Does anyone use "Subject to" or wrap-around to get deals?

Question

I've been seeing a lot of YouTube videos and real estate gurus saying that the subject to loans and wraparound loans are great tools to get off Market properties. It seems a little dicey to me but that may just because I don't understand it. Does anybody else use them successfully?

Rick Pozos · Answer

Hey @Sharon Beatty I must agree that it is NOT for everyone. I think, as Jay and James mentioned, it can have some really bad effects for the seller.

With that said, I do think that it is a super duper way to acquire a property, IF you are a solid and morally upstanding person. I have purchased a number of properties over the years subject to the mortgage. I did not seek them out, but because of the seller's situation, it was the way to help out the seller get out of his/her bad situation that they were in.

I dont like to stay in the property for longer than a year if I am buying sub-to. I use it as a financing mechanism to NOT have to pay hard money rates and expensive closing costs. I do the rehab, pay the mortgage along the way and dispose of the property as quickly as possible. The seller gets his/her name off the loan, I sell the property and make some money, win-win for everyone.

Jay Hinrichs · Answer

while i dont quite share James view on this..  it certianly leads to a ton of fraud and heartache for the actual seller.. you get a lot of undercapitlized wanna bee's try to pull this off and get in over their heads or just plain criminals that rip rents as Jim is probably alluding to.

Jerel Ehlert · Answer

Sub-2 is mostly an acquisition tool - a means to get properties.  Works mostly when the seller's mortgage is less than rents, little equity, and you have the capital to come out of pocket to reinstate/rehab.  Seller will eventually want loan out of their name and has potential of investor abuse.

Wrap (or owner financing) is more a tool to dispose of property when there's an underlying mortgage. Potential for investor abuse.  Typically paired with Sub-2. Can be used to acquire property, but unusual in residential, more common in land/new construction/commercial deals.

For either, must be diligent about accounting.

Rick Pozos · Answer

Since you are looking for buy and hold, buy the property sub to and then 6 months or a year later refinance the loan into your name. It is a quick and inexpensive way to take ownership. As you know it usually costs several thousand dollars to go through a closing. This virtually eliminates that expense.

You can sub to properties that are in perfect condition or some that are in horrible condition or anywhere in between.

Jay Hinrichs · Answer

There is legal and then there is moral and ethical..  the issue is these types of scheme's that guru's talk about many time lure the investor with very limited capital into these transactions. the seller being unsophisticated has no clue how bad they can be if the person buying from them is either not capable of performing or as @jamewise is alluding to is just a flat out crook..

There was a small company here in Oregon back in the early 2000s that did about 35 of these based on what they read and learned ( remember none of this is new information) well they stack them all up..  have little to no cash into them..  then lease the houses out.. the tenants stop paying yet they needed to keep paying the mortgages once they got to about 20% default on the rents.. they could not afford the evictions and then started to default to the sellers.. The sellers then have their credit smashed.. and the sellers then start filing complaints.. I stepped in and solved about 15 of them for them and help unwind them.. I did end up with a few assest for my troubles.

But this is not I repeat NOT a scheme for folks with very limited capital.. its just a disaster waiting to happen.

And just think of your mom and dad they sell a house on terms.. let the buyer wrap it or take title sub too.. then the buyer defaults they are no longer in title and their credit gets trashed.. so thats the other side of the coin that of course those that are trying to sell you HOW to with no money dont quite explain.

Nicole Heasley Beitenman · Answer

Very frustrating. I would love to learn more from the 5%!

JD Martin · Answer

Good question Nicole. I don't remember hearing them discuss it much that's for sure. As @Jay Hinrichs said 95% of the people doing it are scammers or broke as a joke.

Nicole Heasley Beitenman · Answer

Anyone know if @Brandon Turner added sub2's to his book on Investing with No (Or Low) Money Down? Or if it's covered in any of BP's other books?

Sharon Beatty · Answer

@Rick Pozos

@Rick Pozos - I appreciate the additional viewpoint! Obviously, I would not do anything unethical. But I'm looking for buy and hold properties. Could sub-to work for that? Or is it better to sell the property so as not to have potential issues down the road?

Sharon Beatty · Answer

Thank you Jerel and James! It did seem a little dodgy to me but these YouTube gurus made it seem so easy and above board. Good to get objective opinions. I apologize for the slow response. I thought I'd get notifications of responses but didn't and I hadn't realized you'd both responded. My bad!

Does anyone use "Subject to" or wrap-around to get deals?

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