The 4 Strategies To Make Money
From Subject-To’s
by Jason Hanson
The author has permitted the reprinting and redistribution of this
article.
I've said it a million times and I'm going to say it again. This is a
subject-to market, and if you aren't using this method you're probably
throwing away hundreds of thousands of dollars in profits. Now, I want
to show you the four ways that you can making money from Subject-To's:
1. "Traditional" Subject-to
2. "They Pay You" Subject-to
3. "Guaranteed Money" Subject-to
4. "Wholesaling" Subject-to
Alright. Let's first begin with the way that most of you are familiar
with, the traditional subject-to. This is when you get a call from a
motivated seller, and all they want you to do is simply take over their
payments. They don't want any money, or anything else. So, if you get a
call from a seller who owes $200,000 on the house, you're just taking
over the payments on the $200,000 and the sellers will walk away (of
course you will do your due diligence and make sure the property will
cash flow, check the payment amounts, interest, rates, etc).
Next, is the "They Pay You” Subject-To. We all know that you
will
not purchase a property subject-to and take on negative cash flow. If
the payments are $1,500 a month and market rent is $1,000, then most
people are smart enough not to go negative $500 a month. Of course I
say most people, because there are a lot of idiots out there who will
take on negative cash flow. Anyway, let's pretend you got a call from a
seller and he wanted you to take over payments of $2,000 a month. You
did your due diligence and you learn that market rent is $1,800 a
month. You also know that you want to get $200 a month in positive cash
flow from every property that you buy. This means that your payment
should be no more than $1,600 a month (because you will rent it out for
the market rent of $1,800 and get your $200 in cash flow). Well, first
off, when most investors get a lead like this they immediately toss it
in the trash can and don't let their "creative juices" flow. However,
being that you're smart (you're reading this aren't you!) you know that
there's a way to make the above deal work. So, what you do is call the
seller and let them know that you can take over their mortgage
payments; however, because your company doesn't take on negative cash
flow, he will have to write you a check for $400 a month. Yes, you read
that correctly, you can create your own cash flow and have a seller
write you a check for any amount you desire.
Now, you're probably wondering about the risks of the "They Pay
You” Subject-To right? The risk is, that they won't pay you
the
amount of money they owe you every month, which is why you only do this
type of subject-to on straight rentals (you will not do this on
properties you sell via lease option). The absolute worst case scenario
is that the seller doesn't send you the $400 check every month and all
you will do is simply let the property get foreclosed
on…..by
the way, this is why the correct paperwork is so crucial. My subject-to
contract states in very clear language that if the sellers don't make
the payments to me then I will let the property go into foreclosure and
their credit will be ruined. I bet you're probably wondering if this
has ever happened to me, I know you are!
Well, one time I did this type of deal on a property in Baltimore, MD.
To make the property cash flow the sellers had to write me a check for
$300 every month. One month the money didn't come and I called the
sellers. I spoke to the wife, who was a real BI%$#^ and she basically
told me that she didn't feel like making the payments anymore. Then, I
spoke to the husband who started making excuses about how his wife got
in a car accident and some other B.S. So, the sellers tried to call my
bluff, but I immediately stopped making the mortgage payments. A few
months went buy and the sellers got a foreclosure notice in the mail
and wouldn't you know, the sellers made up the payments so that the
property didn't go into foreclosure. Remember, that's only happened to
me once and the sellers ended up paying. This is the way I see it: With
this type of deal I'm purchasing no money down and its risk free.
Because, I will make $200 a month in cash flow and if for some reason I
have to let the property go, at least I made $200 a month for several
months (plus, most people care about their credit and don’t
want
it damaged).
The above technique works, but you have to believe it yourself. When I
was doing the consulting day with a new investor, we were making calls
on leads we had. One of the leads was a potential subject-to and we
figured out that in order to make the deal work, the owner would have
to write this investor a check for $600 every month. We called the
seller on the phone, I "pitched" the idea to him and he was interested
(I actually recorded this call on video, so go to YouTube and type in
"Jason Hanson Real Estate Investing" to watch it). Now, to be realistic
the majority of the time you pitch this idea the owner will say no,
however, we know this business is simply a numbers game.
So, when the phone call was done I remember looking at this new
investor and he seemed astonished that this would
work……Remember the name of the game is "creative"
real
estate investing. The game is also finding motivated sellers and if you
don't ask someone if they will write you a check for $600 a month, then
you'll never find out if they will actually do it, plus, all they can
do is say no. By the way, in the interest of full disclosure the above
deal did not close where this investor was going to get the $600 check
every month. But, he did learn a very lucrative lesson that you can ask
people to write you a check to make a deal work, and if they're really
motivated they will say yes.
We're rockin' and rollin' onto the third type of subject-to, the
"Guaranteed Money" Subject-to. Here's how this works: Sometimes you're
going to get a call from a seller who wants you to take over their
monthly payments, however, they have a lot of equity and they want some
cash at the closing. Since you know we don't do that, here's how we
solve the problem of the seller who wants cash. Once again, let's
create a scenario: You get a call from a seller who wants you to take
over their payment, but they have $80,000 in equity and they want half.
They want their $40,000 at closing, which of course you know we would
never do (that would be the worst "no money" down deal in the world).
When you have someone who wants cash, you will go into your script of
"Mr. Seller, we will be able to give you your $40,000 within five
years. This is because our company specializes in helping people with
less than perfect credit……(you know the rest of
the
script so I'm not typing it, and if you don't, go to YouTube and watch
the videos). Anyway, once the seller agrees to receive their $40,000 in
five years, you will simply give them a note that states within five
years you owe them $40,000. As you can see, you created another
no-money down subject-to and did not have to come out of pocket at all.
(Because when your tenant buyer buys the property and cashes you out,
you will have $80,000. You keep your half and give the other half to
the seller).
Lastly, there is wholesaling subject-to. This is where you play the
middle man as you do with regular wholesaling. You have a seller who
wants someone to take over their payments. For one reason or another
you don't want to own the house, so you find a retail buyer to take
over the payments. You will run ads in the paper that say "Desperate
Seller, Take Over My Payments, $10,000 moves you in!" The $10,000 will
be your wholesaling fee and the buyer will take over the seller's
payments. The biggest risk with wholesaling subject-to is lack of
proper paperwork. You MUST have paperwork which states you're just a
middleman and that you have no control over whether the third party
that you wholesale to will make the monthly mortgage payments. Of
course, you also tell the seller that you're wholesaling the property
and you cannot make any guarantees.
Wow, that's a lot of typing and one long article. This is the type of
article that I would make copies of and keep near your desk when you're
evaluating properties so that money isn't slipping through the cracks.
Also, go back to your old leads and see if you can make any potential
subject-to deals out of them. And now you should make a lot more money
this year, because you’re now armed with 4 more money making
strategies!
Jason R. Hanson is the founder of National Real Estate Investor Month,
author of “How to Build a Real Estate Empire” and
mentor to
students all across America. To get a FREE copy of Jason’s
Special Report “The Insider’s Guide To Buying Your
First
Investment Property in 83 Days or Less!” visit
http://www.PrimoCoach.com or call 800-865-1702.
For more articles on real estate investor training, visit my website at
http://www.dennisjhenson.com.
Also visit http://www.turbo-bidder.com
for great real estate investor tools.
http://www.biggerpockets.com/articles/