One of the things that distresses us about our industry is the amount of wrong or incomplete information available to investors. Some myths block what otherwise would be a great deal, while others would have you believe that a bad deal is actually great. For example, we encourage purchasing homes "subject-to" the existing mortgage as an option to finance the purchase of an investment property. This means that title to the property is transferred to the purchaser, but the loan remains in the original borrower's name with payments made by the purchaser. Unfortunately, many myths exist around this method which could rob you of your profits. Let's take this opportunity to dispel 5 of the most common.
Myth #1: Buying A House "Subject-To" The Existing Mortgage Is Illegal.
Absolutely not true! Most mortgages have a "due-on-sale" clause which states that if the house is sold without paying off the mortgage, the lender has the "right" to call the entire loan due. The key here is that they have a "right" ? not an "obligation". In other words, it's their choice. We asked several attorneys in town who represent lenders to see if they had ever heard of a bank call a loan due because of a sale. In every instance they said not as long as the payments were made timely. Why? Because banks are in the money business ? not in the real estate business. If they call the loan due, and it goes into foreclosure, they have a poor performing loan on the books (for which they have to increase their reserves), they incur additional costs, and they inherit a property. Or, they can just accept the timely payments from the new owner. Which makes more sense?
Myth #2: Buying "Subject-To" Is Complicated And Requires A Ton Of Paperwork.
The truth is that all you have to do is write it into the Purchase and Sales Agreement (PSA). We write it in right next to the Purchase Price. Here's an example using our PSA:
Total Purchase Price to be paid by Buyer is $80,000.00, payable as follows: "subject-to" existing first mortgage with a balance of approximately $77,500, and monthly PITI payments of $695; remainder of Sellers equity to be paid in cash at closing.
That's it. You and the Seller have now agreed that you'll purchase the home subject-to their mortgage. As a precaution, we have the Seller sign a disclaimer that they know that the loan has a due-on-sale clause, and that we make no promise as to when the loan will be paid in full, or how long it will remain in their name. We also prepare a letter from the borrower informing the bank that all future correspondence should be forwarded to us, and we have the right to act for the Seller in every way regarding the loan so they'll disclose loan information to us in the future.
It really is that easy. After closing, you just start making the payments. We don't hide our identity. We send in our own checks, and the house insurance is in our name.
Myth #3: No Homeowner Will Ever Sell Me Their House And Leave The Loan In Their Name.
If you're dealing with a seller who has no problems with his house, this may be true. But when you deal with motivated sellers ? ones that either have financial, personal, or house issues ? this will not be an issue. Motivated sellers need a way out ? quickly! Often, they're already behind in their payments, and facing foreclosure. When you tell them that their worries are over, and you'll catch up their back payments, and make all the subsequent payments on time they'll jump at the opportunity. As a bonus, their credit will even improve.
The key to successful negotiating lies in your confidence. Realize that you're providing a viable alternative solution which allows the highest price to be paid, with the quickest closing, and immediate relief for the Seller's situation.
Myth #4: Kitchen Table Closings Are Perfect For These Transactions
Investors love to say that they "got the deed" at the kitchen table while they presented their offer. The concern is you have no validation of what you purchased. Without a title exam, there's no guarantee the correct owner even signed the deed, nor whether any other loans or liens exist on the property. You also have no title insurance to protect you from any unanticipated title problems. Finally, the actual payoff on the loan must be validated with the lender by requesting a statement of account. Do not use the principal balance payoff shown on the monthly statement because it does not include past due payments, other interest accrued, fees and penalties, and any prepayment penalties. We've seen actual payoffs tens of thousands of dollars greater than the principal payoff.
You could argue that what difference does it make if the loan isn't in your name and you gave the Seller no cash. The problem is that you may not discover any of these issues until much later in the transaction ? maybe not until you try to sell the property. By then, you will have invested time, energy, and money in the property only to see it all lost, when all of these problems could have been avoided by conducting a standard closing with your attorney or title company.
Myth #5: I Can Always Just Walk Away If I Can't Pay The Mortgage
This is technically true, but not a great strategy for the successful investor. Legally, you are not responsible for the payments. But you do have your credibility and reputation to consider ? which are critical to your long term success. You definitely don't want an angry seller defaming your reputation in the community, or submitting a complaint with the Better Business Bureau. Not to mention that you probably have cash invested in the house, which will all be lost. We recommend treating "subject-to" mortgages just like any other with your name attached ? make timely payments.
