Why You Should Not Buy Houses Subject -to The Mortgage

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Topics: Deal Stories

Now, more than ever, there is a great opportunity to buy houses subject to the mortgage (with a little twist).  It is harder for sellers to sell their house to a buyer who gets new financing so sellers are more open to “creative” ways to get their houses sold fast.

In the past few years, it was fairly easy for buyers to get a loan.  That’s not the case in 2015.  There has been a huge turmoil in the mortgage industry thanks to Dodd-Frank and it is much harder for people to get financing. Mortgages are at a 17 year low because it is so hard to get financing.

In every neighborhood, in every price range, there are motivated sellers… even owners of multi-million dollar houses and owners of commercial real estate can become motivated sellers   A motivated seller is someone who needs to get rid of their property (usually they need to get rid of their property payment) as quickly as possible.  Many of them have tried using a Realtor with no luck.  They may have tried selling it themselves with no luck.  By now they are frustrated and desperate for any solution that will help make the house go away.  That’s where you come in!

Any time you have a motivated seller and some equity, there’s an opportunity for you to make money.  If the house is VACANT, the seller is usually twice as motivated.

Very few sellers offer to sell their homes with seller financing – mostly because they don’t know how and NO ONE HAS ASKED THEM TO!

Anytime you have a problem that affects a large population, you’ve got an opportunity on your hands.  Here’s how it might work…

Contact motivated sellers and offer to buy their house now if they will take monthly payments.  Look for vacant looking houses on the FSBO type web sites.  You’ll be surprised how many will say yes.

You do not need to get a mortgage to buy houses that you can rent out.  Instead, look for motivated sellers then buy their house subject to an existing fixed rate non-balloon mortgage with a low enough payment that you can make a good cash flow when you rent the property.  Ideally, you’ll get at least $250 per month cash flow.  You can check rents for any area at www.RentOMeter.com.  Keep in mind that you need to allow for possible vacancies and for repairs to the property.  So you need at least a $250 to $300 per month cash flow.

You need to be careful to structure the transaction so the payment to the seller or lender, plus taxes and insurance is much less than what you will get from rents.  Don’t do skinny deals!

If there is a mortgage on the property the seller will usually to let you just take over the payments on their existing loan.  That means that you can buy houses without getting bank financing, without using your credit, and usually with very little cash.

Even if the seller has substantial equity in their property but they are very motivated to sell they will accept monthly payments for their equity.

Here’s how to buy a house subject to the mortgage…with a little twist…

Instead of just writing a contract to buy the house subject to the mortgage, I much prefer to write a contract that I’m buying with seller financing that wraps the underlying loan.  The terms of my financing mirror the terms on the underlying loan.   I make the contract contingent on me doing my due diligence to verify all the numbers to my satisfaction.  Closing is usually set for 7 days after the contract date.

This is the quickest and easiest way to buy a lot of houses fast! 

The benefit of buying with a seller finance wrap instead of just a subject to purchase is that the seller has a Deed of Trust or a mortgage so they can foreclose if you get abducted by aliens or stop making the payments.  It is much safer for the seller… you need to make sure they know that.

If you only buy Subject to the Mortgage then you stop making payments, the seller would need to go to court to try to get the house back but the house would probably be foreclosed on before they could get the house back.  That’s why I don’t buy Subject to the Mortgage.  It protects the seller.

About 15 years ago, there was an investor in Dallas Texas who had bought 50 houses subject to the mortgage.  He was collecting rents but not making payments on the underlying loan.  Some of the underlying loans where HUD loans ( FHA), so the government got involved.  They raided his house in the wee hours of the morning.  He was charged with equity skimming, among other things, and got sent to prison.  This made national news.

Subject to deals got a bad name after that! The sellers had no way to get their house back or protect their credit.

Some “real estate mentors, gurus, or coaches” still teach buying Subject to the mortgage.  They are putting you at risk.

I tell seller’s if they talk to an investor who wants to buy their house Subject-To the mortgage… they need to be aware of the dangers.

In every transaction I do, I have to think… what if I were standing in front a Judge and had to explain how I purchased the house.  Would the Judge think I did a fair and honest transaction?  Buying with seller financing that wraps the underlying loan is much safer for the seller (and for me) so I’d feel very comfortable explaining that transaction to a Judge instead of just a Subject to purchase.

To verify the numbers, you need to get a letter of authorization to contact the seller’s lender so you can verify the mortgage balance, the loan payment amount, the terms of the note and always verify if the taxes and insurance are escrowed.  Surprisingly, many sellers don’t have a clue about any of these details.  The authorization letter needs to have the address of the property, the owner’s name and Social Security number,  the lender’s name, phone number and the loan number.  The title company will need all this information to prepare the closing documents anyway.

