There’s nothing wrong with taking title subject to a loan, assuming a loan, or borrowing money from a bank so long as everything proceeds according to plan. But suppose it doesn’t?
Just before I sign any loan, I like to project what things might be like on a dark, wet stormy winter day with lowering clouds blocking out the sun. I’m standing forlorn at a public bus stop. My threadbare, shabby coat that I’ve just bought at the thrift shop won’t quite shed the drenching rain that has begun to soak through, chilling my very soul while I wait for the bus that’s late. Only two more transfers until I get back to my cheap apartment in the combat zone. My wife, unable to tolerate the miserable life style I’ve brought my family to, has moved back with her parents with the kids.
I’m broke on top of broke. My tenants have moved out, trashing the house. I’m confronting the holiday season burdened down with the need to come up with my $1000 loan payment which I don’t have. Instead of being able to make the round of seasonal parties, I furtively scurry from dark shadow to dark shadow hoping to avoid my creditors. Oh, if I’d only not signed with full personal recourse.
But there’s a bright side. Since they took out my telephone, I no longer have to screen all telephone calls to avoid being harangued for late payments. They’re going to move out my furniture just before Christmas, shortly followed thereafter by the loss of the family cars. My wife and kids will never forgive me once they’ve lost their transportation. For yet another year, I’ll spend the winter alone pondering where I went wrong. It was that last bank loan that really broke the camel’s back, and brought me to ruin. If only I had invested it more carefully.
Why do I put myself through this? Because, as a buyer of distressed properties, I see lots of others in that situation, all brought about by their lack of discipline when it comes to borrowing money and using debt. The sad fact is that it could all be avoided if the borrower understood and followed some basic rules of borrowing. Adhering to these financial principles can lead to success.
1. Don’t borrow to buy ‘toys’ that you’ll consume or wear out.
2. Don’t borrow to support your lifestyle. Work harder to earn more.
3. Don’t borrow and guarantee payments to gamble on speculations.
4. Don’t borrow short term to buy long term investments.
5. Don’t borrow if what you’re buying won’t generate loan payments.
6. Don’t borrow if you’ve got to personally guarantee repayment.
7. Don’t co-sign another’s loan. Instead, borrow and re-lend to him.
8. Don’t pay more in interest that you’re going to earn in net rents.
9. Don’t borrow equity out ‘tax-free’ unless you reinvest the cash.
10. Don’t place your lifestyle at risk by borrowing on risky terms.
So much for the ‘don’ts. What about the ‘do’s?
1. Do borrow when terms are feasible and reasonable.
2. Do borrow when the collateral is sole security for your loans.
3. Do borrow when you can leverage houses up in a rising market.
4. Do borrow when it’s the only way you can pay for a super deal.
5. Do borrow when you don’t have to personally guarantee payments.
6. Do borrow at below market rates to create liquidity to pay balloons.
7. Do borrow long term for quick turnaround high profit situations.
8. Do borrow when you can re-lend for higher yields safely.
9. Do borrow prudently in order to get started buying houses.
10. Do borrow when you can pass the loan on to someone else.
From Jack Miller's BUYING HOUSES FROM A TO Z seminar manual which also contains a lot of information about buying Subject to the Mortgage. BUYING HOUSES FROM A TO Z is not available in Paperback or any digital format. See details at Buying Houses from A to Z
