Back to Basics: Getting Started with Subject-To Transactions
Posted on February 28, 2013 by Don DeRosa
“The right tool for the job” ~ slogan for True Temper Tools
Congratulations – you made it through the winter and spring is on its way! I think spring is a perfect time to take an inventory of your real estate investment “tools.” And if you’ve been sitting on the sidelines, wondering if real estate investing is for you, spring is also a great time to dive in! Either way, it’s a good time to get back to basics. Today, let’s focus on one of my favorite investment techniques: “subject to” mortgages.
Most of you know that when you buy a house, you usually receive a warranty deed, which gives ownership of a piece of property. If you’re paying all cash for a property, you just exchange the cash for the warranty deed. So far so good.
But if you don’t have all the cash, you have to borrow the money. Most of you know how the typical mortgage loan works: Buddy Banker says, “Sure, just sign this promissory note that says you’ll pay it all back.” In return, you get a security instrument that says if you don’t pay the promissory note, the bank gets the property. In most states, that security instrument is the mortgage (In Georgia, we use security deeds). That mortgage, when it’s recorded, creates a lien on the property. In other words, the bank puts everyone on public notice that if the owner sells or transfers the property, the bank has to be paid off first.
A “subject-to” transaction is a little different. When you buy a house this way, you’ll take over payments on the original mortgage. You’ll bring the house up to date on the mortgage and back taxes and then continue to make mortgage payments, subject to the existing financing. The seller gives you a warranty deed, which conveys ownership to you. That means you get the tax benefits and the profits, but you also get the headaches and costs.
There is one headache you don’t get, though: liability for the loan. Your name isn’t on the mortgage. Of course, if you don’t make the payments, Buddy Banker is going to exercise the default clause in the mortgage. In other words, he’s going to say, “You’ve defaulted, so we’re going to foreclose and grab that house right out from under you.” (Obviously, if you can’t afford the payments, you shouldn’t be buying that property.)
But what about that “due on sale” clause you’ve have heard about? Most mortgages and security deeds now have this clause, which says that if the borrower – our homeowner – sells the house, the bank is allowed to call the loan. In other words, Buddy Banker can tell the seller he’s got to pay the entire amount of the loan – right now!
Luckily, in almost all cases, the bank could care less who owns the house as long as they’re getting paid. After all, Mr. Banker is swimming in foreclosed houses. He’d rather have the money! And that’s why subject-to transactions work.
Maybe you’re an experienced investor, and you’d like a refresher course. Or perhaps you’re just getting started. Whatever your situation, I’d like to invite you to my two-day, boot camp called “An Introduction to Real Estate Investing – Making a Fortune Buying Houses with No Money and No Credit” on March 23rd & 24th in Atlanta, GA. This two-day boot camp will cover all the basics of subject-to investing and is great for every skill level. Among the topics we’ll cover:
Getting started in your business, finding sellers, negotiation, constructing and presenting offers, staying organized and managing the paperwork flow, finding private lenders, exit strategies and much more!
Don’t let spring pass you by. Your fortune awaits!
Back to Basics: Getting Started with Subject-To Transactions
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