Good evening everyone,
I looked around on a couple of threads posted on this site, but didn't quite get the answer I was looking for, so I figured I'd just ask here! (Sorry if this has been asked a thousand times, which I'm sure it has)...
My question is, when trying to convince a seller to do a "subject to" deal and the seller asks "Where am I going to live after you take the deed to the house?" - How do I answer that, or what can I say to convince them it's a good deal? I know Subject To deals can save the sellers credit, and that in itself is good and often a selling point...but where does the seller live afterwords? Do they just normally find a place to live that's cheaper? Like moving into a mobile home or apartment? I have heard of buyers offering 1-2 thousand for moving costs, as a sort of incentive (and / or also paying off any liens against the title if not too high).
If the seller accepts a Subject To, they must have had some problems paying their mortgage, so how can they expect to take out another loan, or come up with any sort of money, if they needed it in the first place?
I guess in my head right now, it doesn't seem logical...."Let me take your house because you have no money and can't pay your bills...now sign over your house to me. Now you have no house AND no money - good luck."
Hopefully this makes sense. Thank you all in advance for responding!
Pod cast 65 talks about subject to. It is a good place to start. My understanding is the main concern you will have is making sure the bank does not default the loan but it is also my understand that this is very uncommon because the bank does not want to be in a situation where they have to foreclose.
@Nathan Samuelson - The real issue that you are asking about is their selling price - regardless of whether it is sub2 or a conventional sale with a new loan or with your cash. Say for example that they owe $50,000. And you offer them $50,000. Regardless of whether it is sub2 or cash, they get their monthly payment problem solved, but they walk away with $0 from the sell. And they probably have $0 in the bank. So, they can't even put down the security deposit for their next move (probably a rental). Maybe you can make your offer to be $1000 more than what they owe (assuming that the deal still works for you). Doing this with sub2 means that you will probably have to come out-of-pocket, but hey, that's the cost of admission. Zero-down investing is possible in this biz, but not as common as most gurus lead you to believe. If it's a good deal, you can find $1000 somewhere.
@Bryan L. That clears it up, thank you for the quick response. I agree, if I have to fork out $1,000 in order to get the house without having to touch my own credit, that is fine by me (like you said though, assuming the deal is still worth it). That was my biggest question was, if the seller is so strapped for cash, why would they choose to become homeless when I walk away with everything, and them with nothing? How would they afford to live anywhere else? -- Thank you for clearing it up.
@Shawn M. I've never heard of Pod Cast 65, I'll have to look them up. Thanks for the refferal.
Link to Podcast 65.
Someone may have had medical bills and got behind on their payments. They have enough to make the monthly payment (and then afford rent somewhere else) but not enough in savings to "catch up".
So you can get the title and get the mortgage caught up, then make the monthly payments out of the rent you can get for the property.
It's advised to NEVER let the existing people stay in the house. Because they think of it as "their" house and they signed the deed away to you. Best to give them money to move at closing, or help them hire a mover, or buy them some boxes or something.
The main thing you are solving for them is getting out from this house that they are not going to get caught up on, and helping them avoid foreclosure. If they could sell the house for more than they owe, that's what they generally would do. Sometimes this also means that the house can't sell because there's a bunch of work to be done on it as well.
So there are many considerations to take into account.
Sorry, the link didn't get in the first iteration.
That is not true. Well; you Do end with everything: all the expense and all the risk.
But the seller ends up without an apparently unpayable debt to deal with, without a foreclosure on their record to explain, and with an excellent opportunity to improve their credit rating.
Maybe they will move in with relatives or friends. Maybe they will rent a smaller house from me or from a friend of mine. Maybe I will offer to pay their security deposit on a new place for them.
Thank you for the link and information Dawn and Stephen! These responses have definitely cleared some things up for me. Really appreciate everyone's comments.
Originally posted by @Nathan Samuelson :
.... when I walk away with everything, and them with nothing?
They did get something out of the deal....1 less bill each month, or maybe more if you count utilities and insurance.
Where were they going to live and how were they going to pay for it if they were foreclosed on and evicted? Where were they going to live and how were they going to pay for it if they are moving out of area for a new job? If sellers are making calls and talking to potential buyers it means their head isn't entirely in the sand and they are making plans.
First off, not all sub2 deals involve a borrower in foreclosure. Secondly, not all sub2 deals involve borrowers that don't have equity. If there is a pending foreclosure, you reinstate and stop the foreclosure, thereby giving everyone more times to do the deal in an orderly fashion. If they have equity, you pay them something for the deed.
People in foreclosure who can keep the lights on and who are putting gas in the car are making choices. They are not making a housing payment, and that may make the most sense depending on their situation. But that doesn't mean they are 5 minutes from homeless. Many borrowers don't make payments for 12 months or more. In this post Bubble market, I've seen no payments for 2-3 years, even without a bankruptcy. That's a lot of free rent.
People who aren't in foreclosure but want to walk from the house might not want to deal with selling it, might not have enough equity to sell it, or don't want the consequences of a short sale.
One note about "saving credit": I strongly suggest you never mention anything to a seller about "saving" their credit or use it as a selling point. You can say you'll be making the payments in a timely way, but that all IMO. A borrower that's in default will have trashed credit for a couple of years, even without a foreclosure. You are not privy to all the things that are wrong with their credit. You can't make claims about fixing or keeping good credit without crossing over into regulated territory. Do not hold out your offer as having anything to do with fixing or maintaining their credit. Let them analyze the benefits, if any. Same goes for tax considerations. Do not suggest or advise about capital gains, or losses, or insolvency. Always advise getting legal and financial advice, and put a clause in your purchase agreement that says they understand and agree that you said that.
I know it hard to see it from here, but after you've taken over a property that someone wanted to get rid of (or after you've been a motivated seller yourself), you'll understand. Trust me on that one.
@Account Closed You make a lot of really good points. Especially about making claims such as telling the seller you can help fix their credit.Thanks for the response!
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