How to overcome pitfalls of subject to investing?

22 Replies

I am new to subject to investing. Like most people, my BIGGEST fears are the due on sale clause. Here is the other thing that bothers me. If the tenant buyer defaults on making payments in the subject to deal, then what? I am still on the hook to pay the sellers debt with or without the tenant buyer being involved. That's where my trouble come in this situation because my faith and trust is in the hands of the tenant buyer or buyer if I find one. That, and I don't want to be sued by the seller, which I heard can happen if I do not keep up my end of the bargain by paying their mortgage via tenant buyer. What is the best exit strategy for subject to? And, who should I target for subject to deals? Thanks in advance.

Well, think of it this way--If you owned the property as a rental and had a mortgage with a bank, it would still be in your tenant's hands. If they stop paying rent, you are still responsible for the mortgage payment, and the bank can sue and foreclose on you if you don't pay.

@Jason Krick Thanks for bringing that up. How can I protect myself from dealing with tenants who may stop paying their rent? By the way, can section 8 tenants be placed in the home using the subject to strategy? I am looking for an exit strategy that works best with subject to.

As far as I can tell, the "pitfalls" as you put it ARE inherent with "subject to" selling. No escaping.

Otherwise, your Tenant/Buyers would just get a normal mortgage and buy you out on day one!

@Brent Coombs Good point. I need some cash flow coming in, and I am just seeing what is my best option since subject to may not be the best way to go. It was a choice between subject to, lease options, or just using private lender funds to invest in properties that are already cash flowing with tenant occupied homes. Wholesaling doesn't seem to be working out like most investor gurus hyped it up to be.

@Tony Marcelle how can you protect yourself from non paying tenants? I would think the same way as anyone who has any kind of rental. Cash reserves, proper screening, eviction if necessary, and more cash reserves. In my opinion it would be extremely unethical to default on the person who's name the loan is in just because your tenant stopped paying you. Not even close to the same as defaulting on a bank loan because not paying an individual's loan would screw that person. A person who most likely agreed to the subject to as a way to get help to begin you promised to give.

reading between the lines if your not very well cashed up.. as in you have ATLEAST 12 to 18 months of mortgage payments plus money to do the fix up after the tenant moves out... even clean tenants there is usually a grand or two ... then subject too is not something you personally qualify for.

as your realizing its a ut oh what happens when... well what happens when your tenant flakes takes a few months to get them out etc etc you HAVE to continue to pay the mortgage the tax's the insurance the UTLS  and put money into the house so it can be rented or sold again..

Sub Too is not like a wholesaling thought process IE make money when you have no money ( like those that try to get into wholesaling and listen to guru's soon realize its very tough and cost money).

So DO NOT engage in Sub too if your not sitting on significant cash reserves and are willing to use them.. Sub too is better for very short term flips that kind of thing..

And of course at the end of the day its the sellers Credit that will get trashed if you don't perform that's why sellers get so hostile when undercapitalized sub too buyers default..

Also you have to look at the stability of your rental pool are these C class B ham rentals or B or A..

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@Ryan E. I don't know how I am going to be protected to be honest. That's why I was looking for some inputinput from those who are more familiar with the pros and con's of sub2 investing. There seems to be more con's than pros, so I will pass on doing sub2. I was feeling iffy about it at first. That, and I don't have to worry whether or not the tenant will pay the sellers mortgage.

@Account Closed Now that you mentioned that, I was concerned about that one. Like I said, I am new to this subject to strategy and wanted to see what my options were. 

@Jay Hinrichs You are right about that. I have two words for you and that is Marko Rubel. I listened to one of his webinars last week. I "almost" bought the course until he gut punched me with his nearly $900 price. That's what brought me here to get FREE information. Thanks for the advice.

I started doing sub-tos a  bunch more recently. I do them as a way to do rehabs. They involve more cash to catch up the sellers with the mortgage, pay on the mortgage while I own the house, pay off the sellers, and then fix up the house to get it sale ready. Around here, they tend to need about 20-30k to do all of the above and then make about 20k profit. This of course is not the only way to do rehabs. 

There are so many ways to buy real estate. You just have to get a little creative in your thinking. Every way that you have to purchase a property is like a tool in your toolbox that you have to fix the sellers problems. If you only know how to do sub-to, you only have 1 tool in your toolbox. The more ways that you know how to purchase a property, the more ways you can help more people with their real estate.