Get a copy of their most recent mortgage statement.

When buying Subject to the mortgage, you need to explain to the seller that the mortgage will stay in their name.  I also explain to the seller that the lender could call the loan due if there is a transfer in title without the lenders permission…but I also explain that in 20 years of buying houses subject to the mortgage it has never happened to me.  I put all this in writing and have the seller sign off on getting the notification.  Then they can’t come back years later saying that I never told them the loan would stay in their name.

Once everything is verified to your satisfaction, get the title company to run a title search on the property to make sure there are no liens or judgments.  If everything turns out ok, set a closing date.

At closing, I always take title in a Land Trust that has the seller’s last name in it or the street name, like JS Smith Trust #345.  This may reduce the chance of the lender calling the loan due.

Get the seller to sign three letters:

(1) is a notice to the lender to send all future mortgage statements to my company because I will be managing the property and sending in the payments.

(2) get a letter to their existing insurance company to cancel their insurance policy and send the proceeds to my company.

(3) get a power of attorney to sign any documents or insurance pertaining to the property.

Before closing, I contact my insurance company to arrange for insurance on the property.  Usually insurance is escrowed so they bill the lender.  Because the seller does not own the property anymore, their home owners insurance policy is no good.

Benefits of Buying with Seller Financing that Wraps the Underlying Loan…

(1) You don’t have to prove any income
(2) You don’t need to fill out a loan application
(3) Your credit scrore does not matter
(4) No junk loan fees
(5) No appraisals needed
(6) No personal guarantee of the loan
(7) No limit to how many houses you can buy – build your portfolio much faster
(8) Better interest rate because it is an owner occupied loan
(9) You can close fast
(10) You often need no money down or very little cash to close

Once you buy the house, this is what you can do…

(1) move in
(2) rent it out for positive cash flow
(3) lease with an option
(4) sell with seller financing (be careful of Dodd-Frank rules)
(5) what else can you think of?

Finding “Seller Finance” Sellers

A motivated seller is anyone who needs to sell NOW.   Think about all the situations that could put a homeowner in that spot.

What makes a seller motivated?
(1) job loss
(2) new job elsewhere –
(3) divorce
(4) ill health – needs to relocate
(5) double house payments
(6) expanding family, smaller family
(6) death
(7) What else can you think of?

You should do marketing with letters or postcards to look for people in those situations.  Many of these lists are public information and can be obtained at the county court house or through a legal newspaper.  Make sure everyone you know understands that you are in the business of solving real estate problems.  Then when they hear of someone who needs to sell quickly, they can refer the seller to you.

GET STARTED WITH NO EXPENSE

To get started with no expense, start calling FSBO ads in the newspaper on any for sale by owner type web sites in your area.  Try www.craigslist.com

Owners of a VACANT house are always the most motivated seller of all.  To find these owners, you can is look on FSBO web sites for pictures of vacant houses.  You can also contact insurance agents to see if they have any clients with a vacant house who needs to sell now.  (Insurance on a vacant house is a lot more expensive than insurance on an occupied house)

Here are a few For Sale By Owner type web sites to check out:
www.FSBO.com
www.ForSaleByOwner.com
www.MilitaryByOwner.com
www.Owner.com

EXAMPLE:  John and Sally Smith are getting a divorce.  Neither of them wants to keep the house and neither of them can afford the $980 PITI (principal payment plus interest, taxes and insurance) house payment on their own.  They have tried to sell with a real estate agent for 6 months with no offers.  They just want out.  Their listing just expired and they are looking for an alternative way to get rid of the house as fast as possible.

Their house is worth $145,000.  They have a mortgage of $118,000 with PITI payment of $945.

The house will rent for $1350 easily.

You offer to buy their house with seller financing that mirrors and wraps the underlying loan, meaning you will start making payments on their underlying loan.  And you offer to pay all the closing costs which will be about $1500.

Does it really work?

I have bought hundreds of homes with seller financing and with seller financing that wraps the underlying loan.  Almost all my rental properties were acquired by buying with seller financing that wraps the underlying loan.  So, yes, it really works!

You might ask.. why didn’t the Sellers rent out the house?  Often sellers are emotionally detached from the property.. especially in a divorce situation.  They don’t want any reason that they would need to communicate with the other parties (husband or wife).  They just want the house and especially the house payments to go away. The same thing happens in probate situations.

I have a ton of training about buying with seller financing or subject to the mortgage (with a twist) in the Premium Training

NOTE…I just added a 90 page document package to the Premium Training (available to Members) which contains all documents to buy or sell subject to the mortgage with a seller finance wrap.

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