By Glen Andrews
The author has permitted the reprinting and redistribution of this article.
I want to walk through Subject To investing just to make sure everyone understands that this is your best strategy for making money investing in real estate in today’s market.
First off let me explain exactly what is Subject To. Subject To is taking over the existing loan without paying off the underlying loan balance. When we take over loans subject to the existing loan, the loan stays in place and the seller stays on title until we’re able to sell it sometime in the near future.
Most new investors will ask me, how can you take over an existing loan and leave it in the sellers name when all loans today have a due on sale clause
I get asked all the time…Will the lender call the loan due Well, my answer is they certainly can. Will the lender call the loan due, not likely as long as the payments are being made. The banks don’t want houses they want payments and as long as they have a performing asset they are not going to call the loan due in order to have a non performing asset.
Just to give you an example of this. I was doing a short sale on a property here in Orlando a few years back. I only had 2 weeks to get this short sale completed before the first lien was taking the property to the court house steps for auction.
The second lien holder had no problem discounting their inferior lien. I received all the paperwork to bring the first current. I sent in the paperwork to the first lien holder and it came back to me in the mail because I forgot to write the loan number on the check.
Needless to say the property went to the courthouse steps to be auctioned. Fortunately nobody bid on this particular property, so the bank called me back to see if I was still interested. I told the bank that I was but I wasn’t willing to pay cash. I asked them if they would be willing to let me take over the existing loan and bring it current.
I thought for sure they’d say NO but she told me she would have to check with her supervisor first. She called back the next day and said yes, but they needed the payment within 5 days. I said Great send me a reinstatement figure. I then called the second and paid them off and sent the check to the first to take-over the existing loan with their permission.
I had a property worth $235,000.00 dollars with an existing first lien of $119,000.00 and a second lien worth $93,000.00. I negotiated the second down to $5,000.00 for a full pay off. I had well over $100,000.00 dollars in equity. I’m telling you the story because banks don’t want property they want payments and the bank proved it when they agreed to let me take it over.
You should always make sure you’re never putting yourself in a position to lose. If the lender decided to say NO to my offer what’s the worst that could have happened I would have lost nothing but a really good deal and a little bit of pride because I screwed it up by not having the loan number on the check.
Let’s get into the paperwork needed to accomplish a Subject To.
Number one. You need a motivated seller. They must need to sell, and have a reason why, maybe their facing foreclosure, their being relocated, the house is in bad condition, they’re getting divorced or they can’t afford the payments any longer. These are folks who need to sell, not want to sell. You should know the difference.
Number two. You must get a purchase and sale agreement signed by the sellers and an authorization to release lending information. You’re also going to need the seller’s last statement from the lender so you can call and get information on the loan. Whether it’s to bring the loan current and make sure the loan doesn’t have a pre-payment penalty. You also need to see if it’s a fixed or adjustable rate mortgage and what the length of the loan… 15 years, 20 years or a 30 year loan. You’ll also want to know if the loan includes taxes and insurance.
Number three. Call the bank and tell them that you are a third party trying to get information on a loan. Ask them where you can fax the authorization to release lending information and how long before the authorization is in the system. It’s usually within 72 hours. Call back and get the information you need. If the property is in foreclosure you’re going to have to get the phone # to the loss mitigation dept and refax the authorization to them specifically.
You or your attorney must also get the sellers to sign these basic contract forms.
Disclosure letter – this document lets everyone know that the seller is completely aware of the due on sale clause and that you’re not making any promises.
Limited Power of Attorney – this gives you the right to sell the property or do anything you need to do specifically with this property only.
Escrow letter – If the seller has their insurance escrowed the lender will apply it to the loan balance when you sell the property.
Change of address – This lets the lender know where to send the payments.
Assignment of Beneficial Interest – Seller signs this giving you their total interest in the land trust. You are now the owners of the property.
Trustee’s Deed – places the property into a land trust.
Notice to Lender – lets the lender know that the property has been put into a land trust and states the law that allows it along with new instructions on insurance and payments.
Getting these forms signed places the property into a Land Trust. Let me explain.
When the sellers sign a Trustee’s Deed, that document is placing the property into a Land Trust, which gets recorded into the courthouse records. Then the Assignment of Beneficial Interest gets signed by the seller giving you all interest in the property that you’ve taken subject to.
If anyone was to look up this property in the court house records or online they would still see the original owner on title. They’ll never see who the real owner is without a court order. Now, if someone does a title search on the property they will know that the property is in a trust but they won’t know who holds the interest in the Trust until you sell the property. That’s the power of the Land Trust. You should never buy a property without using a Land Trust.
