Subject To Financing

[Ashton Noland]

If I were to consider Subject-To financing for a property owner, do I need to have my own finances to do this? Do investors typically use funding for this or their own money? Any ways to get this done without using my own money, I am interested in learning about!

Thanks to all, and INVEST on!

[Kerry Baird]

"If investors typically finance Subject-To properties themselves then rent it out for cash flow, then this is a strategy that I wouldn't be able to (do) at the moment."  Huh?  This is *exactly* how a deal should work.  

You are not financing a sub2 deal out of pocket.  Your new tenant you line up makes the rental payment to you; you make the mortgage payment.  This is also how a lease option deal works, or how a conventional mortgage works, or how a portfolio or private money deal works.  This is the story of real estate investing, no matter the underlying financing.

Savvy investors don't buy houses where we have to come out of pocket every month...that would be an "alligator" in real estate investing parlance.  For each and every deal, run the numbers: ensure the local market rents cover the mortgage, the property manager (if you use one), the property tax, insurance, vacancy (use 4-6% unless your area is higher), and maintenance (the percentage depends on how old the property is).  So on any deal, if the numbers don't work, the numbers won't work for any method of purchase, to include sub2.  Just because you *can* take over a mortgage, doesn't mean you *should.*

One of the major benefits to subject to deals is that the mortgage has been paid down by the previous owner, and so each payment is applied to a greater amount of principle than in the earliest days of the loan.  At first, the interest is high and the principle is low, but as months and years go by, that reverses so that with each payment more principle is paid and less interest.  Well, you are taking over the mortgage where the seller has been making payments for some time.  

You also have the benefit of any equity in the deal.  If they've paid down for some time, the mortgage reduces and the property value may stay the same.  But there is a spread in there due to principle pay down.

When someone is really motivated to sell (I've most commonly seen divorce, medical issues, job loss) they sometimes don't care how you buy because they "just want out."  Yes, they will say that.  One recently divorced woman who called me, and whose house I bought, was not even late on her mortgage, and wanted $10 for her house plus moving money so she could pay first and last months' payment on a new rental.  

What you do not want to do is mess up the credit of the seller!  You MUST have reserves to buy with this, or any other method.  Your integrity is on the line.  And when I buy sub2, I plan on rehabbing and selling, or refinancing soon.