Lou
FREE! Real Estate Investing Secrets To Earning $100,000 Your 1st Year! -- 11 Overlooked Real Estate Statregies That Will Turn Your Investing Business upside Down And On The Fast Track TO Success...Guranteed! Plus A Bonus Track With A Secret So Successful It Can Double Your Investing Income Overnight!
http://www.InvestorSuccessTactics.c om
Finding a lotPlanning for your new home is a very... Read More
The best price to sell your home is always determined... Read More
Real estate investors know how to make money buying distressed... Read More
One big potential deal-killer in buying foreclosures is the homeowner.... Read More
One key that makes investors is conversation or should I... Read More
Interior colors are vitally important to selling your home quickly,... Read More
Real estate is one of the best vehicles of building... Read More
Are you a realtor with curb appeal or are you... Read More
Investing in real estate is more complex than simply buying... Read More
I don't know why I didn't do it sooner, but... Read More
Selling quickly is a high priority for some home sellers.... Read More
You could be forgiven for thinking that property is the... Read More
In a previous article we introduced you to the concept... Read More
Are you ready for the lesson that will put you... Read More
Have you seen this in your classifieds? -"Will pay $$$... Read More
If you plan on getting the most from the sale... Read More
Homebuyers, especially first-timers, may not think of asking about restrictive... Read More
With the recent release from the UK's biggest mortgage lender,... Read More
There's something you should know about PMI!Private mortgage insurance is... Read More
The last downturn of the global stock market saw millions... Read More
When considering investment properties, first of all, it must be... Read More
We all are thinking about it and some of us... Read More
I might upset some folks with this one, but that's... Read More
One of the biggest mistakes people make when selling a... Read More
Okay, so we all can agree - listings are the... Read More
Whether you're a "move up" home buyer, downsizing, or relocating... Read More
Changing social trends point to a huge rise in demand... Read More
Equity lender, hard money lender, private investor or what ever... Read More
Once you have contracted us to sell your property we... Read More
Please don't call it "flipping."Some real estate investors who practice... Read More
Mexico is CHEAP! But its getting more expensive. As property... Read More
I invite you to take the next few minutes to... Read More
Most of us don't talk about money, finances, credit, debt....Young... Read More
Why without asking your boss? Two reasons, one, he or... Read More
In the old days people generally only bought land and... Read More
Central Illinois is an area rich in cultural activities and... Read More
If you are considering getting involved in investment real estate,... Read More
You'll want to take some items in your own car... Read More
Whether you're a "move up" home buyer, downsizing, or relocating... Read More
You may have heard all the buzz about the newest... Read More
Did you hear that? Prices of houses in Phoenix have... Read More
Real estate investments come through a variety of different options.... Read More
So much advice is bandied about on the internet and... Read More
Advice to Help When You're Buying a HomeFirst time home... Read More
When selling your Boston home, it's good practice to be... Read More
Some call it the 30 second commute. We call it... Read More
Be a slumlord? Okay, I got your attention, now the... Read More
As sure as the spring flows at the Fountain of... Read More
Have you ever wondered what it would be like to... Read More
With interest rates at record lows over the past year,... Read More
Almost anyone can become a rural property owner; if you... Read More
What if two people pooled their resources and began investing... Read More
Consider these parameters for a real estate deal:Property Value: $250,000... Read More
We probably answer this question for someone a couple times... Read More
Here are some Handy wee Tips to help you Sell... Read More
The majority of people in the UK who are looking... Read More
With so many realtors competing for your business, how do... Read More
As you continue to read about real estate investing, you... Read More
In the wake of Hurricane Katrina's wide path of destruction,... Read More
What is a "distressed" property? What is "bargain" real estate?A... Read More
Buyers think they care more about the inside of the... Read More
Whether it's selling your home or buying a home, more... Read More
As you are making your cold calls on property, you... Read More
Wouldn't you rather go to Tahiti? Are you a landlord... Read More
An effective real estate advertising strategy entails a 'shotgun' approach.... Read More
I've taught the concepts of Design Psychology for many years,... Read More
Real Estate |