Next you’ll want to make sure you fill out the Declaration of Trust. This has nothing to do with the seller. The Declaration of Trust explains who the Trustee is and who are the individuals who own the interest in the trust and how much interest each individual ones. This document never gets recorded and no one but the Trustee and the interest holders get to see this document.
Now you need to put insurance on the property. If the sellers insurance is escrowed you need to have the seller cancel the insurance after you have put a new policy in place. The insurance policy should read as follows.
Insured… 1324 Greensboro Road Land Trust.
Do not let your insurance agent put your name on the insurance policy as the insured. If you have a problem with your insurance agent tell them that you’re insuring the trust. Make sure you send the “notice to lender” explaining that the property was put into a land trust and exactly where you want the new payments to go. It’s usually your address so you can make the payments on the property until you sell it.
All properties are allowed by law to be placed into a Land Trust. The law is the Garn St. Germains act of 1982 which allows any homeowner to place their property into a Land Trust for estate planning purposes. If you’re refinancing a property that’s in a Land Trust you are in most cases going to have to remove it from the Land Trust and then put it back in, its no big deal it’s only one piece of paper to be filed and your attorney will do it for you.
There you have the basics of a Subject To. I can spend one full day teaching every aspect of the Subject To but if you let your attorney do all the paperwork then you really don’t need to know much more. If you’re doing these on your own then you’ll need to get familiar with all the documents it’s not hard you only need to do 3-4 before you get the hang of it. Make sure when you’re dealing with your attorney, that you send them the paperwork that you want filled out and they will do it for you. Most attorney’s will not have all this paperwork readily available. You will need to e-mail the documents to your attorney or title company and let them know you want the seller to sign these particular papers at closing, they’ll make it happen for you.
Now, I want to go over why you must never pay cash unless the deal is so good that you can’t pass it up. If you’re going to go down and get loans from a bank you’re going to need to put at least 10% – 20% down on an investment property. Their will be no more 100% financing the banks want you to have some skin in the game.
When you take over properties Subject To, you can get in with little money down. And if you’re doing it right it won’t be your money. You should always be looking for private lenders. The worst number as I’ve said before is the number one. If you only have one way to market, one way to buy property or one funding source your business is built on a poor foundation and it’s only time before it comes crashing down.
If you come across a property that has little equity but the payments are low enough to make at least $100.00 dollars net cash flow then just do a Lease Option on the property with a right to sub-lease so you’re at little risk. I see to many investors trying to find the perfect deal.
Let me share this secret with you. “The perfect deal doesn’t exist. You should be educated in the 5 profit centers in real estate investing and you should be able to put together offers that solve the seller’s situation. Every time a deal comes across your desk you should automatically say to yourself… can I wholesale it, retail it, take over the payments, lease option or option it.
If you’re sitting around waiting for the perfect deal to fall in your lap you mine as well go down to your local grocery store and buy all the lottery tickets you can because the odds are very similar. I see investors all the time sitting around waiting for something to happen.
I can almost guarantee them something will happen, It’s called bankruptcy. You need to get off your bum and make something happen nobody is going to hand you anything and remember this… if it is FREE; it’s usually worth what you paid for it…NOTHING!
Success is never cheap or easy let alone FREE. If it were free everyone would be making 7 figure incomes. I’ve always said… look at what everyone else is doing and do the complete opposite. Why you might ask because we know for a fact that the top earners in our country are made up of only 5% and the rest are made up of 95% so doesn’t it make sense to look around to see what everyone else is doing and do something different. If you do you’ll soon be in the top 5%.
The 95% think because they made it through high school or college that their education is over while the 5% make it a daily habit of reading and educating themselves in their chosen field. I just read a staggering statistic last week. 67% of Americans do not read one book per year. So, It’s not hard to figure out how to get into the 5% if you so choose to. I personally read more than 100 books per year and I can say emphatically that it’s changed my life forever. 13 years ago I was the 95% who thought learning was over, boy was I an idiot
I just want to touch on lead flow for a minute because I know that this was a problem for me when I first started. If you’re marketing your business properly you should at least have 1-3 leads coming in each day. If you don’t sooner or later you’re going to try to make chicken shit into chicken salad and I can guarantee you that you won’t like it. So keep marketing because your leads are your life line to success.
Glen Andrews – The #1 Real Estate Investing and Marketing Coach –
If you would like to take advantage of the market and learn how to invest in real estate and you are local to the Dallas Fort Worth area, I know a really great teacher and mentor here in Arlington Texas. Please take a look at his web site: DennisJHenson.com, Dennis has a great Mentoring and training program, I know because I am one of his former students. I learned a lot from his one on one teaching technique. – Michael Harman 817-457-7572 email@example.com