regarding subject to financing.

[Patrick K.]

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

[Marty Boardman]

Quote from @Patrick K.:

Hi all, I have been watching a lot of Pace Morby's videos these days. He is an advocate of subject-to financing to purchase properties. 

In all the videos I have watched, he talked about all the up-side of subject-to financing. but the downside is rarely discussed. I thought I could use BP's collective brain power to help educate myself further on this subject. For all questions below, it is assumed I am the buyer, who wants to assume the seller's loan and take the title of their properties. 

The pinkest elephant in the room is what happens when I as an investor default on the loan payment. I understand the ownership goes back to the original seller. However, if this is during an economic downturn when default would likely happen, there might be no equity in the house for the original seller, and I can't see how a seller would be comfortable being ultimately responsible for a mortgage that might last 20-30 years. It felt like a glorified rent-to-own agreement. 

Any thought would be appreciated. 

As others have pointed out Patrick the original seller does not get the house back if the buyer defaults. The investor has equitable title to the property. If the bank foreclosures the investor receives any surplus funds and the original seller gets nothing (well, they do get a foreclosure on their credit report).

There are really only two types of sellers that are agreeable to subject-to deals:

1. Sellers with no equity

2. Sellers in foreclosure

I've done hundreds of subject-to deals with both. 

When the housing market crashed in 2008 I defaulted on numerous subject-to deals. Values dropped by 55% in my area (Phoenix) and there was no way I could sell these properties. Fortunately, I escaped any legal trouble because I worked out arrangements with the original sellers and gave them their houses back. Others didn't want them back and were okay with a foreclosure. After all, they were headed that direction before I stepped in to buy their house in the first place.

In 2023 and beyond, I think acquiring houses subject-to is a smart strategy, especially if you plan to fix and flip because you don't need to keep the mortgage in the original seller's name for very long.

As for acquiring rentals, subject-to is also preferable as long as you can count on at least $300 + in cash flow (and have reserves for 6 months). But I would advise you have a plan in place to pay off the existing mortgage in 2-3 years because eventually the original seller will become unhappy with having a loan in their name and no house to show for it.

Finally, there's a lot of irrational fear out there about the due on sale clause and the lender calling the note. I've never seen this happen. Banks are in the business of collecting loan payments, not calling mortgages. If you're paying on time they don't care if Santa Claus owns the house.

Good luck Patrick!