There are many ways to buy property. In the almost 3 years that I have been investing, I have bought with cash, bank loans, via sandwich lease options and my personal favorite, “Subject-To”.
In my opinion, subject-to is the easiest, fastest, cheapest, least complicated way to acquire property, although contrary to what some will tell you, it is not without risk. Although in a lot of cases you CAN buy without having cash, I would not recommend doing so without cash or access to it. Agreeing to make payments on someone's loan is a huge responsibility, and I think everyone that utilizes this way of buying should look at each loan as if he himself had personally signed the mortgage.
Below are a few of the questions I have been asked in the past about this method of buying property. I hope these questions and answers help you in understanding this method.
What is buying a house “Subject-To”?
When you buy a property “subject-to”, you are purchasing it subject to the existing financing. Simply, this means that the loan already on the property stays there without any formal assumption on your part. The owner deeds the property to you, and you take the payment book and start sending in the payments just as the former owner did. Simple, huh?
The seller deeds you the property and remains liable for the debt? Why would any seller agree to that?
There are as many reasons as there are houses. In the 2 1/2 years that I have been a full time investor, I have had over 60 houses deeded to me from sellers in a wide variety of situations.
There was the seller with perfect credit who was being downsized and wanted to stay, as he put it, “ahead of the 8 ball”. He deeded me a beautiful 3/2 2 story, only 7 years old with over 25k in equity. He just needed a fast sale.
There was the lady who deeded me her house for the loan balance of 14k. She had owned the house for 25 years and her mother had recently died and left her another house free and clear. Although the house she deeded me needed 10k in work, it was still worth 70k or so. When I asked what she wanted for it, she said she just wanted to be rid of it. I was happy I could assist her.
There have been many sellers who have deeded me properties days and even hours away from the auction block, some with substantial equity, some with little equity but 6% loans.
Not all sellers who deed you their property are “unsophisticated” or “down and out”. Some just realize that they have a problem that needs an immediate solution. You just need to know how to provide it.
Isn't buying this way illegal? What about the “due on sale” clause?
There is absolutely NOTHING illegal, immoral or unethical about buying property subject to. Banks began using “due on sale” clauses in their mortgages in the 80's when interest rates rose significantly and homebuyers were assuming lower rate mortgages instead of obtaining the higher rate, new loans. The due on sale clause gives banks the right, at their option, to call the loan due upon transfer of title or beneficial interest in the property with a few exceptions such as transferring title into a land trust for estate planning purposes. With today's interest rates, the likelihood of any bank calling a performing loan due would be in my opinion miniscule.
I heard that if I buy this way, I am not liable for the loan. If I can't make the payments, I can just give the house back to the seller. Is this true?
Sorry, but I don't go along with that boloney some gurus will tell you about how you should “not make any promises” to your sellers.
In my opinion, from a moral standpoint, you are totally responsible for this loan once the paperwork is signed. A seller needed your help and you offered him a solution. He trusted you and now it is up to you to keep your word and do what you have to keep that loan in good standing.
From a legal standpoint, you might be responsible. I have heard of a couple of lawsuits in the past few months regarding investors who failed to make payments on loans they had taken over with this method.
My best advice would be, don't do the deal if you can't follow through.
I have heard “Subject-To” is a good way to get started without cash or credit. Would you recommend this?
Absolutely not. Although it is touted by some investors as a good “no money down” way to buy, I recommend having at least 3 months reserves to cover payments until you can either sell this property or get a tenant/buyer in it. What happens if you can't get it rented quick enough? What happens if your tenant doesn't pay and you have to evict? Things like this happen (ask me how I know) and you have to be ready.
There is also the DOS to think about. What would happen if the bank DID call it due? Granted, the chance is small, but that has to be a consideration. What would you do? Could you refinance it? Do you know another investor who had good credit who would partner with you?
Subject to is a great way to buy property. It is cheap (no closing costs to pay), fast, (no qualifying with the bank), easy, (you can close on a kitchen table) but it is not without risk.
Learn to use this method properly and it will be very good to your balance sheet.