There are two things I love in life, real estate investing and the great outdoors. This week I’ll be in North Carolina doing some hiking in Asheville and then later in the week I’m heading to Charlotte. Hopefully as you’re reading this I’m deep in the mountains and maybe I’ve found a swimming hole or two (or maybe I’ll just disappear into the woods forever and live off the grid with the one member of my cult…yes, I’m still the only member of Jason’s cult…there was one guy who offered to join my cult if I’d murder his wife, but I decided to pass since our legal system frowns upon that type of behavior).

Make Sure You’re Using a Contract Specific to Subject-To

Anyways, recently I was doing consulting for someone who needed help with her first subject-to deal. She faxed over the contract she was going to use and as usual, it was a standard contract that could have come from Office Depot. Repeat after me: You need a specific contract for your subject-to deals. The best way to get this contact is to use a contract from one of the courses you’ve purchased. Then take that contract to your lawyer and have them look it over and improve it (and if you don’t have a lawyer, start treating this business seriously and get one). This will save you a lot of money because you won’t have to start from scratch and your lawyer will have a template to work from. So, as I promised last week here are some of the clauses and information from the contract I use (first, remember I’m not a lawyer, seek competent legal advice, these are just the clauses that I use, yadda, yadda, yadda).

• A check in the amount of: Ten-Dollars ($10.00) shall be deposited into the Escrow Account of the Attorney for the Buyer, the receipt of which will be acknowledged by the Attorney for the Buyer (”The Deposit”)………alright, that clause is not sub-2 specific, however it should be in every contract you use. There is no need to put more than $10 because we are working only with motivated sellers.
• This property is being purchased “Subject To” the existing First Mortgage- currently owned or collected by___________________……………list the name of the sellers mortgage company
• The Seller represents that the principal balance of the First Mortgage as of date of settlement shall be no more than _________________________ Dollars ($______)……..you will verify this amount using an authorization to release information.
• This property is being purchased “Subject To” the existing Second Mortgage- currently owned or collected by_______________……….list the name of the second mortgage company
• The Seller represents that the principal balance of the Second Mortgage as of date of settlement shall be no more than _________________________ Dollars ($______)……once again, you’ll verify this amount by calling the bank
• In addition to purchasing the property subject to the First and Second Mortgage, Buyer shall pay the balance of the Purchase Price amounting to _____________________________ Dollars ($________) within 5 years of date of settlement. Seller will receive approximately $___________ dollars in cash or certified funds, on or before ___________________200___……..You only use this clause if you are giving the sellers money in addition to taking over their mortgage. For example, I never put money down on a subject-to. If the seller’s want money, I tell them I will give it to them usually in 5-10 years (and when my tenant/buyers purchase the property, then the seller’s get their cash).
• The purchase price of this property is strictly predicated and contingent on the Buyer paying a total of no more than __________________________ Dollars, ($_______) for the property. Should there be any additional liens, mortgages, and/or judgments existing on the property as of the time of settlement, it shall be the responsibility of the seller to pay these amounts……just another CYA clause
• There will be no cash due to seller at closing…..I never put any money down, if the seller’s have a lot of equity in the property they will get it in 5-10 years.
• Buyer is talking over seller’s mortgage payments amounting to $________ Dollars a month. Buyer is only responsible for this amount for the first 5 years after settlement. If interest rates increase during the first 5 years, seller is required to cover any amount over the current monthly payment of $___________ a month. Should the interest rate increase on property, seller will immediately be notified in writing and will be required to cover the difference. If seller does not cover any increase above $__________ a month, then buyer has the option to stop making the mortgage payments and the property may be foreclosed on and the sellers credit may be severely damaged……..In case you took over an ARM that adjusts, you don’t want negative cash flow, so you make the seller’s responsible for the difference.
• Seller will allow Purchaser to place a sign on the property prior to closing for prospective tenants or Purchasers. Purchaser may advertise or market said property in any means until settlement. This includes public auctions or any other means of advertisement……this clause should be in every one of your contracts
• Purchaser is purchasing Property with the intent to rent, lease, trade or sell Property for a profit…..I always give the seller 100% full disclosure that I’m an investor and I plan to make money on the property.
• With regard to the existing mortgage(s), if Buyer fails to make any payment on any such mortgage when such payment is due, and such failure continues for more than 30 days after the due date, then Seller shall have the right to require Buyer to convey Property back to the Seller upon written request. At settlement, the Parties shall execute and deliver to the settlement agent documents and funds sufficient to re-convey the Property to the Seller, together with an appropriate escrow agreement………..This is one of the most IMPORTANT clauses in my subject-to contract. This gives the seller’s “comfort” that in case you don’t make their mortgage payments, they can easily get the house back.

There you have it. Once again, talk to your lawyer before you use any of these clauses. And, get off your butt and start making a killing in this market from subject-to’s like I am!

Photo Credit: Linville Falls, Blue Ridge Mountains, NC by eseering

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Tags: investing subject-to, real estate, real estate investing, subject to

I screwed myself at the grocery store again. I bought 24 cans of Spaghettio’s (no, I don’t care if that’s the correct spelling) because they were on sale two for one. Well, I finally ate a can yesterday and it was terrible. As in, I didn’t even eat it all and I will eat almost anything. I’m not a picky guy at all, but it tasted like cardboard and dead rat. So now I’m stuck with 23 cans of Spaghettio’s. (Would I be a bad person if I donated them to the homeless? I think if I was homeless I would be motivated enough for food, to eat dead rat, cardboard Spaghettio’s…there’s only one way to find out).

