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