Real Estate Investing Subject To
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
-
www.realestateinvestingeducation.info
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
mchfun.business@gmail.com
http://www.biggerpockets.com/articles/