Anyway, before I do my good deed for the week and poison the homeless, let’s talk about this excellent market we’re in. Because, as John D. Rockefeller said, “Buy when the blood is running in the streets.” Well, as we all know opportunity is KNOCKING loud and clear for us real estate investors. For people who have been in this game a while (meaning around five years) you remember the hot market when people had 16 contracts on a house by noon. In this market, it’s like shooting fish in a barrel. I think this market is actually making me lazy because it’s so easy to find motivated sellers and deals.

So how do you clean up right now?

As a good friend of mine says, “You can’t be a one trick pony.” You need to wholesale to get cash now. But also, the big money to be made is buying and holding. Pick up 20 properties this year (which isn’t tough if you do lease options and subject-to), hold onto these properties for five years and you will make a life changing amount of money when you sell.

And, if you haven’t learned the subject-to strategy, start learning today. If I had tried going through banks when I first started, I would never have been able to purchase millions of dollars in property (it still boggles my mind the thought of putting 20% or even 10% down on a property).

Please think big and please think positive during this buyer’s real estate market. The size of your thinking determines the size of your bank account (I can’t remember who said that, or else I’d give them credit…adios).

P.S. Next week, I’m going to reveal some of the most important clauses in my
subject-to contract which help CYA and save me a ton of money.

Tags: real estate, real estate investing, subject to, wholesaling

Just as a review, buying property “subject to” means buying a property subject to the existing financing.
The seller’s original financing stays in place until either refinanced or sold to a third party. The investor/buyer takes title to the property while leaving the loan in the seller’s name. If we were to take over payments on a property worth $100K and the mortgage payoff is roughly $50K; our offer should be in the $80K range. That leaves a $30K equity payout to the seller. In the perfect world we would love for the seller to agree to accept that $30K when the property is refinanced or sold to a third party.

Assuming that the seller accepted these terms, the seller always is concerned about how they are protected. In these types of transactions we immediately notice that there really isn’t any way to force the investor to make on time payments on a seller’s loan. The seller generally has to trust that the investor/buyer is not going to let the payments go after a few months and leave their credit jacked. The seller realizes that if that happens then their equity payout due is in jeopardy.

So the question is: “How can the seller protect themselves from these types of situations?” The answer on the investor is “we don’t have to take title immediately.”

You may have heard of a Land Installment Contract. There is a pro-seller contract and a pro-buyer contract. In this case you would use a hybrid of the two to give the seller the most amount of comfort possible. In a gist, this agreement transfers the title of the property from the seller into escrow instead of it being transferred to the investor/buyer. Without title to the property the investor/buyer lacks the power of an actual owner and the only way to reap the full benefits of property ownership is to give the seller the equity payout in full via refinance or sale. Sellers love this. And the Land Installment Contract can totally be tailored to the situation. This will definitely help you close some of those home runs that turned sour.

Blessings to Your Real Estate Investing Successes,
Milton B. Yates

Tags: buying property subject to, creative real estate, financing, real estate investing, real-estate-finance, subject to

The real estate investing craze that falls just behind the business of buying directly from the bank with Short Sales or REOs is buying “subject to.” This non-traditional method is simply purchasing real estate subject to the existing financing. The financing that is held by the seller stays in place, the mortgage on the property stays in his/her name, and the title to the property is transferred to the investor’s name or company. With a swift transfer of title to the investor, there is an even larger transfer; the seller’s shift from dependency on self to dependency on the investor to make on time payments for the period agreed upon.

Everyday investors ask themselves, who would do this?

Apparently a lot of sellers are ready to move and don’t have time to wait around for traditional financing programs to fund the sale of their homes. As investors, we become so anxious to get deals that we overlook very MAJOR details when it comes to buying subject to.

What is the #1 question that an investor should ask when considering purchasing a property subject to the existing financing?
Is your mortgage fixed or adjustable? Bingo.

Believe me, this question doesn’t get asked enough because deals are being made in haste. The deals will be there because houses don’t have tires and they can’t run away. We must look thoroughly at our real estate dealings to ensure a smart acquisition and a healthy return on our back end.

So here is a quick story all about how a colleague of mine’s life got flipped up side down.

It is a very exciting day when you get your first real estate investment deal that you decide to HOLD. It is a big deal. You may have started in the business of wholesaling to build up the cash reserve to finally own something of your own and profit like the investors you have been selling to. If that was you then you are no different from my friend, Investorina (for the sake of the story). Investorina picked up a single family home subject to the existing financing and didn’t bother to pay attention to whether the mortgage was fixed or adjustable. In all of the excitement, it never dawned on him that a $400,000 home should never have a mortgage of $1,800. Hey sometimes we all make mistakes.

Well the property was purchased and payments to the lender were being made automatically through the business checking account of Investorina. Because of the preference for a paperless lender/investor relationship, the Investorina was a bit out of the loop when it came to the changes occurring on the adjustable mortgage product that he took over. While Investorina was paying $1,800, the mortgage rose to $2,200 and been that way for over 8 months. With the late fees, financing charges, and attorney billing; the outstanding balance on the account was all of the sudden $11,000. WOW!

A foreclosure date has been set for the 14^th of March 2008. Because Investorina’s name is not attached to the property in any way nor to the mortgage product, it is character that urges him to contact the seller and alert them that the house will be going to foreclosure sale on the 14^th of March.

In our real estate investing businesses, lacking attention to detail can hurt our business and it can ruin others’ credit and livelihood. Investorina is going to do a listing forbearance with the lender to save what can be salvaged of the seller’s credit. Remember that sometimes buying subject to existing financing can leave your seller subject to foreclosure if you don’t pay attention to the details of your investments.

Blessings to your Real Estate Investing Business,

Milton B. Yates.

Tags: adjustable rate, Buying real estate, creative, foreclosure, mortgage, real estate financing, real estate invest, real estate investing, REO, subject to