All Forum Posts by: Matt Moger

To piggyback on your replies, a mentor of mine would always say, "don't think for the seller." 

We have utilized this strategy 5 or 6 times over the last 5 years while purchasing. In those instances, we are interested in monthly, residual cashflow on DAY 1. Therefore we are willing to sacrifice on the overall purchase price, for better monthly terms. If we are paying down principal faster than a bank note & we cashflow more with less down payment, we are happy; However, our strategy is to hold for a long time, so we can afford to do it this way.

On the other side, we have sold where we have been the bank. In that instance, it is a home that we are not comfortable putting money into. Because we are shouldering the risk, we require a substantial down payment and interest rate from our end buyer. The one thing I will never do though, is implement a pre-payment penalty. I believe the goal should be for the buyer to pay us off & to create raving fans that could not otherwise obtain a loan from a bank.

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $53,000
Cash invested: $10,000

I have nicknamed this 'The House From Hell' which is referenced in my book 'The Book on Relational Real Estate.' Every possible mistake you could make, I made it as a young 27 year old investor. The power of a long term hold is that it ultimately made money & continues to do so.

What made you interested in investing in this type of deal?

One of my first opportunities to invest

How did you find this deal and how did you negotiate it?

MLS through an real estate agent

How did you finance this deal?

Bank Financing

How did you add value to the deal?

Full Rehab including new HVAC and roof

What was the outcome?

Still cashflowing well today

Lessons learned? Challenges?

Hiring/Firing contractors. Learned how to more accurately assess rehab costs. Properly vet tenants for the future.

@Erin Elam

Ultimately you have to continue some sort of relationship with the seller. On the over payments question. In the beginning, it is best to have the seller call the bank & change their address to your address with their name still in place. At least this way, an escrow overage would come to you & the 1098’s at the end of the year come straight to you, but they still have to endorse that check 😐

I have had the seller file the interest on their taxes & keep an overage check. It’s not common, but it is part of the risk.

This strategy is phenomenal for shorter term projects like flips. We predominantly hold everything we buy; however we did flip one this summer using Subject To. In this scenario, the seller was under water & she paid us quite a bit at closing & we were able to renovate & sell with a realtor.

As far as using Sub2 to pay full price? That is never something that we have done. The longer your hand stays in the pot with these, the more volatile they become. We have paid a seller some of their equity up front & the rest on a promissory note when we refinanced.

Most of the time this is only an option when the seller is in a very tight spot, If there are time pressures or money pressures.

Since our goal is long term hold, we want to see how quickly we can lump several together in a portfolio loan, we recently put 4 Subject To’s together into our own loan & squared everything away removing the previous owner from any attachment to the property. Which ultimately lessened our risk & made raving fans out of those sellers.

I hope this helps a little.

Matt

@Erin Elam

We have done 7 subject to purchases over the last 10 years, not our go to strategy, but one we have used & love when the situation calls for it.

I have attempted to use the power of attorney that I secured at the time of a subject to sale in the past. Usually the bank still requires authorization from the original borrower at the time you are requesting information. They don’t care that you have that piece of paper notarized & signed.

In the beginning, you can call in with the seller on the other line & have them authorize you to speak on their behalf, but that seems to only last temporarily.

This is just from our personal experiences

@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. 

@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.

@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.  

@Fred Lopez, I love investing Subject To, but please keep in mind that it is an advanced strategy. As @Account Closed 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.

The name of the lady is Barbara Evans (732)504-8086. She's expecting your call.

You are only required to give the seller AT LEAST 50% of fair market value. It doesn't have to be 50%, it can be more.  The bank will be glad to reinstate a bad loan that they were going to foreclose on, you just pick up where they left off. It would really only become an issue if they owed significantly less than what it was worth, including the rehab costs. 

If you're buying the house sub2 & the loan balance is $49,000, & it costs you $11,000 to reinstate the loan & send the seller on his way, then your purchase price is $60,000. So you're actually giving the seller 100% of his fair market value. There's no scenario where anyone could say you treated the seller unfairly, which is the whole point of the rescue scam. Personally I wouldn't pay 100%, but if there was $500 a month cash flow there, I'd reconsider :)

We're not going to call & ask the bank's permission to take over the loan, they would definitely say 'no'

This only works in a pre-foreclosure situation where the seller is in default, but has not gone to court yet.