Subject To Vs. Lease Option

9 Replies

Hi,

I'm new to investing and like most things starting out I don't have capital.  An old mentor of mine once told me that if you can't make money without money then even if you have money you'll probably go broke.  He wasn't into real estate so I couldn't really use him for reference.  I've been looking for ways to creatively and legally build capital for the next couple years so that I can begin to have down payments on multifamily long term rentals.  Some way or another whether by coincidence or divine intervention I came across a youtube video discussing "zero down" deals in which none of my personal money or credit is at stake.  The two terms I heard over and over for the next 7 hours (I was super intrigued and lost all at once) were Lease Options and Subject to existing mortgage deals.  Good videos that I found talked about one of the categories but never talked about both Lease option and Subject to deals in the same videos.  Some decent videos I found seemed to blend the two too much and confused me as to what was what.  Can anyone give me a crash course on Subject to Vs. Lease Options as an investor?  Thanks for sticking around this long.  I'm appreciative of any help the community can give me.  

The two get confused by many people. Buying subject to the existing mortgage has been around a long time. It is often coupled with an exit strategy of selling under a lease option. The reason for the coupling is the property has no or very little equity and is not a "deal" as you commonly hear the term used. You will only be successful on a "subject to" buy if you have a very motivated seller who needs to move on because, they will stay on the Mortgage as the primary obligee ,while you have promised in your contract with them to pay their mortgage. This is their "least worst option" (with apologies to Phil Grove). They really don't have any other choice as the property simply isn't "sellable". The advantage to the investor is that they have no skin in the game and have control over the property. Usually, the property really can't be "sold" as the mortgage payoff & closing costs exceed the current ARV. The only really viable exit strategy is to find someone who currently can't qualify for their own mortgage and lease the property to them on terms that pay the existing mortgage and if possible add some cash flow for you. Also you take an upfront payment for the option, which gives you the cushion if the lease doesn't work out. That's the gist of it. Don't try it without proper legal counsel, as the uninitiated can get burned, if the paperwork isn't properly done. It is a strategy I employ and is very viable in the current market.

Originally posted by @Gary Van Horn :

The two get confused by many people. Buying subject to the existing mortgage has been around a long time. It is often coupled with an exit strategy of selling under a lease option. The reason for the coupling is the property has no or very little equity and is not a "deal" as you commonly hear the term used. You will only be successful on a "subject to" buy if you have a very motivated seller who needs to move on because, they will stay on the Mortgage as the primary obligee ,while you have promised in your contract with them to pay their mortgage. This is their "least worst option" (with apologies to Phil Grove). They really don't have any other choice as the property simply isn't "sellable". The advantage to the investor is that they have no skin in the game and have control over the property. Usually, the property really can't be "sold" as the mortgage payoff & closing costs exceed the current ARV. The only really viable exit strategy is to find someone who currently can't qualify for their own mortgage and lease the property to them on terms that pay the existing mortgage and if possible add some cash flow for you. Also you take an upfront payment for the option, which gives you the cushion if the lease doesn't work out. That's the gist of it. Don't try it without proper legal counsel, as the uninitiated can get burned, if the paperwork isn't properly done. It is a strategy I employ and is very viable in the current market.

 Thanks for the response Gary!  Quick follow up I would be targeting people who haven't been able to sell for 5 months to a year.  The beauty of the system appears to be that my credit nor my money is directly tied to the existing mortgage from what I see.  I'd like to do right by the seller as my intention is to solve their problem but also profit.  Would you set up the deal having a 2-3 year deal with the seller covering just their mortgage payments and find a motivated buyer under a 1 year option?  

