Buying "Subject to" Existing Financing – Subject to Foreclosure

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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.

Caution_2062 by Bludgeoner86Everyday 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 14th 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 14th 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.

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  1. Milton, nice post. Subject to has gotten a bad rap as you can see from the states that are trying to put law on the books to prevent it. Investorina seemed to be pretty ethical, but there are a lot of unethical investors out there too that don’t care about sellers and figure better the seller gets hurt then them. I’m not opposed to sub2 deals and I think your story just goes to show some of the unseen problems investors don’t think about. It also show how this is real money and real financial lives that we deal with when we run our businesses.

  2. I have never understood the concept of lending your credit and loan to someone else. I generally see this done because the buyer could not qualify for a loan on their own merit. In Florida we are seeing a lot of lease options where the first years rent is increased to add to the down payment and then the home is sold outright. At least this way the seller will not face the same situation that they did with Investorina since they are responsible for paying the bank until the house is sold.

  3. Jerry Maleesh on

    Does anyone know if credit checks are common place in a purchase option? We are trying to invest, but since I was laid off we cannot get our hands on the equity in our own house right now and are looking into other purchase options. Our credit is fair but not great. We are trying to purchase option and then get a tenant buyer in the property.

  4. On the flip side, it can save someone’s credit if they cannot any longer afford their mortgage or can’t sell given the current market conditions. Seller financing can work out. The seller should check their credit every month to insure the payments are being made.

  5. Question to Subject to Existing Financing: So when using this method to invest in property, at what point does the property actually become yours? The transfer of title is transfered to the investor but the financing is still in the sellers name. So if you stop making payments then the house forecloses on the seller. I guess what i’m trying to say is if the title is transfered to the investor but the financing mortgage remains with the seller, at what point does the investor gain from this? Does this make sense I hope? Lol! you can see i’m a little puzzled! Hope to hear some response, thanks!

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