How to make profit by allocating "Subject to" Buying options for buyers with mortgage difficulties
For those looking to get into real estate investing in today’s market, there is a unique way to earn profits without the need for cash or credit, and without the risks or headaches of owning rental properties. In this article, I’ll show you how you can put unsaleable homes under contract subject to the existing mortgage and then assign the contract to a buyer who has been unable to qualify for a mortgage. Your profit is on average around 5% of the purchase price.
This is NOT Mortgage Assignment
One of the latest fads making the rounds on the internet right now, and the email inboxes of many investors, is a concept called Mortgage Assignment. For those unfamiliar with this, it appears that you are just assigning a mortgage from one person to another. Note that this is not the same as a mortgage assumption in which the lender legally transfers responsibility from the seller to the buyer. Rather, a mortgage assignment is nothing more than assigning the payments to the buyer, while the seller holds the mortgage in their name. In the Mortgage Assignment program, the underlying transaction remains a dirty deal for the existing mortgage. In any case, the seller of the property is still in trouble, credit-wise, if the mortgage is not paid. What you will do is find sellers who are willing to sell their property subject to the existing mortgage and market that property to a buyer who has some cash, but may not qualify for a mortgage under today’s more stringent underwriting standards.
Why you don’t need to be a real estate agent
One of the first questions that comes up is how can you do this without being a real estate agent? Well, it’s simple. What you will do is get the seller to agree to you placing a call option on their property. You will market his interest in the property to other buyers. This is not unlike marketing your property to buyers as a FSBO.
Description of offers “subject to”
In a “Subject To” or “Sub2” offer, you are purchasing the property subject to existing financing. This means that the existing mortgage will not be paid. If there is equity in the home that the seller wants to collect, the buyer would need to have the cash on hand or the seller may agree to make the payments in the form of a second mortgage. Typically, a Sub2 deal is done when there is little or no equity in the property, because the seller is unable to pay the mortgage at closing, or pay fees and commissions, or both. The alternatives to this are a short sale or foreclosure, and neither is easy or pleasant.
The biggest problem one faces with Sub2 offers is something called the Expiration of Sale Clause. What this means is that when the property is sold, the lender has the right to claim the mortgage due, which means the buyer would have to refinance the seller’s property facing foreclosure. However, in the experience of almost all Sub2 investors, not once has a mortgage been required to mature on the sale. Many gurus teach all sorts of tricks to prevent the lender from being notified of the sale, including a land trust and deed contract, but others will teach you to be honest with the lender and not lie or hide anything. The way a lender usually finds out about the sale is not when the new deed is recorded, but when the homeowner’s insurance policy has a new owner. In my Find and Assign package, I explain the sale expiration clause in more detail and why it’s not something you need to worry about.
The seller’s dilemma
Right now the market is perfect for making Sub2 assignments. Many homes are now underwater, which means the seller owes more on the mortgage than the home is worth. There are sellers who can no longer afford their mortgage payments and are struggling to make the payments each month or are behind on their payments and facing foreclosure. In Find and Assign, I have a matrix showing the various options a seller has to dispose of their property, along with the costs of each. If you can show a seller how they can walk away from their property and make mortgage payments without hurting their credit, you have a motivated seller who is receptive to your offer.
The buyer’s dilemma
In the past, all you had to do to get a mortgage was fog up a mirror. This means that you simply had to be alive! Banks and mortgage companies made loans to anyone who could fill out an application. There were undocumented loans, declared income loans, and subprime homebuyer loans. Initial payments are as low as zero. Fast forward to today. Now, you must prove your income, provide two years of tax returns, bank statements, and have a credit score above 680. What we have now are buyers who a few years ago could get a mortgage, but now they can’t. . Therefore, you are in the perfect position to sell unsaleable homes to unloanable buyers simply by having the seller make a purchase option subject to the existing mortgage and assigning this deal to a buyer for a fee. of transfer. The new buyer gets the deed at closing and pays the closing costs.
