Long-Term Investing Using Subject-To Transactions
A subject-to transaction is a real estate deal in which the buyer purchases the property subject to the existing mortgage. This means that they assume the current payments at the current interest rates and their payments, present and future, are subject to the terms of the loan. This is an extremely useful and valuable tool to have in your real estate investing arsenal, particularly in the current market when traditional lender-financing is hard to come by. However, if you are going to use subject-to transactions to invest long-term in properties, then there are some things that you can do to make that transaction best suited to you.
One of the things to look out for in subject-to deals is the terms of the mortgage. If you planned to only own a property for a few months or even a year, for example, then a second mortgage with an ARM, a short term on a fixed rate or a balloon payment might not be that big a deal. However, if you are in it for the long haul, then those lousy terms become your problem, and you should steer clear of mortgages that do not have fixed, low rates – even if you think you can refinance, because unless you have the new financing in place already, nothing is certain right now in that arena.
Once you have made sure that the terms of the loan are acceptable, start thinking about things that will make this investment to your advantage. Most subject-to sellers would like to include in the terms of the sale that you will refinance the property after a certain period of time – often 3 to 5 years at the outside. Again, if you were going to flip this property, then this would not be a big deal. However, if you are going to own it for the long haul, you do not want the seller showing up 10 years down the road saying that you failed to keep up your end of the bargain because you were not able to refinance. Make sure that you can keep that mortgage and that interest rate for the life of the loan if you wish.
Finally, check on any other regulations having to do with the property. For example, many real estate investors like to rent out their long-term real estate investments. However, many homeowners’ associations (HOAs) prohibit this. A seller is not likely to tell you this type of thing even if they know about it because it could discourage you from purchasing the property. It will be up to you to check zoning, HOA regulations and any other legal requirements that are involved with the property because these issues are going to be your issues once you purchase the property.
Finally, make sure that the seller does not have any outstanding liens against the property. These liens can and probably will become your liens, even if the seller signed for them personally. If the seller has borrowed money against the property from a private lender or even an acquaintance, you must get the terms of that loan renegotiated before you buy in case at some point the seller fails to make those payments and the note-holder comes after you and your property to satisfy the debt.
Buying subject-to properties in the current market is a great way to add to your real estate investing portfolio without a large outlay of cash. Some particularly motivated sellers will sell for no down payment at all just to get out of their mortgages, and even the most stubborn sellers often can be negotiated down to down payments that are extremely small – particularly in today’s credit market.
Peter Vekselman has been successfully investing in real estate since 1996. He has completed over 1200 real estate deals, owned a construction company, been a private lender, and owned a property management company. Peter currently works with clients all over the US helping them achieve riches in real estate investing. For more information please visit www.CoachingByPeter.com.
Questions and Answers
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