppose you want to share your great knowledge with a few bird dogs or JV?
Lol. Subject To is about sales. Doing the work, making the calls, is the hard stuff. The easy stuff is learning about it. And
"you have to have some money to bring the loan current, give moving money to the seller, pay closing costs and make payments for a few months while you find your buyer. If it's a fixer, you need rehab money. But whatever you do, don't miss a payment."
Since bringing the loan current can be $10,000 to $50,000 - that alone shocks people into reality. When you add together what I outlined, it's a wake up call for those who either a. Aren't into sales and/or b. Don't have $20,000 sitting around ,that this is a serious business and you don't do it with zero down.
Think of it this way, if anyone wants to wire a house they can go to Home Depot, buy the wire and the drill and bits and then drill holes. The tools are there waiting to be used. The can start stringing wire all over the house. Does that mean they can finish the job without an expert? Sure. If they spend the time on youtube watching every video on wiring a house & learning. But that takes time and most people aren't into investing time to become good at something. Will it pass code, well maybe, maybe not. It depends on how long they spend learning before they drill holes.
You know Subject To and Creative Finance so well you can imagine the steps over BBQ & Texas Tea or even salsa & eggs. For most people on BP, Subject To or wiring a house is way over their pay grade. They hire people to help them. Now, I don't mentor, or train or coach anymore so that 's not the point here. But, it's okay for newbies and wannabes to be exposed to the truth once in a while. It takes training, action & money to do Subject To.
I don't think you have to worry my friend, people in your area will be bringing you deals to help them get through the transaction.
I still do Joint Venture with people that want to learn the craft, but I won't partner or charge a fee. Subject To is profitable enough there is no need to charge. Plus the teaching comes with the doing, not the coaching or mentoring.
I've also learned that something like maybe 5 out of a thousand will do a Subject To from a mentor group, (one that charges $7,800 to join the group, you know of whom I speak) but maybe only 1 out of a thousand will do more than 1.
And, when interest rates go up this week and more again in October and when preforeclosures start happening again, and they will happen again, we will be so busy you won't have time to worry about wannabes.
@Mike Hern I need to learn this asap please!
Quote from @Charles Williams:It takes lots of phone calls, are you ready for that?
@Mike Hern I need to learn this asap please!