Investing in residential homes, condos, apartment buildings or whatever you'd like to do within real estate, there are several creative payment methods. My favorite just happens to be SUBJECT TO, as it does not get any better. Where else can you purchase your dream home and five others, without ever tapping your own credit, assuming you have good credit and closing on all five within a matter of days. So the advantages and disadvantages of my favorite method below.
1. Speed & Time: The number one advantage to subject to deals is that they are just SO DARN FAST TO close. With a traditional home buying process you have to wait anywhere from 15-60days before you'll ever get qualified for a mortgage or hard-money loan, let alone find the contract that meets your needs and buying power. With a subject to, you are simply limited in the time that it takes you to find a motivated seller with a deal of investment.
2. No money down – In some cases of finding the best deals, sellers may often times pay you to purchase their house. That's right, its true when you hear people talk about no money down deals. The way this happens is when the market value and loan value (LTV) are reliably equal. When that happens the sellers homes are "Upside down" with little to no equity to cover the closing costs. In a typical buyers market the sellers HAVE .. let me say that again HAVE come up with closing assistance, which at a minimum should cover your area's, transfer and recordation taxes. When this happens, they pay you and you might even walk away with cash in hand, if you are a good negotiator. Now, just because you can get closing assistance for no-money down deals, if a house and area are great, you might take the risk and cover the cost. Me, never pass up free money if a seller can and is willing to assist.
3. Got bad credit – WHO CARES: With subject to deals, you get the best of both worlds, the property you want and none of the credit burden. If you've had a couple of bad marks, filed for bankruptcy, had a divorce or for whatever reason you have less the superb credit, it does not matter. Acquiring properties subject to the existing financing are excellent for investment properties or your personal residence. Now, that being said, if the cause of your credit challenges are you inability to pay on time or just plain forgettable then we advise that you go out and get financial planning assistance. That being said your credit will not stop you from acquiring an investment property.
4. Take over existing payments – If you are lucky and smart, you'll find great deals with motivated sellers that secured homes with OUTSTANDING interest rates and VERY LOW payments. Once you get those low payments and get a home under contract through closing, now you get to take over the current mortgage payments but since you are smart, you'll never pay them, as your TENANTS will pay the monthly mortgage payments for you, plus a hefty increase to generate you a POSITIVE monthly cash flow. Unless you have an aching for pain, DO NOT take over payments if you can not at a minimum get a buyer / buyer to cover the total amount, otherwise you will begin to lose money immediately.
5. Assign or not to Assign – Now, since you were smart and secured the deal, you can either purchase it yourself and play landlord to create generational wealth or you can wholesale (or some investors refer to this an option the property to another investor ) for a quick cash fee. This CASH is yours with NO SERSS attached or ownership in the property. The new investor will cover the rest, closing cost and more.
Well, like with most things in life, using the Subject To method, has a few challenges too. Here are the top 2 challenges, but I can certainly list a ton more but you do not want to spend your weekend reading this article.
1. Integrity, Honesty and Ethics – When you begin to talk to motivated sellers or buyers / investors, you'll have deal with one thing … EARNING THEIR TRUST. No matter how motivated the seller is they are not just buying your good lucks, the sellers are trusting that you will honor your word, pay the mortgage and of course buy their house. The disadvantage is not all investors are trustworthy and ruin it for the folks that are true investors and NOT out to take advantage of people. Not only that, but some of us need help and training in the honesty department.
2. Ugly mortgages – Heard of ARMS or Negative AM ??? Yikes. For some of us, we do not find out that mortgages are bad until we've spent too much time in the process. Change your process number one, but STAY AWAY from ARMS !!!