How to Buy Houses Using the "Subject To" TechniqueGlen Gallucci
July 10, 2008 — 1,564 views
There are several ways to purchase homes. We all know about the traditional methods of buying with a purchase contract, lease optioning a home, options or just paying cash. But another savvy investor way to purchase homes that is not really new but is over looked by beginners is buying homes "subject to."
What does “Subject to” mean?
When you purchase a home "subject to" it means you are buying the house subject to the existing mortgage that is already in place on the property. The terms of the note that were initially created with the lender stay the same. That includes the name the loan was purchased in. So the seller still has the obligation to fulfill the mortgage requirements.
In other words, you are not assuming the loan. The terms you create with the seller are between you and the seller as long as you follow the terms set up when the loan was originated.
Doesn’t this trigger the "due on sale" clause?
This is the most common question asked by new investors (buyers). They always ask "what about the due on sale clause?" This one concern keeps many investors from purchasing properties using this technique.
The due on sale clause states that the lender has the right to call the entire note due if any of the terms of the initial agreement are not met, such as payments being paid or transfer of the deed without paying off the original loan.
All lenders only want to collect payments. They loan out money at a higher interest rate then they are paying and create their cash flow from the difference on that spread. If a loan were at 8 or 9% why would a lender call that loan due to have it financed at a lower interest rate? They wouldn’t and they don’t.
Now, if the payments were not being made and it was a non-performing loan, they have the right to foreclose in order to recapture their property so they can sell it again. Everyone is so worried about what will happen to the buyer or seller of that home if a loan is called due. Let's look at the other end of it. What would happen to the lender if they called that loan due?
Here's what happens to the lending institutions if they take back a property. When a lender has taken back a property either by foreclosing or calling a note due, they are "punished" by the Federal government for having that non-performing loan. I am sure you have heard the expression "bad debt"?
If a loan that was taken through a lender is a non-performing loan (meaning the loan is on the "books" of that lender and payments are not being collected on that loan) then it is considered a bad debt. When this happens the government will not allow eight times that amount to be loaned out by the institution that is holding that bad debt.
In other words, if a bank has $100,000 in bad debts, that means they cannot loan out the amount of $800,000 because the government is punishing them for having that non-performing loan on their "books."
One of the disclosures on an FHA-insured loan requires that the lender contact HUD for permission to foreclose a mortgage on a property that was transferred without paying off the loan (subject to). To date, there have been NO reporting cases in which HUD actually gave that permission.
No personal liability
Let's try to understand the legal difference between buying a home "subject to" and assuming the loan. When a property owner sells his home "subject to" the existing mortgage, the buyer must make the payments on the mortgage or lose the property by foreclosure. (That is the same as if the seller were not making payments on his loan.)
However, the foreclosure will never show up on the buyer's credit record because the buyer was not legally obligated to make the mortgage payments on that existing loan. Such a foreclosure on a "subject to" mortgage will adversely affect to seller's credit record, not
We are not advocating that you go out and purchase a lot of homes and never make the payments. Remember, you are not legally obligated to make those payments. But you ARE morally obligated. Your word is the most important thing you have. Keep it.
Why would a seller deed you their house?
The two main reasons we have found are "time" and "debt relief." If someone is being transferred, divorcing, buying a new home, or financially strapped, you can buy today so they can move tomorrow. You are giving them a solution to their problem today, immediately. You can offer that seller instant debt relief and help them out of their situation. Most people do not realize that by purchasing homes "subject to" they are in total control. You own the home, they own they loan. You have the deed to that property.
You the Buyer have Little Risk with Potential Big Rewards
Purchasing homes "subject to" is a creative, fast and financially rewarding way to buy homes. It gives you instant ownership yet you are not legally bound with a lot of loans in your personal name.
We believe with this method of buying homes you can achieve financial freedom with little risk and great rewards. It takes little money to get started buying homes 'Subject To' and, remember, when you are able to buy homes with great terms, you can pass on great terms to your tenant buyer, making it easier and quicker to fill homes, and with a greater financial reward to you.
Think about using this exciting way of acquiring property with little or no risk. Last I heard, there is no “breaking the due on sale cause jail”. It is not illegal, but the seller is violating their agreement with the lender. But if the lender is getting paid each month, they are happy. Especially since the seller had been delinquent in their payments. Remember, the bank wants their money and that’s exactly what you are doing. They don’t care where the payments come from, only that they continue to come.
You go to see a motivated seller and find out they have a mortgage balance of $80,000 including back payments on their home that is worth $200,000. They are $15,000 behind on their payments. The bank is threatening to foreclose if they don’t receive the back payments of $15,000. The house needs work of approximately $10,000.
Ideally, you will not want to pay anymore than $130,000 for this house. That means you would offer to buy the house for $130,000. You will pay the $15,000 and you can offer the owners the balance of the $130,000 purchase price and the $80,000 mortgage which would be $50,000. You could offer less but not more. And you can either give it to them at signing of the deed, or pay some upfront and the balance when you resell the house.
So for your $15,000 pus whatever you give the seller, you have the opportunity to make at least a $70,000 gross profit minus your holding costs.
I’d say this is a very handsome payday for you considering the amount of money you have to lay out.
Glen Gallucci, also known as "A Seasoned Investor" actively buys, rehabs and sells residential properties. He has invested, renovated and built numerous residential and commercial projects during his 30-year career. A well diversified businessman; Glen is also engaged in real estate education. From the trenches, and with his down to earth "tell it like it is" teaching style, makes Glen the "real deal" and a sought after speaker around the country as his business experience proves invaluable for the beginner as well as the seasoned investor regarding the successful structure of starting a wholesale or rehabbing business as well as securing private lenders when investing in "quick turn real estate."