“Subject to” Real estate strategy

“Subject to” Real estate strategy

The idea of buying investment property without having to get a new loan is a very attractive idea. One way this occurs is that you take title to a property but leave your seller’s existing loan in place. This particular method of acquiring property is a little-known technique of buying and financing property with a “subject to” the existing mortgage strategy, a form of seller-financing.
The Benefits
There are many benefits to buying property with the “subject to” the existing mortgage technique, including:
• No Qualification Process
• Fast Closings
• No Loan Costs
• No Impact on Borrowing Power
• Seller’s Credit is Often Improved or less damaged
• Lender Losses are Minimized

No Qualification Process
When we buy property with a “subject to” the existing mortgage, we are not “asking permission” from a lender as to whether we can buy the property and qualify for a loan. Neither are we trying to formally “assume” the loan.
We are simply making alternative offers to sellers (who already went through a loan qualification process) for us to step in, take over their position, and begin making payments. In effect, we bypass the normally cumbersome loan qualification process.
Fast Closings
Because we are simply assuming the seller’s position with the loan, we are able to do quick closings. Often, all that is required for a closing on such properties is for us to do a title check, verify the loan status with the lender, and then set up an appointment with a real estate attorney (or title company) to complete the paperwork and close the deal. Typically, all these events can happen within a week.
We use this benefit in our negotiations with our sellers who may want to move out and on with their lives quickly.
No Loan Costs
Buying investment property typically requires getting new financing, which often means qualifying for a new loan. When a lender agrees to provide financing to a borrower, theses loans and closing costs can add several thousand dollars to the purchase price of the property. Such costs can include fees for appraisals, loan underwriting, attorneys, couriers, surveys, insurance, and inspections. The list of the fees to be paid for a new loan can be quite long.
Buying property with a “subject to” the existing mortgage eliminates the loan fees and closing costs because they were already paid by the seller when they originally bought the property. The only exception to this no-fee approach is that when we close with our sellers, we pay our real estate attorney a fee to do our closings.
No Impact on Borrowing Power
A common challenge for many real estate investors is the amount of financing they can qualify for as their portfolio grows. With every new investment loan, an investor’s borrowing power generally weakens.
Ultimately, many investors will encounter a time when getting new investment properties with their own borrowing power becomes very difficult.
Buying properties with a “subject to” the existing mortgage bypasses any impact on our credit reports and our borrowing power. The reason is that the loan continues to appear on the seller’s credit report until we ultimately pay off and satisfy the loan.
As such, there is not a credit limit to how many properties we can buy with a “subject to” mortgage.

Seller’s Credit is Often Improved or less damaged
Often, we buy from sellers with a troubled payment record. They frequently have loan arrearages they cannot pay. In some situations, foreclosure is imminent. When we step in to buy these properties, we pay the arrearage and reinstate the loan.
Many times we use this strategy to wholesale the property to another investor, or an end buyer. When doing so the lenders win when they are paid off in full from a potential troubled asset. The seller wins by having what could have been a foreclosure on their credit now being a loan that was paid in full. This does not always improve the sellers credit, however it can have minimize the damage already done.
Once we reinstate the loan, we begin to make regular monthly payments to the seller’s account. From the lender’s point of view, the account has “miraculously” improved. From the seller’s point of view, their troubled credit “magically” begins improving as their delinquent account and arrearage disappears and the account becomes and stays current. Over a 12-month period, having a mortgage loan that is current goes a long way to improving the seller’s credit score and borrowing power.
And as part of our negotiations, we often tell our sellers about this particular benefit. Not only do they sell their property quickly but also they get their credit scores and credit records improved because of it.
Lender Losses are Minimized
Lenders are helped by “subject to” the existing mortgage transactions. By creatively utilizing this technique, we often save properties and loans from foreclosure action.
Foreclosure action is generally a very expensive process where many parties lose. The borrower would clearly vacate the property and suffer a foreclosure record. But the lender often takes business losses by paying fees on foreclosing and managing vacant properties that have little or no equity.
Additionally, when they do finally resell the properties, they often do not fully recover the monies they originally loaned out. These costs are passed on to future loan customers.
By doing our part to “save” the properties and the accompanying loans, lenders suffer fewer losses from foreclosure action. More importantly, they continue to have a performing account with ongoing loan payments.
As Investors
We understand the concept, advantages, and process of purchasing property subject to the seller’s existing financing. Understand the goals of prescreening sellers. Identify key points in negotiating a purchase subject to existing financing. Identify points of analysis when considering the subject to deal. Understand lender motivation factors and learn how to address those factors. Know how to present offers to motivated sellers and how to gain ownership of property without qualifying for new financing and without using much, if any, of their own money. Evaluate the existing financing, the seller, and the market. Always look for a win win scenario for all parties involved.

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Christion says:

Your right Paula it is almost aways more inviting when no RE Agent involved in my opinion, simply because it is easier to negotiate one on one with the home owner. This of course does not mean that having an agent involved will kill the transaction. Real Estate agents many times do have the best interest of all parties in mind and can also be very flexible with how and when they are paid. I have even seen Agents be willing to take their commission after a period of time, or when us as an investor sells the property. You can make great alliances with proffesionals in the industry, and now more than ever is a time to work together. The key really in my opinion is being educated and knowledgable in multiple strategies. This creates more flexibility and an ability to help more people come out ahead.
Many times it will really come down to personal prefferance though. I personally am not usually looking for properties listed on the MLS because though great deals can be found it is more of a retail venue. I as an investor want to find my properties wholesale.
Thanks for the question!!

paula montrose says:

Question????When doing subject to on purchasing properties
is it unwise to use a re agent. Most listings have an agent attached to them. As i will negotiate to receive % cash back vs the typical 6% commission. To forgo the commission and get cash back. But most of the properties I see are listed w/ an agent.
How does one circumvent this situation, to make it a win win for all parties involved? Also, I holds a RE license as well.
It is so much more attractive w/o an agent. But more secure w/one.
Maybe the agent would be willing to take less commission. And we should all do well. Thank You!!!! Just thought I would ask. Paula