Part Two – “Subject-to the existing mortgage”
A typical purchase and sale agreement for a home often includes items upon which the entire agreement is “subject to” some particular circumstance. For example, most typical offers made by a buyer include a clause that says that the buyers offer is “subject-to the buyer obtaining adequate financing”, or the buyer does not have to purchase the home.
Another one is the property inspection. Purchase agreements often say that the buyers purchase is “subject-to a satisfactory property inspection report“. This is done to insure that systems and appliances are in good working order. There is also a commonly used clause for “subject-to an insect infestation report“, to insure that there is no existing termite damage or active termite activity.
When it comes to financing a home purchase without having to go through the hassles and expense of qualifying for a new mortgage, a common practice, well known to real estate investors, is buying a home “subject to the existing mortgage“. This means that the seller will allow the buyer to take over the payments on the sellers existing mortgage, and the buyer will usually make the payments directly to the mortgage lender. In either case, the mortgage remains in the name of the seller, but the buyer goes on the deed as the property owner. (subject to the security deed that says that the property is collateral for the loan.)
Why would a seller be willing to leave their name on a mortgage?
Home owners often find themselves in a situation where they need to sell rather quickly due to a job transfer, loss of income, or life change such as a marriage or a death. Allowing a buyer to buy the property without having to obtain a new mortgage can open up opportunities for sellers to sell quickly when needed, and avoid having to pay two mortgage payments in a case where the seller has another home they want to purchase.
I once purchased a home subject-to the existing mortgage from a seller who was due to move out of state and get married in just a few weeks. Her property had failed to sell after being listed with an agent for 6 months and the seller was running out of time. She actually called our office and asked us to come out to her home. We made a deal to pay her $5000 at closing, which allowed her to pay some expenses and get a few bucks out of the property, and we took over her existing mortgage payments for a term of 18 months. We essentially planned to update the property and resell it to a buyer who could qualify for a new mortgage.
After some much needed, but relatively inexpensive updating of paint and carpet, we sold the home for a profit in less than 6 months, and paid the seller’s original mortgage off at the closing. The original seller was able to move and get married, we made a profit of about $18,000 cash after expenses, and paid off the seller’s mortgage in only 4 months. Plus the new buyer got a nice, up to date home at a very good price that was a bit below the appraised value. Everyone was happy.
Here are some quick tips for finding and using “subject-to” deals to buy your next home or investment property:
1. Look for sellers who have a need to move quickly. While any seller may consider your offer, those sellers who are motivated by circumstances such as a need to move quickly will be more likely to seriously consider this type of offer.
2. Properties listed on the MLS may be a candidate for this buying strategy, but the listing agent may not be aware that the seller is motivated, and may advise the seller to reject this type of offer. It’s best to work directly with the seller and usually that means looking at properties which are “For Sale By Owner” (a.k.a. FSBO or Fizz-Bo)
3. Look for sellers who are not underwater on their mortgage. Be careful to note how much a seller owes on their mortgage, versus how much the property is worth. You don’t want to saddle yourself with an upside-down mortgage.
4. When making your offer, show a seller how this offer will benefit them – “you can move quickly”, “get out from under your debt problem” etc. Find out what the sellers problem is, and take over their mortgage as a way to help them solve their problem.
5. Make sure you can afford the existing mortgage payments. The loan is still in the sellers name, so it’s their credit that is at risk. Be responsible and don’t leave a seller hanging by not making the payments as agreed. If you’re planning to rent the property, make sure the rent will be adequate to pay the mortgage, as well as other expenses such as maintenance.
6. If you are interested in real estate investing, you can buy as many houses as you wish without having to qualify for new loans. But make sure your numbers will work for an investment.
7. Finally, whether you are a buyer or a seller, use an experienced real estate attorney to insure that everything is written up and set up clearly and correctly.
As I noted in part one – this type of strategy does trigger the “due on sale” clause found in the mortgage, but in the present climate with millions of foreclosures, banks are not going to call the loan due as long as the mortgage payments are current.
Donna S. Robinson has 17 years experience in the real estate industry. She is a real estate investing coach, real estate investor and real estate agent located in Atlanta, GA. Follow her on twitter at donnaconsults or you may read more articles on her blog at www.realtybizconsulting.com