The Pros and Cons of Subject-To Deals
Subject-To deals are a great way to make a living as a real estate investor. They are low risk and don’t take a large investment to start. In fact, we buy all of our properties with no money down. However, let it be known you will want to get the right type of education if you plan to do this type of creative investing, and like with any type of real estate there are some risks. Seek legal advice before attempting to do any of these types of transactions, especially with the new laws coming into play in 2014.
Who Owns What In A Subject-To Deal?
These type of deals can get confusing because it is not like any other type of real estate transaction. You own the house and are paying the mortgage payment to the bank (or a third party servicing company). However, the original owner owns the loan and is still liable for making the payments. Of course, in these transactions, since you (the investor) are making the payments on their behalf, the original owner is therefore getting credit for those payments, which is a great benefit to sellers in subject-to deals.
A quick side note: On FHA deals, it is possible for homeowners to be released from liability. Please consult your attorney for more information on how this works. This is another reason why it’s imperative to work with an attorney who specializes in subject-to deals.
The Pros of Subject-To Deals
- A Subject-To transaction, if done correctly and wrapped to an end buyer, can provide you the investor monthly cash flow which is exactly what the REI Rockstars love…. Passive Income!! So that one day we can do amazing things for our families and live the dream of doing what we want, when we want and with whom we want!
- You, the investor, can obtain properties without having to come up with a large out-of-pocket down payment. In fact, we have never put $1 down on a property we bought subject-to. We do every transaction with no money out of pocket which is why it’s such a great real estate strategy to learn as a new investor.
- You are not using your own credit to buy houses, so you aren’t capped at how many houses you can buy like you are when buying properties traditionally.
- The original seller benefits from this type of sale for many reasons, but two of the most popular are because they are 1. Helped out of their negative situation, and 2. They don’t have to pay added expenses that they would be paying through a traditional sale.
The Cons of Subject-To Deals
- You, the investor, own the home and you can’t change your mind even if things change. You have an ethical obligation to the seller. (We have developed ways to mitigate this)
- You can hurt the seller’s credit if you or the end buyer do not make the underlying mortgage payments on a timely basis. (We have developed ways to mitigate this)
- If not done correctly the lender can call the loan due. (We have developed ways to mitigate this)
- You will have to obtain insurance on the home as well as keep track of the buyer’s payments and other financial paperwork. (We have developed ways to mitigate this)
Does Subject-To Investing Appeal To You?
If this sounds appealing to you, there are many ways to make money on these deals, so let’s dive into the types of deals that are a good fit for this type of real estate investing.
The Types of Deals That Fit Subject-To Investing
- Look for homes with little to no equity
- Search for properties that are underwater
- Find properties that need some fixing up and need to be sold as-is.
The truth is almost any house will work with this type of strategy so long as you’re meeting the needs and goals of the seller. The 3 types of deals I listed above are meant to lead you in the direction of finding the more motivated sellers who will be open to the idea of subject-to financing even if you’re not incredibly skilled at making your presentation and offer!
Motivated Sellers Love Subject-To Financing
You may be wondering who would be interested in letting me take their home subject-to the original financing.
Answer: The type of seller who is motivated to sell their house and whose options are limited!
Many sellers want to sell because they are down sizing or they need to get their equity out. While this method will work with people who have equity in their houses, it is more accepted by homeowners who NEED to sell their home and are not expecting to make a profit. They want out of their situation and are willing to walk away if they can. This often is:
- Homeowners facing foreclosure.
- People who are facing life-changing circumstances, such as divorce, a sickness or death and they can no longer make the payments.
- Owners who are behind on their payments and urgently need a solution.
- Landlords who are tired of dealing with renters (aka, tenants and toilets).
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!