Personal Podcast Notes (70) Subject-To & WRAP Mortgages 2/ Grant Kemp

My personal takeaways.

If you’re considering doing subject-to deals, be sure you talk to a real estate attorney first.

My big question was how can I do this without any cash? And that led me to subject-to financing.

Diving in is the biggest thing I can recommend for any part of real estate investing. You just have to do it.

The most important thing you have to do in a subject to transaction is properly disclose everything. You must disclose the due-on-sale clause to the seller and, if you turn around and do an owner finance/WRAP transaction, to your buyer. When disclosed properly, the due-on-sale clause is not really a real world problem. In 25 years our od 10,000 subject-to transactions, 3 of those mortgages have been called due by the bank. In all 3 cases we were able to fix the transaction without a refinance having to occur. The bank has the right to call the mortgage due, but we’ve only seen it become an issues in non-payment scenarios when the bank is not receiving payment.

What does a bank want? If they call that due-on-sale clause they are probably getting the property back. And they are not in the real estate business. If they were, they would be called Caldwell Banker not Bank of America. The bank wants its money, not the property. Our outlook on this is proper disclosure. Can a seller, who has had everything explained from top to bottom, make that decision for themselves that says, “yeah, you know what, I’m comfortable with this due-on-sale clause being a possible risk, but I have to offload this house or else I’m going to foreclosure for sure.” I think yes, the seller can make that decision. Absolutely yes.

There is nothing illegal about the due-on-sale clause. The due-on-sale clause is a trigger, it’s not a rule to be broken. Once you’ve sold that property subject-to you have triggered due-on-sale clause and at that point in time, the bank has the option to call the loan due. But it doesn’t say, if you sell this property without paying it off, you have broken this clause and we will call the loan due. It says, if you sell it we have the option to call this loan due.

Our goal is to buy the subject to properties with no money down. For homes with equity we may put some money down but it’s rarely going to be more than $5000.

For example, we just secured an option on a subject-2 property and we’re into it for $750. We also already have a buyer and the sales side is going to close tomorrow morning. My $750 out of pocket will be recouped for me in the morning. This home has no equity. The owners refinanced in 2006 and subsequently moved into another property and they were going to have two payments. It doesn’t make sense for them anymore and they need to get rid of it. This house was in terrible shape. There’s garbage everywhere, kitchen tiles are missing, the toilet is sitting in the hallway, and it has foundation issues. In order to sell this home at retail, they would need to invest a solid $15,000 - $20,000, plus holding costs, plus realtor commissions, and there’s just not room for that. So should they go into foreclosure or sell subject-to? You might wonder who is going to buy this house with all these issues and no equity, but there’s a whole demographic for that. We are in Dallas and about 95% of our buyers are family members that may be in the construction business and the wife is in the the cleaning bushings. That’s about 65 to 70% of our buyers. If you look at them from Dave Ramsey’s perspective, they are phenomenal buyers. They have absolutely no debt. They’ve been saving their money. They live well beneath their means, and they’re self-employed. But when you look a them from a banks perspective, and the banks sees, strike 1, they’re self-employed, strike 2, no credit history. These are people that can’t get traditional lending and they want to be homeowners. They have pride of ownership, and often they don’t care if the house is in terrible shape because they fix this stuff all day anyway. They would rather get the house, own the house, and make the repairs. And this particular house is sold on a 15 year note. Often these families are doing routinely doing 10 to 15 year note, and they’re just fantastic buyers. We aren’t buying houses that are underwater but we can buy houses that are “at water” (little to no equity) all day. They couldn’t sell without bringing money to the table.

A WRAP mortgage is when we purchase a house with subject-to and then turn around and try to find a buyer who needs owner financing. So let’s say that I buy a house for $90,000 and my payments to the bank PITI are gonna be 850 a month. Now I will turn around and sell that house for 105,000 and receive a $10,000 down payment. That’s my profit up front and I’m financing a $95,000 note. So I’m selling a note to an owner occupant in such away got their payment will be $1000 a month PITI. So I made $10,000 upfront and will make $150 a month for 10, 15, or 30 years. That’s a wrap mortgage.

When you buy an owner financed house you’re typically gonna pay about 10% more than retail price because financing is built in.

The main way we acquire these subject-to properties is through wholesalers because they are discarding tons or these leads that don’t have enough equity for a rental or flip. And our wholesalers love it because they get at least $500 or more for leads they were going to throw away .

The primary way we find buyers for these properties is by word of mouth and a sign in the yard.

When you sell a property with a WRAP mortgage to an owner occupant there are a lot of compliance issues. And if you originate more than five of these owner occupant loans a year, you need either be a certified RMLO (residential mortgage loan originator) or find one to originate your loans. All of the RMLO fees come from the buyer.

You do need to go through a full closing with a wrap mortgage. Typically these closings are done at a law firm instead of a title company.

If you are just buying these subject to properties and then turning around and renting them you do not need an RMLO.

What I do when I go under contract with all of my sub 2 sellers is we go under a 60 day lease option period and we give the seller 10 dollars as the option fee. That gives us two months to try to market the property for sale while my seller is still paying the underlying lien. The lease option gives us the right to end the transaction at any time within 60 days, and during that time we have a written agreement which allows us to market that property. So we put signs in the yard and put ads in craigslist and postlets.

My business really exploded when I started working with other wholesalers and investors and training them as interns.

Subject-to was my side job when I was getting started. I need little to no money of my own and spent a little bit on marketing. I hired Gerry Puckett who is on BiggerPockets to do my marketing, set up my phone to route to an answering service that collected seller information and email it to me. On my breaks and after work, I would call people back and try to get the deal done. Most of these people are working 9 to 5 anyways so you’re probably gonna be talking with them after work.