I write a lot about leasing with the option to purchase because it’s at the top of my list for how to creatively acquire property for very little money. However, I also frequently acquire homes using subject to deals (aka get the deed). Anyone can use this financing method but few do because many retail buyers even think it’s illegal. It’s not.
Buying subject to means that you take over the existing loan on the mortgage (without putting your name on it). The reason some people think that is illegal is because since the 1970s or 1980s, most mortgage contracts have a “due on sale” clause. That implies that the full sales price from the original sale must be paid off if the home is sold. This is a contractual issue. Not a legal issue. If the loan holder wanted to enforce that contractual clause, they could. They would have to incur their own legal costs to do so.
Subject to deals are a form of owner financing. The current owner already has financing in place. Instead of the investor going through the painstaking task of applying and being approved for a new loan, the investor simply takes over the sellers existing loan. The seller can make a profit on the deal but that becomes a second mortgage that the seller puts in place.
Like most creative financing deals, there are several ways these deals can be put in place. The one thing that needs to happen is the terms of the original loan contract need to be adhered to. However, there are three common ways that subject to deals are put together. One is for the investor to obtain the original loan account number, mailing address, and due date to make the monthly payments. As long as the payments keep coming, the lender isn’t likely to call the “due on sale” clause (no matter whose name is on the check).
Another common scenario is for the investor to send the loan amount plus the amount for the second mortgage directly to the seller. The risk here is that the seller simply pockets all of the cash without keeping the original loan current. This is not a preferred way to write a subject to deal contract.
The third common method is using a third party to distribute the money. The investor sends the money to a third party (essentially an escrow company) and that company sends one check to the original lender and another check to the seller for the second mortgage.
Why You Would Invest in Subject to Deals
One main reason you want to invest this way is because you can take ownership of the property without putting up much of your own money. The other is because you don’t have to take out a new mortgage. Taking out a new mortgage takes time and money – if you can qualify. You’ll be filling out long application forms when you don’t know if you’ll even qualify. If you do qualify, at closing, you’ll be paying all kinds of loan fees, setting up escrow accounts and who knows what other costs will be slipped into the loan. A common term for many of the loan costs is “garbage fees”. It makes a lot more sense to take over an existing loan where all these costs and troubles have already been taken care of. You simply take possession of the house and start making the existing mortgage payments.
There are many reasons why a lender won’t call the loan due as long as it stays current. Beyond the legal costs, the government keeps count of nonperforming loans and accesses punishment to irresponsible lenders that have to take a property back. Something else to keep in mind is that the investor is taking almost no risk. Even if something goes wrong with the loan and the house is foreclosed on, it’s the seller’s name that is still on the loan. In subject to deals, it’s the seller that takes the hit on his or her credit report rather than the investor.
Each of my articles are intended to help investors find creative and low cost investment techniques.
For more than 30 years, I’ve used the Sandwich Lease Option System and Subject to Deals to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
By Wendy Patton
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