In the current economy subject-to’s are the best way to make money. Yes, a lot of people have terrible loans that you can’t do anything with. However, remember this business is simply a numbers game. If you do the proper marketing you will still find the 5% of people who have loans that you can take over and make a healthy cash flow.
So, today I decided to do something a little different. I’m working with a new investor who just had his first ever meeting with a seller concerning a potential sub-2 deal. When that investor got home from the meeting he was unsure of the answers to several of the objections the seller raised. I answered his questions and since they are similar to the questions that many new investors ask, I’ve given you the questions and answers below to help you close more sub-2 deals this year:
Subject-To Answers that will Help You Close More Deals
Q–What can a seller do if a buyer purchases sellers house subject-to and buyer stops paying mortgage? If seller does not have deed what can they do?
A–If a buyer stops making the payments the seller can take back the house. I had my lawyer create a special clause for me to help overcome sellers objections. Basically, if a buyer is ever 30 days past due, the seller gets the house back. Here’s the clause (of course we will never not make a payment, but this is an awesome clause to show sellers to make them feel safer about working with you):
“With regard to the existing mortgage(s), if Buyer fails to make any payment on any such mortgage when such payment is due, and such failure continues for more than 30 days after the due date, then Seller shall have the right to require Buyer to convey Property back to the Seller upon written request. At settlement, the Parties shall execute and deliver to the settlement agent documents and funds sufficient to re-convey the Property to the Seller, together with an appropriate escrow agreement.”
Q–What do you say to a seller when pitching a subject-to and they say why don’t you just get a new loan?
A–If a seller asks me why I don’t get a new loan here’s what I tell them: Mr. Seller when we have to get financing it costs us a great deal of money in fees. The only reason we are able to help you and buy the house is because we get to take over your existing loan. If we had to get our own financing then there would not be any profit for us in buying your house…and obviously we are a company that has to make a little bit of money. Also, in today’s current economy since people have very little equity, this is how we are helping 99% of sellers we are working with these days.(This will usually satisfy them. If they need more convincing, explain that when you pay with cash, you have to buy at a significant discount of 60% of the house value, and they do not have enough equity for you to pay cash).
Q–When sellers sell a home subject-to, can a seller then go and get a new owner occupant loan? Or how do they show previous house is sold?
A–Yes, when a seller sells they can go get a new owner occupant loan. What happens is that when they are applying for their new loan, the loan officer will make you send a written letter that states your company is making the payments on the loan and the seller is not responsible.(I send this letter all the time and a seller has never had a problem getting a loan…obviously make sure its a professional letter on your company letterhead).
Q–What do you do on subject-to about a escrow refund or shortage?
A–Everything is negotiable and this changes on a case by case basis. Try and keep as much money as you can, and get the seller to cover a shortage if they have the money to do so. You can just write a simple addendum for whatever you wish (nothing is set in stone in a contract, anything can be changed). Whatever you do, don’t get greedy and kill the deal over a few bucks