Jay Conner explains how to buy properties that are subject to the existing note.
“Who, in their right mind, would sell their house, leave the mortgage in their name, and trust you will make their payment?”
When I first heard about closing deals subject to the existing note, this was the first question that popped into my mind. This method of buying properties sounded impossible!
When I say “subject to,” I mean buying a home, or any property, subject to the existing mortgage. In short, I buy a house from a seller, the deed is transferred into my entity's name, and I agree to make the seller's mortgage payments. However, the mortgage stays in the seller's name until I sell the property to a new buyer.
There are plenty of reasons why I buy properties subject to the existing note, but who would be willing to sell me their house while still being responsible for the mortgage?
For a seller, it sounds like a big risk. Where's the guarantee that I will pay their mortgage that remains in their name?
When I first started talking to potential sellers about buying their properties “subject to,” I quickly learned that it was my motivated sellers who were willing to take me up on the offer.
Who is my Motivated Seller? After many years of buying properties “subject to,” I've learned how to review a seller's property information sheet and quickly determine if it is a possible “subject to” deal.
From my experience, the strongest candidates for “subject to” are sellers who are currently behind on their payments. Recently, I bought a house “subject to” from a seller who was four months behind on their payments. If the seller has a mortgage, I talk to them about selling subject to the existing note.
In order to buy a property “subject to,” there has to be a current mortgage in place. Obviously, sellers who own their house free and clear of any mortgages aren't going to sell “subject to.” On a free and clear house, I negotiate to buy with seller financing.
The Most Profitable Deals Buying subject to the existing note will always provide you with the most profitable deals. When you are buying “subject to,” you will be paying the current mortgage's interest rate.
So, if the interest rate on the existing mortgage is only 4%, that's a whole lot better than paying a private lender 8%.
It's also worth noting that houses you buy “subject to” are usually in good condition and need very few repairs. This is because the seller is usually still living in the home when you purchase it.
Not long ago, I went out with my acquisitions to view a property. The sellers had painted, installed new hardwood floors, and updated the bathrooms. There was almost nothing that needed to be done; it was gorgeous!
The after-repair value on that house was $170,000; the seller had already agreed to sell it for what they owed, which was $118,000. “Oh, my lands!” Talk about a $52,000 profit with no rehab needed!
Let's Talk About Attorneys When you're considering “subject to” deals, it's important to be aware that some real estate attorneys won't close a “subject to” deal. Believe it or not, a lot of real estate attorneys haven't even heard of “subject to.” In fact, on line 203 of the HUD Settlement Statement, it states, “Existing loan(s) taken subject to.” This is a completely legal method for buying properties.
The reason some attorneys refuse to do “subject to” deals is because they have an issue with the due-on-sale clause, which is included in most mortgages. This clause gives the lender the right—but not the obligation—to call the note due when ownership is transferred prior to the mortgage being paid off. Some attorneys feel ethically bound to notify the lender about the transfer of ownership.
Recently, I talked with one of my platinum coaching students who used my foreclosure system to locate a motivated seller. They found a deal ready to be purchased subject to the existing note and were under contract to purchase; however, she couldn't find a real estate attorney that would close her “subject to” deal.
I taught her how to locate a real estate investor-friendly attorney, and she now has a real estate attorney that will close “subject to” deals. Lesson learned: Establish a relationship with a real estate attorney before negotiating and getting deals under contract to purchase using “subject to.”
