How to Do a Subject To Real Estate Deal

By Susan Lassiter-Lyons | Real Estate

Today, I'm revealing a couple of my Fast Financing Secrets starting with a step by step primer on how to do a subject to real estate deal.

Raise your hand if you have cash on hand to complete all of the deals available to you right now.

Raise em high.

Higher.

Yeah, me neither.

Unless you’re sitting on a stack of gold bars, chances are you’re going to have to find some creative ways to uncover financing solutions. Here is my philosophy on this:

  • Don’t go in search of financing, create financing.
  • Seek out leverage points to keep the power in your corner.
  • Eliminate the constraints of conventional financing.

Let’s visit these points from the bottom up.

Conventional Financing

This is exactly what you think.

Seller and buyer sign a purchase agreement. Buyer applies for a mortgage loan at the bank.

After much frustration, document scanning, emailing, yelling, crying and drinking there is FINALLY a closing.

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At closing, a seller conveys a deed to a buyer, the buyer obtains a loan for most of the purchase price from a bank (conventional lender), then the bank gives the seller cash and the buyer gives the banker a promissory note.

The buyer gives the bank a security instrument, the deed of trust or mortgage, which creates a lien on the property as collateral for the note.

And, as explained by our friends at The Mortgage Reports, finding the right loan program (if one fits at all, can be daunting…

What is missing from this setup?

You!

And, your ability to make all those little purple boxes say yes. (Stupid purple boxes trying to keep us down!)

Without the ability to use leverage, such as equity and underlying financing, to keep the power in your corner.

You have no power. The power is in the hands of the conventional lender.

Leverage = Power

Why should you leave the success of your business up to whether a banker says yes or no to your financing?

You shouldn’t.

I decided a long time ago that I would be the person to decide such questions in my business, and so should you.

Here is the story of how young Susan Lassiter-Lyons said “YES!” to her real estate investment business.

While working in the corporate world at Hertz Rent A Car, I decided I wanted to invest in real estate instead.

It sounded so fun, profitable, and right up my alley. So, I quit my job to invest full time.

That’s how I roll – two feet, straight into the deep end.

There was one big problem. Well, several really.

I lacked cash, credit, and risk taking capability.

There was not enough cash flow in my business and I didn’t qualify for conventional lending.

I needed to create a solution – fast – if I wanted to continue feeding myself and fancy stuff like that.

So, I discovered the lease option. This involved leasing a property from a seller with the option to purchase in the future. While leasing, I would re-lease the property to a tenant buyer at a higher price than I was leasing to cover the spread of my lease and make money.

And, feed myself.

I could also negotiate to have my tenant-buyer purchase the property at a higher price than what I negotiated with my seller.

And, fancy stuff.

This gave me the ability to get three deals under my belt right away. The deals, actually, propelled my confidence to look further into creative financing options to close more deals.

Bottom line, I was hooked.

Create Financing

Back to where we started.

Don’t go searching for financing and placing yourself in a position for someone else to say “no” to your business.

Create the power to eliminate the constraints of conventional financing and say “yes” to yourself!

My Fast Financing Formulas course covers 14 financing formulas (Say that 14 times fast) to keep the power of your business in your corner.

In this course, I cover the what, why, and when framework of how to use each formula. I also teach you creative financing combos, creative financing do’s and don’ts, and much, much more.

But, in this two-part series on Fast Financing Formulas, I am going to give away all of my secrets for two of the formulas because I want you to get those three successful deals under your belt just like I did.

I want you to be empowered in this business. Just like I mentioned in our last blog installment, How to Market to Private Money, there is more than enough money to go around and more than enough deals for us all to be successful in this industry and fulfill our “Why”.

You just need to be creative in leveraging yourself.

So, let’s get to it.

Free formula numero uno…

Subject To

Buckle up, because this is perhaps the most profitable way to purchase properties!

What is it?

When you purchase a property ‘Subject To,’ you buy a property by taking over the existing financing.

Yes, you make the payments on someone else’s mortgage. This is different than an assumable mortgage because you don’t have to qualify. (Yay!)

