How NOT To Lose Money On Sub-2 Deals

One of my partners and I are closing a subject-to this week and I thought I’d quickly show you how I make my subject-to deals almost risk free.

First off, subject – to’s are my favorite investing method. I can think of few better things in life than being able to take over someone else’s loan and buy a house using none of your own credit.

But let me get back to making this almost risk free: It starts out by properly evaluating the deal. You need to run the numbers to make sure the property will cash flow. If the seller’s mortgage payment is $2,100 a month and the market rent is only $1,500 a month then you obviously won’t get positive cash flow. Unfortunately, I come across a lot of deals like this these days and you just have to realize this business is a numbers game and most leads will not pan out.

Next, you want to use an authorization to release and check out the person’s mortgage.

If the seller tells you they owe $325,000 on the house and then you verify this amount with the mortgage company and it turns out they owe $425,000 then you won’t want to do this deal. I’ve had this type of thing happen to me quite a few times where sellers “accidentally” forgot their balance.

While you’re verifying the mortgage you want to check out the interest rate too. The best thing you can see is a 30-year fixed because it’s not going anywhere. But you need to be very careful that you’re not taking over a loan payment of $700 a month and then have it jump to $1,100 a month because it was on a 3-year ARM.

However, even if the seller does have an arm, there is a way around this. I have a clause in my contract that says the seller pays any dollar amount above the current mortgage payment until I sell the property. That way I don’t have to worry if I’ve made a mistake and overlooked a risky type of mortgage.

The last way to eliminate risk…

Now, the final way you can eliminate risk is by getting the longest amount of time before you have to pay off the seller’s mortgage. Ideally, you just want the contract to be open-ended and say that you’ll pay off the loan when it sells whether it be one year from now or 20 years.

But on this particular property my partner and I are currently working on, the seller would not go for that. Instead he agreed to a 10-year time frame before we have to pay off the loan in his name. I’ll certainly take that amount of time because it gives me awhile to re-sell the house or refinance depending on what we want to do with it.

In short, if you make sure a property cash flows, you verify mortgage amounts and interest rates and you get 10 years or longer to pay off a loan you’ll make a lot of money off sub-2’s with very few problems.