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Buying Properties “Subject To”
REI ETUTOR
Defining “Subject To”
 What does it mean when you buy a property “Subject To”?
 Various meanings: “Subject to” an inspection; “Subject to” financing
approval; subject to etc.
 We are interested in buying properties “subject to” existing financing.
 What happens to the existing mortgage?
 The existing mortgage remains unchanged.
 The title is transferred to the buyer’s name.
 The loan remains in the seller’s name.
 Do you have to file any documents with the mortgage
company? Do you have to be approved to takeover the
existing mortgage?

No. You are buying the property “subject to” not assuming the
mortgage.
REI eTutor
Due-On-Sale Clause
 What is the Due-On-Sale clause?

A clause that states the mortgage balance must be paid in full upon
the conveyance of ownership.
 Is this clause enforced?



Rarely. We have never seen the clause enforced or heard of it ever
being enforced to date.
Mortgage companies would be foolish to call a performing mortgage
due simply because of a change in ownership.
For FHA insured loans, the lender must receive HUD approval to
foreclosure on the property and enforce the due-on-sale clause
 Is “Subject To” buying legal?

Yes! The due-on-sale clause is not a law.
REI eTutor
Contract Tips
 Always have your sales contract reviewed by an
attorney.


Trying to keep your expenses down? Go to your local office
supply store and see if they have any local real estate contracts
for use.
Can also contact a local realtor for a “sample” sales contract.
 Make sure the contract you use has a “subject to”
option for financing.

If this option is not available, write “subject to existing
financing” in “other” section of contract.
REI eTutor
Contract Tips
 Spell out the existing mortgage terms in the contract.

If no space in the main portion of the contract include in an
addendum.
 Example:

The buyer is purchasing the property subject to the existing financing
with monthly payments of $1,064.37 which includes taxes and
insurance. The mortgage is a 30 year mortgage with 23 years
remaining and a current balance of $114,846.
 Include a full disclosure in the contract explaining how
the property is being purchased and the “due-on-sale”
clause.
REI eTutor
Potential Deals
Are All Properties Potentially “Subject To” Deals
No! There are certain things a buyer should look for:
 Always examine the mortgage documents


Original loan term and number of years remaining
Interest Rate


Adjustable or Fixed
Monthly Payment Amount
Does the mortgage payment include taxes and insurance?
 Is there PMI?

 Equity

Ideal is for the mortgage balance to be 75% to 80% below market
value
REI eTutor
Potential Deals
 Condition of the property?
 Does the property need immediate repairs?


Possible future repairs?


Cosmetic, Roof, A/C, Structural
Kitchen & Bath Updates, Flooring, Roof, Exterior
Code enforcement issues?

Overgrown landscaping, illegal additions, electrical meters
 Neighborhood
 Any proposed zoning changes?
 Number of vacant houses in the neighborhood.
 Overall curb appeal
REI eTutor
Exit Strategy
 What is your exit strategy?

Fix (if needed) and Flip
Repairs Needed
 Holding Time
 Selling Costs


Lease Purchase
Cash Flow
 Appreciation Rate


Buy and Hold
Cash Flow
 Vacancy Rate
 Replacement Reserves

 Always know your exit strategy before making an offer.
REI eTutor
Psychology of the Seller
Why Would Someone Sell a Property “Subject To”?
 As an investor you are offering an immediate solution for
the seller’s problem.
 The average person values their credit rating.
Motivation attributable to:
 Loss of a job
 Increase in cost of living
 Immediate property expenses (repairs, updates, etc.)
 Mortgage balance is higher than the house’s value
 Little to no equity
REI eTutor
“Subject To” Example
Example:
Fact Pattern
 A mother passes away and leaves the house to her
son.
 The son has two options, keep the house or sell it.
 Son decides it is easier to sell the house than keep
the house as a rental property.

Does not want to be a landlord managing repairs and chasing
tenants for rent money.
REI eTutor
“Subject To” Example
 What is his motivation to sell the house “subject to”?


Does not want to spend the next 3 to 6 months trying to sell the
house retail on the MLS.
Does not have the extra money available to pay the utilities,
mortgage, and any repairs that arise while the house is being
marketed.
 What about any equity in the house?

Seller is willing to sacrifice profit for the immediate removal of
responsibility.
Negotiation Tip: Remind the seller of the 6%
commission they would lose plus holding costs if they sell
the home on the MLS.
REI eTutor
“Subject To” Example
Why would an investor be interested in this property?
In this example:
 Property does not need any immediate repairs.
 Solid rental market with a limited supply.

Positive cash flow estimated at $300 to $500 per month.
 Market is appreciating
REI eTutor
“Subject To” Example
Investor’s Exit Strategy
 Increasing values + Positive Cash Flow = Lease
Option Opportunity!
REI eTutor
“Subject To” Example
Deal Specifics
 Investor agreed to purchaser the property “subject
to” the existing financing with the mortgage being
paid off in five years or less.
 Property marketed to potential buyers as a 2 year
lease-purchase with $6,000 nonrefundable down
and the tenant responsible for all repairs less than
$500.
 Lease-purchase sales price advertised as 5% below
market value.
REI eTutor
“Subject To” Example
Deal Specifics Continued
 Profit is the positive monthly cash flow and the
spread between the sales price and the mortgage
balance at the time of sale.
 Investor looks like a hero!
 Mortgage is paid off 3 years earlier than contractual
agreement.
REI eTutor
“Subject To” Example
What if the lease-option buyer does not qualify?
 $6,000 nonrefundable deposit = Profit
 3 years left on original sales contract
 Advertise for new 2 year lease-option buyer
Worst Case Scenario
 If close to 5 year mark with no lease-option buyer
then market to retail buyers.
 Price reasonably or at a discount to sell in 90 days or
less.
REI eTutor
Money Making Secret Revealed
Interested in learning how investors are continuing to
buy properties “subject to” in a declining market?
Want to know how to work with homeowners who
have zero equity or are even upside down?
Despite what others may say, you can make Large
Profits buying properties such as this that no one else
wants.
REI eTutor
Money Making Secret Revealed
How is this possible?
 Think long term – Buy and Hold
 Focus on cash flows, not on current market
value/mortgage balance
REI eTutor
Money Making Secret Revealed
Example:
 Homeowner has a house worth $50,000
 Mortgage balance is $65,000
 Mortgage payment, including taxes and insurance is
$600 a month.
Most investors would walk away from this property
Why?
 No equity – Upside down $15,000
REI eTutor
Money Making Secret Revealed
Additional Research = Potential Profit
 Homeowner is 8 years into a 30 year mortgage

Based on amortization schedule more money is paid towards
the principal than interest.
 Comparable rental rates are $850 to $950 per
month, tenant pays utilities.

Annual net cash flow, not including reserves is $3,000 to
$4,200
 Taxes are stable
 Property insurance rates have been decreasing
slightly.
REI eTutor
Money Making Secret Revealed
Exit Strategy – Buy and Hold
Why?
 You purchased a rental property with positive cash
flow, put no money down, and did not have to qualify
for financing.
 Each month you are closer to a larger profit


Mortgage balance decreases
Another month of positive cash flows
 Real estate is cyclical
REI eTutor
Conclusion
REMEMBER
Every Offer Does Not Result In A Deal But Every
Deal Is The Result Of An Offer
REI eTutor
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