The terms of the note initially created by the lender stay the same, including the name the loan was purchased in.

The title transfers to you – the buyer. There is even a line on the settlement statement to show financing was taken “Subject-To.”

You become the owner of the property when the seller signs the grant deed, warranty deed or whatever state specific form is needed to transfer property.

How to Do a Subject To Real Estate Deal Step by Step

1.     Get the deed signed before a notary. Better than that, use a title company.

2.     Get the seller to sign a limited Power of Attorney and authorization to release information.

3.     Get the seller’s monthly mortgage statement and send in a change of address request so you are dealing directly with the lender.

4.     Have the seller sign a CYA disclosure (yes, that stands for exactly what you think it does) about ‘due on’ sale. (We’ll go over this in a moment, in the meantime, feel free to copy and paste the following)

I/We, _________________________________________, hereinafter referred to as the “Buyer” have been informed by _____________________________, hereinafter referred to as the “Seller”, that the Seller purchased this property, hereinafter referred to as the “premises”, located at _________________________________, subject to the indebtedness of the existing loan(s) on the premises, which loan(s) were obtained by a previous owner (an owner prior to the Seller) and which loans are still in the name of the previous owner. Buyer understands that the loan, or loans, on the home that were obtained by the previous owner contain(s) a “due on sale” clause in the deed of trust, the document that has been recorded with the county recorder which document secures payment on the promissory note (the loan) on the premises.   The due on sale clause is a paragraph in the deed of trust that indicates that the lender can “call the loan” due and immediately payable (demand payment of the loan in full or accelerate that which is due on the promissory note) upon discovering that transfer, conveyance or change of ownership in the deed has taken place. Although this seldom happens, and Seller has never actually seen such an event transpire, nonetheless such an event still could happen and it is a risk that Buyer knowingly and voluntarily assumes.

In such an unlikely event, Buyer agrees to take all reasonable steps to satisfy the loan(s), including Buyer taking steps to obtain financing and/or Buyer submitting an application to formally assume liability for said loan obligations. Buyer understands that in the event that the loan is called and the underlying debt is not paid off, the lender holding the security instruments (promissory note(s) and deed(s) of trust) could foreclose on the premises which would extinguish ALL of Buyer interest in the property, and then the purchase agreement entered into between Buyer and Seller would become unenforceable, terminated and void, and the foreclosing party could demand the Buyer vacates the premises.

In such events, Buyer agrees to release Seller from any and all damages, including but not limited to loss of Buyer’s option consideration, rent credits or any appreciation profits. Buyer agrees to hold Seller harmless for any loss of any kind whatsoever.

Dated this _________ day of ______________________, 200___.

___________________________                       ___________________________

Buyer                                                                                      Seller

Where were we? Oh, yes, last step:

5.     Get a non-owner occupied landlord's insurance policy, with you as the new first named insured. The bank/mortgage company is named, as normal, as mortgagee. The prior owner should be named as the additional insured ONLY. (Naming the prior owner as additional insured will usually keep the mortgage company happy.)

Now, I hear the question in your head…

What About the ‘Due on Sale’ Clause?

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance of the loan may be called due upon sale or transfer of ownership of the property used to secure the note.

Basically…

Whenever the title to a property changes names, this could trigger the due on sale clause.

It could.

But, look, it has never happened to me or anyone I’ve ever known with regard to credit financing.

That’s not saying it can’t happen, or it won’t. It’s a risk. Just like any business.

Subject To Real Estate Makes Money

The subject to financing option is great for a few reasons.

First, you don't have to go through that flow chart from hell above to try and qualify for conventional financing.

AND because you get paid to buy from a seller.

You make money in the spread between the mortgage payment and the lease payment you receive.

You also can create a back-end profit from the difference between what you paid for the home and what you sell it for.

Finally, you can reap tax benefits like depreciation and interest deductions because YOU are the owner!

Tips to making this money

·       Buy under market value. There will be little room to make a profit if you by over or even right at market value.

·       Sell at or above market value.

