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How Do I Get Out Of A Subject To Deal If The Market Drops And The Buyer Wants Out?
Joe: Hey, it’s Joe Crump. Got a bunch of questions from you and I’m going to answer them here on these videos. This first one is from Jane. She’s from Pasadena and she has a question about doing subject to’s. She says here, “Thanks for your website videos. I’m new and you’re helping me. Your calmness makes me feel you have a solution to any problem.” Thank you. She says, “I’m happy you made your movie,” and she’s talking about “The Storyteller” which is, by the way, available, I give it a little plug here, it’s available on Amazon Prime. If you haven’t watched it, so take a watch on that video and it’s free, it’s a family movie, it’s a lot of fun.
Joe: Her question is, “How would I get out of a deal if I buy it subject to and then I sell it owner-financed or lease option, but then the market drops and I have negative equity on the property and the buyer wants out and wants to stope paying?”
Joe: Well, that’s a pretty straight forward question. One of the beauties of buying subject to is your name’s not on the loan. You don’t have any down payment into the property, so if you have to give that property back to the seller, it’s not really, it’s not going to hurt you. All it’s going to do is do what you promised the seller you would do in the first place. Whenever you take a property subject to, you tell them, “I’m going to make payments on this property, I’m going to keep it in good condition, I’m going to put a tenant in here and I promise to make your payments on time. And if this ever becomes unviable as an investment I am going to give the property back to you. But if I give it back to you, I’ll give it back to you in at least as good condition as it’s in now. And I’ll make sure that the payments are on time up to the date that I give it to you.”
Joe: That way you can always give it back to them if the deal becomes no longer viable for you. So, let’s say you get into this situation. Most of the time, even if the value drops, as long as the rent stays solid and you don’t have much negative cash flow, it’s going to make sense for you. Because you’re going to be making money on this property in a lot of different ways. One, you’re going to get a lease option fee on it because you’re going to sell it on a lease option. So, let’s take a $150K property as an example, that has, you know, $1,400 a month income on that property and it has a payment of, you know, $1,100 and it’s got twenty-seven years left on the mortgage and it’s, you know, it’s mortgaged up to the hilt, I mean, up to the full value of the property.
Joe: And then suddenly the value drops down to $130K. You’re making money on that property every month because you’re paying down on the mortgage every month, not very much, but you’re paying down on it. You’re getting that lease option fee when you sold it, because you’re going to sell it for maybe $10,000 or $20,000 more than you bought it. So, let’s say you get $5,000 in cash on that property. So, you’ve got $5,000 that you can put into an escrow account in case you ever, the property goes vacant, you can make payments on it.
Joe: You’re going to have a little bit of cash flow, maybe $300 or $400 a month positive cash flow on that property that you can also put aside and make sure you have a reserve on it. Because the property’s eventually going to go vacant after two or three years if that buyer doesn’t exercise their option. And you’re going to sell it again. This time, hopefully, the values have gone up. But if they haven’t, you can still sell it on terms for a little bit more than it’s worth. So the likelihood, unless it drops 30% in value or something, the likelihood is it’s not going to be a problem for you. You’re going to be able to keep that property, you’re going to continue to have cash flow on it, you’re gong to have money coming in from the lease option fees and you’ll be able to sustain that property over the long term. After 5, 10, 20 years, you’re going to own that property and you’re going to pay it off and you’re going to have made money during that time. And even if you have negative cash flow, there’s, even a little bit of negative cash flow’s not going to be a big problem because you’re going to get all the positive benefits from it.
Joe: So if it costs you $100 a month to keep that property, you don’t want to have a lot of those that are like that, but, if that one did, it’s not going to be the end of the world because you made money on your taxes, because you got depreciation on it, you got the buy down on the note, you got the cash flow on it, you got the lease option fee. You know, you got the appreciation on the property, if the option buyer doesn’t buy it. So, you’ve got a lot of benefits from that to make sure that you’re going to be okay. And worse case scenario, you give it back to the seller, doesn’t affect your credit, it didn’t cost you any money. So it’s not going to be the end of the world.
Joe: So, that’s why subject to can be a wonderful way to build a portfolio without much risk. All right. I hope that helps.