How To Buy Properties Subject-To
Subject-To deals are easy to do, do not involve a lot of risk, and they typically require no money down. This is a great strategy to start with if you want to be a real estate investor. Many people have not heard of Subject-To investing because they are not as popular as flipping houses or short sales. However, the truth is almost any house that qualifies for a short sale may also work in a sub to deal. Your goal in a subject to transaction is to simply take over the sellers house payments.
While Subject-To deals can be easy it is important to always consult your lawyer for many reasons. First, because you will be signing a contract with the homeowners and you want to make sure you’ve followed your state guidelines. Secondly, with the new Dodd-Frank regulations that we all must follow starting in 2014, there are many hoops you need to jump through to remain legally compliant.
Our advice is to find a team and attorney who are currently doing these types of deals because they will have already done the research to make sure they are following all the new guidelines. If you want more information on this, make sure to contact us because subject-to deals are our specialty!!
Important To Know When Doing A Subject-To Deal
- Subject-To deals are legal, and done in all 50 states.
- The original homeowners will not be released from the loan (there are some legal exceptions to this if it’s an FHA loan).
- The original homeowners will move out of the house.
- The original homeowners usually do not profit from this deal. They save their credit and move on with their life.
- A subject-to house is usually bought for the price “owed” on the house.
What Does A Subject-To House Look Like?
This creative strategy is typically used when there is a bank loan in place. It is usually offered to homeowners who want out of their house, and out of their loan. Perhaps they owe more on their house than it’s worth, or they have a lot of bills, have encountered medical problems, a divorce, or need to move for a job. Whatever the reason, they can’t make their mortgage payment.
Why A Realtor Can’t Really Save The Day
Realtors simply don’t have enough tools in their toolbox. Many homeowners who could benefit from a subject-to transaction have little to no equity or are already behind on payments. Because Realtors are not well educated about a subject-to transaction, when they meet with homeowners in these circumstances, most Realtors simply offer to list traditionally (and overprice the home to do this) or they suggest a short sale.
For sellers who do not want to hurt their credit, they choose to list the property. But because it’s overpriced, it just sits on the market and costs the homeowner months of mortgage payments they wouldn’t have had to pay if they had learned about a different solution: Subject-To.
Realtors have a fiduciary responsibility to homeowners to present every option available to them and help them navigate through this decision. Due to a serious lack of education in the area of subject-to transactions, most homeowners are never offered the option of subject-to and they end up facing a short sale or foreclosure.
Can Realtors help in these situations? Yes, they can, if they educate themselves about this option and present it as a potential combo plan in trying to sell their house. This will give the homeowner a higher chance of success by maximizing their exposure to the buyer marketplace.
Why Does My Realtor Not Offer Me This Type of Option?
- In some states, realtors can be fined or lose their license because it can be considered against their code of ethics to assist a person in violating the due-on-sale clause in the real estate contract. I want you to take note of the word “violating” here. I wrote it because that’s what you’ll hear most people say. However, it’s not correct. You aren’t “violating” the due-on-sale clause, you are simply triggering it and that is not illegal.
- The due-on-sale clause simply states that the bank has the “right, but not the obligation” to call the note due. That means the bank does not have to exercise their right! This is where many Realtors are confused and why they are not offering this solution to homeowners. Additionally, there are investors, like us, who take an extra step in subject-to transactions by notifying the bank of the transaction in order to give the bank the opportunity to object if they intend to call the note due.
- While Subject-To deals are not illegal – and, as previously stated, are being done everywhere – make sure you seek advice from a lawyer who has experience in real estate law, particularly real estate investing and buying properties subject-to.
In order to overcome the potential risks, it is imperative to disclose in writing that any or all of the above “problems” mentioned above could happen. It is a honorable business practice for an investor to disclose to a seller the extent of liability he or she may have. Of course, this disclosure will also benefit the investor by means of helping to forgo a lawsuit if something goes wrong down the road.
If you’d like to learn more about building passive income by buying and selling real estate for a profit with no money down using strategies like subject-to and wrap around mortgages, then check out our very affordable REI Rockstars Back Stage Access Coaching Series for both new and seasoned investors!
If you prefer not to stay in the middle of transactions and simply want to sell your contracts for a quick fee, then you’ll want to learn more about how to do mortgage assignments and wholesaling, and we teach that in our coaching series as well! For under $100/mth, you’ll learn Four (4) No Money Down Real Estate Investing Strategies so that you can better evaluate the deals you come across in order to make maximum profit!