"Subject To" Real Estate Deals Explained
"Subject To" financing actually can be a win-win situation for
both the seller and the buyer/investor if both parties
understand their obligations to one another. The seller usually
gets to sell his/her property at the asking price which was
originally sought, and the buyer/investor usually gets the
property with very little money down, if any, while not having
to qualify for any bank loans.
We know, that traditional real estate investing is mainly about
buying low and selling high, and making a profit from that
difference, usually over time. There's absolutely no secret to
that. While doing it this way, of course, you would incur all
the paperwork and everything else that goes along with buying
and selling a home like paying all the transaction fees that are
involved like commissions, closing costs, title, recording fees
and of course your time. On an average, the whole process
usually takes a month and a half up to six months depending on
the situation.
Creative financing, or "other than" traditional and/or
conventional real estate investing, is basically working out an
agreement that is fair both the seller and the buyer, without
using banks or mortgage brokers. By incorporating this type of
financing, the sellers can sell their property for the price
they want, and in a timely fashion. The buyer/investor can
create an environment for him/her to profit in some manner over
a period of time.
By leaving out the usual suspects like title companies, real
estate agents and loan officers, both parties stand to make the
transaction more profitable for the buyer/investor and more cost
effective for the sellers. Specifically this can be real
profitable for the real estate investor because in any type of
investing, and especially in real estate, it's about leverage.
The leverage is what makes creative financing a powerful,
profit-making tool for those looking to start a real estate
investing business. The leverage is usually represented by how
much money you put into a certain investment, and how much you
make from that amount over time. "Subject To" deals make your
leverage extremely high, since most of the time you place a
small amount of cash, for usually a much lager return.
Let's go over a sample situation which would create an ideal
environment for a "Subject To" agreement.
Debbie and Joe Blume bought their house five years ago for a
$100,000 dollars. After 5 years, they now owe about $95,000
dollars, while their house is appraised for $160,000 dollars.
Both Debbie and Joe have accumulated a credit card debt of about
$20,000 dollars since that time, and of course, the interest on
that debt is much larger than they really care to have.
Joe and Debbie take out a second mortgage to pay off their
credit card debt, take a vacation and buy a new car. With their
second mortgage, they do all those things and have about $10,000
leftover, after everything is done. After 7 short months, most
of that $10,000 is gone also.
Shortly after this, Joe receives an offer within his company for
a higher paying position, but in a different State. Joe and
Debbie talk it over, and decide to take the offer and move out
of State. Of course, deciding to do that, they must now sell
their beautiful home.
Like so many of us, when we look to sell our house, we think
logically and talk to a real estate agent. The agent informs
them that there is little to no equity left in the house, and
tells the Blume's that they will have to pay the agent's
commissions out of pocket. Of course, Joe and Debbie can't do
that, because they ran out of money and are basically living
paycheck to paycheck until the new job starts.
Joe starts to worry a bit, because he needs to get to his new
job out of State, within 14 days, and Joe and Debbie would like
to spend a few days off together before going to his new job.
Joe starts to think and remembers a "We Buy Houses" sign down
the street from their home and runs down and calls the number on
his cell phone. After talking with the investor, Joe finds out
that the investor isn't will to pay more than $120,000 for the
house. Hearing that, Joe is mad and upset that such a person can
come in with such a low and insulting offer. Besides Joe
couldn't do that deal anyway because the second mortgage they
took out last year, places their debt just about what the house
is worth.
Getting worried and running out of time, Joe places an ad in the
local newspaper advertising the house as a "For Sale By Owner".
Mostly everyone is trying to low ball him except for one guy who
said "he will offer the asking price, so long as he can see the
place first". Feeling excited and curious at the same time, Joe
invites the man over.
A couple of hours later, Brad comes over and tells Joe that he
is the one who called about the house. Brad tells Joe to explain
to him a little about the house and his situation.
Joe spills his guts and describes his dilemma to Brad. After Joe
finishes his story about his situation, Brad tells Joe that he
thinks he can still offer the asking price and if Joe was still
interested in selling?
But before they start agreeing any further, Brad says, that as
an investor, that his primary motivation to make a profit on the
house. Joe and Debbie understand that, so long as their asking
price is met and the house is sold quickly.
Brad continues and tells both Joe and Debbie that because of his
need to make a profit, he needs to offer an agreement which will
satisfy both their needs. Brad continues and says "That offer is
what's called a Subject To" offer. Of course bewildered and
confused, Debbie and Joe ask what kind of program is that. Brad
simply states, that it's a program that suspends both their
money for the house and his profit on the house for 2 years,
while Brad takes over the payments. Not fully understanding, Joe
continues to listen to Brad's offer.
Here's what it entails:
>keep the current mortgage in place for 2 years, at which time
the house will be sold, and Joe's originally asking price will
be met, plus 5% of whatever profit is made by Brad
>escrow account is setup and paid by Brad to ensure full
integrity of his contractual agreement with Joe and Debbie
>property is claimed over to Brad which obligates Brad to
continue making the existing payments to the escrow account. The
deed will stay in the attorney's presence until the deal is
fully obligated by Brad in 2 years
>relieves Joe and Debbie of the monthly debt for the mortgage
payment so they can move on with their life
>Brad offers to pay closing cost and 2 months of mortgage
payments to the escrow account to solidify his offer and his
intentions to make good on the contract
After discussing the deal with each other and realizing that
their options and time are running low, both Joe and Debbie
agree with Brad over the details and sign over the deed to Brad
via the attorney.
Brad then quickly rents out the house to cover the mortgage
payments and manages the house as a rental.
Two years later, Brad sells the house for $210,000 and pays
$160,000 dollars to Joe and Debbie's mortgage company, plus
sends Joe and Debbie a check for %5 of the $50,000 dollar
profits, which is $2,500. Everybody wins!