Creative Financing — Am I Missing Something?

Question

I’ve been involved in real estate sales and investing in various capacities for the past 12 years. My family has 20 doors that we own, and my wife and I are wanting to start buying some separately for ourselves.  Another investor buddy brought me a financing idea and I just can’t see a downside...

1. Find a home that is a great rental prospect but the owner just wants to get out from under it because they either don’t have the time or equity to sell it to a traditional buyer.

2. Write an offer for what is owed on the property with the seller agreeing to let an LLC take over the current mortgage.

The worst case scenario I can come up with is the bank finds out about the arrangement and exercises the acceleration clause on the note. Since I’m not guaranteeing anything personally, I could just let them foreclose and I’ve just lost some time, or I can refinance and move on with my life.

It can’t be this easy can it?  What am I missing?

Andrew Postell · Answer

@Clay French what you are describing is a classic "Subject To" transaction.  You "buy" the house from the owner (buy it for nothing essentially) and then make the payments of the mortgage.  You can do a quick search for "subject to" or "sub to" or something along those lines on how to structure it but essentially you now own the title to the property (meaning, you own the property).  You make the payments DIRECTLY to the lender, to ensure that the payments are made, and you can certainly refinance out if you qualify, etc. but a lot of investors just leave the mortgage in place.

As long as you make the mortgage payment on time the lender makes a TON of money on the loan, so they won't be calling the loan due in this scenario.  This is a pretty common strategy, albeit a little harder to find, but certainly many investors use this strategy to their advantage.

Feel free to ask any other additional questions if you need.  Thanks!

Account Closed · Answer

@Clay French you probably need to research Sub2 investing a little on your own. One of the people on the thread does not understand it themselves, and they are giving you advice.( For example the deed WOULD transfer to you or your company at closing.)... and he said it wouldn’t.

Sub2 investing is broadly discouraged on Biggerpockets so you will not get much encouragement here. The newbies would and have muddled the Sub2 pond so it is Not promoted here. People think they can be broke and jobless and do no money down deals or take over loans from people without be responsible for the loan payments.

A quick note like @Derek Dombeck mentioned you should plan on paying off the underlying note if it’s called due if all possible.

Joe Villeneuve · Answer

Let's think about a property where the seller doesn't want to profit from the sale, and is only looking to get out of that property.  My question is what would put the seller in that frame of mind, and how does that translate to the type, condition. and quality of that property.

It will be tough to get a title company to agree to setting up escrow for you if you don't hold title.

You can't refinance something you don't own.  What you're talking about is just getting financing to buy the property where the sale price is the balance owed on the seller's current mortgage.

Joe Villeneuve · Answer

Everything is wrong with this.

1 - Not sure how to interpret this statement.

2 - Taking over a mortgage is called "Subject 2".  You mentioned one of the "worst cashs".  What if the seller doesn't make the payments on the mortgage?  You're not going to make the payments direct.  You pay the seller, and the seller pays the mortgage.

If the bank "finds out", you'll lose all the money you paid to the seller too.

You can't refi since the property is used as collateral on the seller's mortgage...not your's.  What are you refinancing?

Clay French · Answer

@Derek Dombeck I would never get into an agreement with someone if I didn’t intend to fulfill it. I was talking absolute worst case scenarios. I’m glad you called me out on that though, because I’d hate for anyone to get that idea about me.

Clay French · Answer

@Joe Villeneuve thanks for your reply! I’ll try to clarify my first point.  I’m looking for properties where I the sellers aren’t looking to make any money. They just want to unload the property. I would literally just take over making payments. The seller would not walk away with any cash.

As for the sellers not making payments, my plan was to have everything paid out of an escrow account held by a title attorney here in town. Would that solve that problem?

When I talk about refinancing, I’m not talking about a cash out refi, I’m talking about just refinancing it with another mortgage company to pay off the original mortgage, so the property would still be able to be used as collateral in that case, right?

Thanks again for your response. It helps me to talk things like this through.

Creative Financing — Am I Missing Something?

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