find sellers
There are many ways to find sellers, including posting ads on Craigslist and newspaper classifieds. A sample ad might say, “We buy homes with little or no equity. Don’t make any more mortgage payments.” A great way to find sellers is to call real estate agents and ask them to provide leads on those who want to sell but can’t because they can’t muster the cash to make a deal. You can offer the agent a referral fee. If the agent is honest and says they can’t accept a referral fee, you can still legally pay the agent by having the agent become your buyer’s agent. When you get the house under contract and then assign the contract to the final buyer, at the time of settlement, the agent will receive their legal fee, depending on what you agree to. In Find and Assign, I review many other ways to find vendors for the Sub2 Assignment program.
find buyers
Of course, you need buyers to complete the deal and make money. You can find buyers by posting ads that say “Buy a house that doesn’t qualify for a mortgage. 10% cash needed.” You can run these ads on Craigslist and newspaper classifieds. You can also call mortgage loan officers and ask for leads on those who want to buy a home but can’t qualify for a mortgage. What you may have to do is simply give these loan officers your information and ask them to give it to would-be buyers. You can offer a fee to the LO on any deal you make.
Writing the Agreement
There are two ways to do this. One way is to write a simple real estate purchase contract, where you write “and/or assigns” after your name. In the purchase price section, you would write the price, then “subject to existing financing as detailed in Appendix A. In the appendix, you would list the balance of the mortgage(s) on the property and the existing monthly payment.” no special forms are needed. It’s just the wording you should use. The second way is to write a purchase option on the house, using the same theme for the language. It would then assign the purchase contract or option to the new buyer. If you use a purchase agreement, you need to make sure you have the right escape clauses in place that allow you to walk out of the deal if you don’t find a buyer. You do not want to actually buy the property. And that’s what the contract says. With a purchase option, the seller is giving you the right to purchase the property, but you are not required to do so. If you can’t find a buyer to assign the property to within a 90-day period, you just walk away.
When making these deals, there are also some statements that must be signed by the seller, namely disclosing the fact that the sale is subject to the existing mortgage and that the mortgage will remain in your name. It also discloses the potential of the Expiration in Sale Clause. What I always suggest is that before you start on this, find a real estate attorney who has done Sub2 deals before. You can find one the same way I did, on Craigslist! In Find and Assign, I share with you how I did this and what questions you should ask. You may also need a title agency to close the deal, and I cover that at Find and Assign. Your real estate attorney should also know which one to use.
Close the deal
All you really have to do is get the end buyer to write you a certified check for your assignment fee after doing your due diligence on the property, including a title search, inspection, etc. The title search will show you any and all liens that are attached to the property, along with judgments on the owner and any back taxes that are owed. You can use any title agency to do a search. The fee would be around $60 or less. You can have the buyer do this or have the seller do it and make it available to potential buyers.
When you have a buyer for the property, you want to refer them to your real estate attorney to close the deal. In this way, you have done your part to unite the two parties and thus earn your allocation fee. The key is to have a real estate attorney involved in these deals and not try to close a “kitchen table.” You don’t want the seller or the buyer to approach you because you didn’t reveal everything you should have. If you do this right, you can make a reasonable income by assigning just one or two properties per month. If you search online, you can find just about anything you need on forums and other sites. There are no special forms, other than the purchase option, the purchase option assignment, the purchase agreement, and of course the CYA disclosure form. Other forms that are involved are an Authorization to Release Information and perhaps a Power of Attorney. If you find a real estate attorney who has done these deals, this person can provide you with all the forms you need.
Learn more
In my Find and Assign package, I give you much more detailed information on how to do Sub2 Assignments. This is all in one of the bonus packages in the form of a 42 page guide, plus all the forms and agreements you need, including a very detailed disclosure form. I teach you many ways to find sellers and buyers, and even show you how to have others search for properties for you with no money up front. Along with this, you get a PowerPoint package that you can use with vendors, along with other helpful tools and resources. There is no need to spend hundreds of dollars on courses or workshops. Once you understand how to find buyers and sellers, and know what forms to fill out, you can get started with very little cash. All you really need is the motivation and dedication to place ads online and what to say to callers from your ads. In Find & Assign, you even get scripts and information to send to sellers and buyers.