How to handle Subject To's

Question

What are some of the typical things to overcome when acquiring a property Subject To the existing mortgage? I know a big one is the sellers concern that the mortgage will stay in their name which basically "puts them on the hook" for future issues if the mortgage is not paid.

Aside from that, what are some other concerns customers have given and how did you overcome those concerns? With so many pre foreclosures in my area, I would like to get more involved in Subject To's if the deal makes sense.

I am also open to new strategies as well being I have only been investing 4 months now and have lots more to learn and more people to help grow along the way!

Jay Hinrichs · Answer

@Matt Moger  I no longer do this but when I did  I had over 100 of these.. and my dad did this in the 70's and 80s by the multiple hundreds..

WE simply have our own insurance policy ( commercial policy)  and kept owners insurance in place. if there was a event.. we turn it over to OUR insurance.. and then we pay the bank off. or if its a tree blew through it something like that we get the check and fix it... cost of doing business if your worried about the alienation clause.. but really I have own hundreds upon hundreds of homes over the year and a full blown fire total loss is quite remote.. but it does happen...

However I totally agree with you.. this scheme simply should not be used by anyone who does not have SIGNIFICANT CASH reserves... the chance of harming the seller and their credit is huge and especially in a state like Texas were a bank can and WILL get a deficiency judgment on a foreclosure.

The downside risk to homeowners selling in this method is real.

I have seen so many boot strap investors try this scheme and they get in trouble the sellers end up filing complaints at the AG's offices.. it can be a real mess if you don't know what your doing or have the cash to pay a loan off when its called.. or carry a property that a tenant trashed and needs 10k of work plus the negative cash flow until its done and re rented.. it can easily suck 20k out of your jeans.

Matt Moger · Answer

@Fred Lopez, I love investing Subject To, but please keep in mind that it is an advanced strategy. As @John Anderson mentioned above, a real estate specific attorney who has worked with these transactions in the past should be consulted.

I like to reiterate a couple things when speaking with seller's who have agreed to talk about subject to as a way to sell their home. The first thing is that I am GUARANTEEING that I will pay the mortgage payment, even if I had to default on my own loan. Anyone that uses the fact that you can walk away with no consequence to you as the investor is not only a moron, but a con artist! In this business our name is everything & unfortunately there are a bunch of jokers out there calling themselves real estate investors. The second thing I emphasize is the point that there is no way for me to realize my maximum profit, unless I do exactly what I say I'm going to do. These folks understand that we need to make money or we wouldn't be able to do this. It's not a bad thing to mention when in front of the seller, that also provides a deeper level of honesty that they really appreciate.

The insurance issue can raise a red flag as far as the lender is concerned, which is why we utilize the land trust when purchasing this way. However, we ALWAYS make sure that we are getting our own insurance, because the last thing that we would want is a large check to make it's way to the old homeowner because their name is on the mortgage. A homeowner is allowed to deed their own property into a trust for estate planning purposes, so if the trust has a name that contains the street that the property is on, that can look like a fairly normal transaction.

ONCE AGAIN, AN ATTORNEY SHOULD BE CONSULTED. EVERY STATE HAS THEIR OWN VARIATION ON WHAT YOU ARE ALLOWED TO DO CONCERNING LAND TRUSTS

Most attorneys are going to tell you that you cannot do this transaction though. That's why you need one that primarily does real estate.

Matt Moger · Answer

Account Closed, You're absolutely right. These are uncertain, there is one thing I failed to mention regarding insurance. Most lenders will want to see the original owners listed as additionally insured. It can be a bit of an educated guessing game based on past experiences.

Matt Moger · Answer

@Jay Hinrichs, I really appreciate you speaking up here, because Guru's just like to throw it out there frivolously, but reality is that there is a lot at stake here.

I've had to carry & repair a few when tenants did the wrong thing, but certainly haven't had the experience of hundreds, so it's good for me to here about the experiences of you & your father.

The fact remains that, often times, this is taught as a strategy to use when you DON'T have much cash & if something goes wrong, then your entire business going forward is shot! So I think it wise for folks to educate themselves as much as possible & grow organically instead of thrusting themselves into a bunch of properties just because they can.

Matt Moger · Answer

@Brent Coombs

Just saying those words does not separate us from folks with ill intent. The proof would be in our track record with sellers that I would gladly point to, who are happy with our performance. In the instances where this strategy has been implemented, the seller needed help & they were thrilled that someone was giving them an opportunity to move past this home as an anchor.

I was attempting to address the first question posed by Fred on how to overcome objections.

My point was that if an investor is purposefully taking advantage of someone, then they are out of line. I think everyone can agree there.

Brent Coombs · Answer

@Matt Moger, I don't get it! You wrote that you tell the Seller that you're "GUARANTEEING that I will pay the mortgage payment, even if I had to default on my own loan". But I'm wondering, how does just SAYING that, separate you from possibly being "not only a moron, but a con artist"?

Just asking...

Jay Hinrichs · Answer

@Matt Moger  there was a group of young investors here in PDX who followed this Guru scheme and got themselves about 30 of these and when a few went bad at the same time they simply did not have the funds to carry the bad one.s  late payments.. sellers freaking out because they no longer own the home and they thought the buyer would simply always pay... complaints to AG... fines and cease and desist.. the folks that do this with criminal intent.. they go to jail I have personally seen that as well.. Equity strippers.. this is just one scheme best left in the shadows.. too many sociopaths out there to take advantage of poor sellers.

Fred Lopez · Answer

I will start to look for an attorney in my area who is familiar with Subject To's. Sounds like I have a lot more to learn about them to fully understand and to be able to speak to questions that come up.

With laws varying from state to state, it will just be a matter of finding someone local is actively doing them and learning from them. Thank you for the info everyone, and if anyone has anything else to add or be aware of, please let me know.

How to handle Subject To's

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