BiggerPockets

Benefits Of Subject To Financing For The Homeowners

No Money No Credit Strategies (NMNCS) are a great way for new investors to get involved in real estate. While NMNCS generally do require some capital, the requirement is lower than other types of real estate and does not have to be your own money. One of the most common and profitable NMNC strategies for beginning investors is wholesaling a property, which is when you get a property under contract and assign it to another investor for an assignment fee. The problem with this philosophy is that you are only making money when you perform a transaction. If you could own property with a NMNCS, generating upfront capital, building equity, while collecting monthly cash flow, would this type of strategy help you achieve your goal of creating wealth?

Subject-to financing is a buying strategy that allows for wealth creation. It is a method for taking ownership of properties subject-to the existing financing that is already in place on the property. The benefits to the investor is that they are able to acquire properties without assuming the credit risks or investing typical down payment amounts. Plus, since the investors' credit is not being used, an investor can purchase as many homes with this strategy as they are comfortable with owning.

Different exit strategies enjoy different advantages. Purchasing a property with 35%+ equity and selling retail will reduce holding costs compared with purchasing property with hard money, thus making a fix and flip or repair quicker and easier to acquire and more profitable when sold. Utilizing a short term buy and hold strategy, such as Owner Financing or Lease Options will provide an investor with upfront money in the form of down payments, monthly cash flow, and equity on the back end when the new buyer refinances. This latter strategy is one of the most common strategies enjoyed by investors who focus on subject-to financing.

Why would any â"sane' person sell the deed to their house but leave the existing financing in place? The investor who is able to answer this question is able to have success with this strategy. Asking implication questions, or finding out what detriment will come to the seller if they don't sell quickly or have to invest their own money to sell their houses will allow the investor to show the payoffs to the Seller of this strategy. What the investor will typically find out is that Sellers are willing to trade equity for piece of mind.

Sellers that are willing to part with a property while leaving the existing financing in place are usually distressed for one reason or another (such as job loss, moving, or financial strain), have decent credit & don't want a foreclosure or short sale on affecting their credit scores, don't want to come out of pocket to pay any closing costs or fees, and place a large amount of trust in your organization. A successful investor will provide a needs-payoff solution to the aforementioned challenges while providing a credible and professional business structure to the homeowner. Succeeding in these two items will greatly increase the universe of properties that you can acquire using this strategy.
Point of Emphasis: It's important to be able to impress sellers by offering credibility, experience, and testimonials. Having a professional website, professional attire, and professional business cards can give you a much needed professional first impression.

Be aware on the types of motivated seller that you attract. If they are behind on payments, then you will want to make sure that you have access to capital to invest in the property to get to ARV. Repair should be simple carpet, touch up paint, door repair, & landscaping. Anything more may require a different type of buying & exit strategy. Instead of focusing strictly on hyper-distressed sellers you can market to MLS expired listings, For Sale By Owner (FSBO) properties, and sellers that are not interested in engaging an agent to list and sell their property.

Sellers primarily benefit from a subject-to transaction in the following ways:
1. Sale of their property without many of the fees inherent to the traditional sales process, such as Realtor fees and other closing costs. We will later see that this greatly benefits sellers that have thin equity positions where the net sale proceeds would give them "negative equity" by selling their home traditionally
2. A lack of third party financing allows the investor to purchase the house very quickly so that they can leave their problem in the past
3. For the sellers with missed payments and equity positions that make the purchase favorable to the investor a solid payment history helps to restore their FICO score over the course of the first few years the investor owns the property
4. The primary way the purchase benefits the seller is that it opens up the pool of buyers that cannot qualify for bank financing. This is especially important during the subprime aftermath where banks' underwriting standard have become increasingly stringent to correct for years of loose and reckless lending practices.

There are risks to subject to financing transactions, and it is strongly recommended that the new investor seek legal guidance on the required paperwork and risk adherence. But this strategy, if done correctly, can afford the new investor with a business that will allow upfront capital, monthly cash flow, and equity, which may outweigh several of the risks.

Comments