The Secret to Protecting yourself When Doing “subject To” Transactions
I've been telling my students repeatedly that the key to runaway success in real estate investing is to have a solid understanding how to utilize a few creative investing techniques so that they can capitalize on the opportunities available in today's market. One tool you need to add to your toolkit if you haven't already is the subject to deal.
The subject to deal is simply the act of buying somebody's house subject to the existing financing. It's not a difficult concept and it's not hard to implement. It is, however, misunderstood by too many investors – and in some cases it's abused by so-called real estate investors who should be in a six by nine jail cell and not roaming around taking advantage of people who don't know any better.
There are a lot of buying situations that lend themselves very well to using the subject to deal. For instance, if you find a seller who has a property that had a fair amount of equity in their home before the real estate market tanked, you might find that a lot of other transactions wouldn't work so well.
A subject to deal could be the answer to your problem.
By buying subject to the existing mortgage you could take possession of their home and let them ride off into the sunset. Even if they're facing an impending foreclosure, you could use this technique to gain possession of the property. It would require you to catch up their payments with the bank, but it could still very easily be worth your while, especially if they have favorable financing.
Since the seller is still on the hook with their lender, they're very likely going to want some assurance that the payments will get made on on time. While you can swear on a stack of Bibles that you'll make the payments faithfully every month, they might need additional proof.
As a last resort, you could find a title company or a lawyer that could take your payment every month, forward the mortgage company their share, and the balance to the seller. This is a common strategy and a common technique. That way, the seller knows that the payment is making it all the way to the lender each month. This gives both of you some added peace of mind.
The subject to deal is getting a bit of a black eye in the press right now by fly by night investors and others running scams on desperate homeowners. A few bad players are screwing up a perfectly good technique for everyone else.
Here's how you can cover your rear end and make sure the transaction is a clean one that will stand the test of time.
The key here is to be a real estate investor with honesty, integrity, and a willingness to shine the bright light of truth on the entire transaction.
l Explain the transaction fully – You may be dealing with somebody in a financial pinch, but they are still people deserving of an honest, full explanation of what they are getting into. By explaining the transaction completely it helps to take away a complaint later that they didn't understand what they were getting into.
l Disclose that you are buying their home – Some sellers may not fully comprehend that they are actually losing any equity they have in their home. Make sure they understand the terms of your deal. The bright light of truth is preferable to dancing around the shadows of lies and half truths any day of the week.
l Explain that they are still responsible for the mortgage until the loan is paid off – A common complaint that sellers have is that they thought by signing the subject to agreement that they would no longer be responsible for the underlying mortgage. Be sure they know what the deal means.
l Have them explain in writing what their understanding of your transaction is – It's one thing to explain a transaction until you're blue in the face. It's even better that the seller understands the transaction so clearly that they can explain it in their own words. By having them explain it in their own words you can know absolutely that they know exactly what sort of transaction they're signing off on.
The best advice you can take on your subject to transactions is to make certain that everything you do avoids even the appearance of being a shady deal. Will this runaway honesty cost you deals? It's possible that it could. But it also helps guarantee that the transactions that you do are clearly understood by both parties and that you can sleep soundly at night.
Real estate investing is tough enough. Learn the ins and outs of subject to transactions so you can experience the kinds of returns that will secure your ability to declare yourself a real estate investing success story that won't be subject to judicial review.
About the Author:
Sean Flanagan went from dead broke, living off Ramen Noodles and selling used pallets from the roadside for $20 a day, to a self made real estate multimillionaire in under 2 years time. He now shares his secrets with thousands of students across the country.
He has a FREE audio course titled 7 Secrets to Making Big Bucks in a Slow Real Estate Market which you can get right now by quickly visiting http://www.Yuckyhousetraining.com. He also gives away a coaching program for new real estate investors where he offers a risk free trial to prove to new real estate investors how much money they can make with his program at http://www.Yuckyhousetraining.com.
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