Also quick example:

Let's say the house is worth 100k and the owner has 95k left.  Require a payment of 700 for Mortgage with a 2000 down payment requirement, that I would agree to contingent of me finding a qualified buyer within the term.  I then find a buyer willing to pay 110k with 7000 fee option (2k to the seller and 5k to me non refundable) lease rate of 900 for 1 year with option to extend a year (2400 a year rental spread) and have lease agreement where there cover all repairs and maintenance.  If the option is picked up I would then make the additional 3k from the locked in price, the original seller would have 100k loan taken over by the new lease buyer and I'm removed from the equation all together correct?  Just trying to make sure my logic isn't terribly flawed.  Thanks again for your help.

Texas lease options and Texas wraps and Texas subject to's are well explained here

Www.LoneStarLandLaw.com

The thing about buying a property subject to or wrapound mortgage and getting on title is 

you need to do something quickly with the property because of the due on sale clause

The Texas Lease option laws you need to understand them because many Texas RE attorneys don't

@John Jackson of leasingtobuy.com it's probably the best resource for Texas

Aaron you are essentially correct. 1st the due on sale clause may be triggered if the bank wants to, but generally they don't and there is daily  activity in Harris County Texas where mortgage payments are being assigned and sold without any action by the bank.  The bank just get told that payments are to be mailed to new address and as long as they are getting paid, they don't care who's paying.  The original mortgagee is still on the paper and still liable so they are essentially in a better position than they were before.

In buying subject to you take the title so there is no "lease term".   You can "buy" on a lease option too, but I see no advantage to doing so .  Yes the Option money you get  can be used to pay seller any cash you promised. I usually plan on a minimum 2 years lease and would extend up to 5 years if cash flow is good, depending upon the worthiness of the lease option buyer..  I avoid wraps as current law is very tricky.  Good luck

Just a further point about the "due on sale" clause.  It is generally an option the bank has.  This means they may  choose to exercise the option or not choose to exercise it.  Generally if they don't exercise it when someone else takes over making the payments, the mortgage documents still allows them to exercise it later without any penalty.  It is not a use it or lose it  situation for them, so they are quite willing to acept payments on anyone's mortgage from anyone else.

Originally posted by @Gary Van Horn :

Just a further point about the "due on sale" clause.  It is generally an option the bank has.  This means they may  choose to exercise the option or not choose to exercise it.  Generally if they don't exercise it when someone else takes over making the payments, the mortgage documents still allows them to exercise it later without any penalty.  It is not a use it or lose it  situation for them, so they are quite willing to acept payments on anyone's mortgage from anyone else.

 I really appreciate all of your feedback Gary.  I'll continue to dig into this and try to get some kinks worked out.

Originally posted by @Brian Gibbons :

Texas lease options and Texas wraps and Texas subject to's are well explained here

Www.LoneStarLandLaw.com

The thing about buying a property subject to or wrapound mortgage and getting on title is 

you need to do something quickly with the property because of the due on sale clause

The Texas Lease option laws you need to understand them because many Texas RE attorneys don't

@John Jackson of leasingtobuy.com it's probably the best resource for Texas

 I've come across a few of his youtube interview and they seem to conflict a tad with LoneStarLandLaw.com but he seems to be the man in Texas so I think I'll reach out to him.  Thanks for all of your help.  This may be a silly question but is there any place where I can see if laws are more strict or less strict than Texas?  I'm from Baton Rouge, LA and if things are easier to do there I think I'd lean towards moving my investing there.  Or would I have to pretty much save up to consult a lawyer in each state I want to invest to protect myself?

@Aaron Lathan

I also employ both strategies and have done so since the 1980s when I was like you...without much capital. Things have changed a lot and I would suggest also looking into sandwich lease options and land contracts. BTW, some states are harder on investors for lease options (generally). And you most know what you are doing or you can get sued for non-performance and/or theft by deception if you don't hold to your word. A word of caution is just to learn more about your process and to be careful in your recording process so you aren't the victim of the DOSC. Best of luck to you in your endeavor.

@Aaron Lathan

Regarding the best dates I think Georgia I'm Southeast

But Texas is great too

To get an education the fastest way I think it's to get a real estate license and to find a wonderful broker that does investments

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