@Rick Pozos That's a nice way to put. I am trying to come up with different ideas to help the sellers and myself. I just don't want to screw anyone over in the process including me.

@Tony Marcelle , and here we were, thinking you were SELLING "subject to".

But now you tell us that you're BUYING "sub to"?

ie. "How to overcome pitfalls of ME not being able to fulfill MY contract with the Seller"?...

@Brent Coombs I was referring to buying subject to existing mortgage. I am looking for ways to buy property. As for the selling side of the subject to, my intentions were to buy subject to and sell with lease option. 

@Tony Marcelle , the main "pitfall" I can see with THAT plan is: how will you convince Sellers to let you go forward with your plan in the first place - without exaggerating your "buyers list", or lying?

subject to Deals can be very profitable or very risky and expensive. Like many others have said and if you do some additional research you will see, that to do it right, you really need to keep the seller's interest in the forefront and in order to do so, you should have significant reserves to be able to cover all those noted expenses. Remember when you're doing subject to, that you are actually buying the property subject to the existing financing. Therefore you are actually transferring title from the seller to you as the owner. Now as the owner you can lease the property, rehab it and then resell it at retail, do a lease option deal, etc. But since you own it - it's your responsibility - mortgage, taxes, insurance, maintenance, etc..

So you're right to be concerned and wanting to be prepared, ultimately there's not too many different options, just a variety of strategies to carry out those options. Basically once you're on title as the owner, you can do what you want with the property. Rehab it, rent it, lease option, sell it, sell the note, refinance.  You should strongly consider and be prepared to immediately refinance the property to your own name or your company if possible should the due on sale clause come about. Or you can sell the property and pay off the original seller, assuming there's enough equity in the deal, so you should be prepared if the property is under water to make up the difference out of your pocket. After all, you, as the new owner of the property, are 100% liable for that property and obligated to pay off that mortgage.

Basically the subject to is just a "no money down" type a strategy that lets you acquire the property without any cash out of your pocket,.... In Theory. At face value, it's a quasi loan assumption, where you just step into the place of the seller and keep making the payments on the current loan without having to qualify for that loan yourself.  You really have to see the reality in this strategy that you're buying a house just like anyone else who buys a house, it's now your responsibility. In the subject to strategy you get the added benefit of not having to dump 20% down to purchase it and you don't have a mortgage in your name on your credit. But if you approach the deal as if you were buying the property out of your own pocket, under your name, and in your own credit, then you can move forward with how you want to handle the property and you'll be much more prepared and better off to succeed.

Hi @Tony Marcelle

DO NOT DO SUB2 if you do not have reserves! You are getting the deed on a property and are morally promising to pay the PITI even if a tenant stiffs you!

Use sub2 for fix and flips, get the mortgage out of the sellers' name FAST.  Do not use sub2 for buy and rent long term.

Looks like I am going to need to write a long post on - HOW TO STAY OUT OF TROUBLE WITH TERMS DEALS ON PRETTY HOUSES - SUB2, LEASE OPTIONS and WRAPS (when buying or controlling).

@Brent Coombs I wouldn't go into detail what I plan to do do with the property after I take title. I would, however, be upfront with them and ask them would they sell the house for the amount owed? I will tell them I would leave the existing loan in place and make payments. I would ask if they are OK with that. I can't put people in jeopardy by not paying their mortgage. That's why I would either do subject to when I have enough capital set aside just in case or very carefully screening tenants to make sure they qualify to pay the mortgage.

@Brian Gibbons How exactly does the subject to work in a fix and flip? I have only heard of using it for leasing the property.

Example of a "subject to" with existing first mortgage on a "buy fix flip"

Ex ARV is $100,000,

needs 20,000 in work,

first mortgage is low at $20,000 Payoff

You buy the property "subject to the existing financing" and then I own it,

I would give a note for equity payable in three or four months in a balloon payment single payment note.

You want to factor the sub 2 PITI payment in, say 3 X 1200 or $3600

You also want to figure in about 10% of the value of the property for commissions, for closing costs, for sellers concessions, so for $100,000 house you subtract another $10,000.

Don't forget to factor in your rehab cost, i use private lender loans and I give 10% interest in three or four months to private lender.

Lastly you need to figure out your profit and I recommend that you start small and make $10,000 per house using subject to on fix and flips.

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