·       If the underlying mortgage is adjustable, make sure you have a plan for a potential rate change (ie refinance, sale, etc).

When to Use Subject To

So, when and why would the Subject To formula be applicable to your business? Why would someone give you the deed to their house but keep the mortgage in their name?

I have found that the two biggest reasons most sellers agree to a Subject To real estate deal is time and debt relief.

Time

When a person is transferred for a job, they don’t have a ton of time to dedicate to selling their home.

They need to get out and find a new home. Unfortunately, this is also the case in some divorces. People want, or need, to get out of a home so they can start over.

Finally, if someone has purchased their dream home, but can’t unload their old home, a Subject To sale is often in their best interest.

The U.S. Median age of housing inventory is currently 94 days. That is three months before a home is sold and another 30 to 60 days to close that loan.

If time is the most important factor to a seller experiencing a job transfer, divorce, or hoping to get into their dream home – over 120 days is just not going to cut it.

Debt Relief

Subject To allows you to offer a seller relief by helping them out of a tough situation.

Other reasons to feel great about Subject To:

·       If your seller is behind on mortgage payments and you can get the cash (or private money) together to bring the loan current, you can work with sellers in pre-foreclosure.

·       If your seller loses their job and can’t afford to wait the 100 + days to unload their home, you’re helping with a fast closing!

·       If your seller has little or no equity, you can work with them and create a win-win for both of you to help them out of their situation.

·       If your seller simply wants to move to another house, they don’t need to wait for the perfect buyer or deal with open houses and showing. They deed the home over to you and move on.

Big Rewards

Purchasing homes Subject To is a creative and rewarding way to buy investment properties. As a real estate investor, it gives you instant ownership without a lot of loans in your name.

When you first start using the ‘Subject To' formula, you may be ‘Subject To' (hehehe) coming into large amounts of money.

My advice to you is to hold off on your impulse to run out and buy the new Tesla. It’s wicked cool, but, if you want to be in this business for the long haul – reinvest your profits.

We have more formulas to explore to get you towards your Tesla goal. Don’t worry, I hear they're always on backorder.

Next up. The Self Directed IRA formula!

Until, then…

Have Fun. Create Value.

Leave a Comment:

(14) comments

JayAlexander

Hello first timer to this sight.I am curious as to what are all the documents I need at closing, for a subject to deal? Also where do I get those documents from? If I can receive a reply it would be appreciated thanks.?

Reply
    Susan Lassiter-Lyons

    Everything I mentioned is available from your closing attorney or title company except the CYA clause which is posted in its entirety above.

    Reply
Franco

Where do i find Section 2?

Reply
    Susan Lassiter-Lyons

    Just click the link at the end of the article for part two – self-directed IRA’s.

    Reply
Franco

Hi Susan, great article. So how do I market to find a potential subject-to deal?

Reply
    Susan Lassiter-Lyons

    They’re usually preforeclosures so you’re looking for mortgage late and preforeclosure lists. Try ListSource.

    Reply

Hey I’m in the middle of a subject to deal right now and I’m wondering how to go about switching the mortgage into my name. They are on automatic payments. Do I have the owners call and ask for a change of address?

Reply
    Susan Lassiter-Lyons

    Hi Jake. The mortgage won’t be “switched into your name” unless you assume it formally. The owners can request a change of address so the billing statement comes to you but I suggest having them complete a Borrower’s Certification and Authorization form which authorizes you to speak with the mortgage co on their behalf.

    Reply
Jim Gordon

When you buy this second insurance policy, do you also keep the original insurance policy in place? In other words, do you end up with two insurance policies ?

Reply
Angelo

Hello,

Free formula numero uno…

and Two … is where ?

Reply
Chuck

Great information as usual, Susan! If I missed it, I apologize, but what was the hook that was used to get the home owner’s interest opened to a “subject too?” Got any good “ice breakers”, assuming you are searching for these types of sellers?

Thanks,

Chuck

Reply
    Susan Lassiter-Lyons

    Check out the section under When to Use Subject To. Those are all the reasons why a seller would consider a sub2.

    Reply
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