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“Subject To” Real Estate Financing – No Money Down
Joe: Hey, it’s Joe Crump. Subject to real estate financing, no money down. I’ve talked about subject to in a lot of my videos here, but let me go into it in a little bit more detail. Let’s take a specific deal and we’ll just work with $100K property not because that’s an average price range in the country, but just because it’s an easy round number to work with. And I can do the numbers off the top of my head.
Joe: So we’ve got a property that’s $100K. And it’s got a mortgage on it that’s also $100K. Does it make sense to buy this property from that person? Not if we don’t get it under market value. We don’t want to pay cash for it, right? But if we can get it on terms at market value or below then we can make a profit as an investor. So there’s only two ways that you make money as an investor. Buying a property substantially below market value for cash or closer to market value but on terms. Especially if you don’t have to put any money into the deals at all. And on a subject to deal like this you don’t put any money into it. So let’s just talk about how that would be structured.
Joe: Subject to is this particular seller has a property that’s worth $100K. Decent condition, it’s rentable. It’s got a mortgage on there of $100K. His payment on it is $850 a month. It would rent for let’s say $1,100 a month. Typically $100K property will rent for a little bit more than 1%. So let’s say it’s $1,100 a month. And we’d want to check for comps because you’re not going to be able to rent it for more than it will rent for, or lease option for more than it’ll rent for. So make sure you know that number.
Joe: So. $100K. $850 is the monthly payment on it. We’re going to have that seller deed us the property. So you’re going to sign a deed in front of a notary that says that I am now going to own that property and they are no longer going to own that property. That mortgage stays on the property. You can’t get rid of that without paying it off. So you buying this property is subject to the existing loan. That’s why it’s called subject to. So you’re buying the property subject to that loan that’s already on there and you’ll have to make payments on that loan until it’s paid off. You can either pay it off in a lump sum or you can pay it off over time.
Joe: And let’s say it’s still got, they’ve only owned it for a month and they’ve still got 30 years on that mortgage. You make payments on that property for 30 years. You want to be able to get the best interest rate that you can, but that’s going to be determined by what they got when they got that loan originally. So hopefully it’s a decent interest rate and the payments are fairly low. At $850 that’s probably a higher interest rate depending on the taxes and insurance on the property because that $850 has to include PITI. PITI maybe on something like this would be $150, so maybe you’re looking at $700 payment with a 5%, 4% interest on that mortgage.
Joe: Now. You’re going to have them deed you the property. You’re going to take over their payment stubs. You’re going to get online access to their account and you’re going to start making payments. You’re also going to change the insurance into your name, so you’re going to have to have a document that allows you to get that transfer. And you’re going to be able to have permission to talk to that seller. So you need to have a document that gives you permission to talk to that seller. You also want to create some kind of disclosure for them to help them understand how the due on sale clause works. A due on sale clause is on almost every mortgage in the country. And that due on sale clause says anytime that seller transfers their property the bank has the right to foreclose on that property and take that property back. It’s called an acceleration clause and they can take that property back if they choose to. I have never seen a bank exercise a due on sale clause. But they have the right to.
Joe: Now, we’ve done this with me and my students, you know, thousands of times. And it’s never happened. So it’s unlikely the bank will take it back. And there’s really no reason for them to take it back if their mortgages are being paid. If they’re monthly payments are coming in they’re usually okay with that. The banks have credit reports too. And if they have defaults, if they have to foreclose on a property that’s considered default and that affects their credit and it affects their ability to buy mortgages on the secondary market because they don’t, most mortgage companies do not, mortgage companies or banks do not hold those mortgages in house. They usually sell them to the secondary market. That’s what Fannie Mae and Freddie Mac’s all about.
Joe: So they have to be able to have the ability to do that and if they have too many foreclosures they can’t do that. So they don’t want foreclosure properties. They don’t want REOs, real estate owned. They don’t want that stuff because it just costs them money. So you can usually make these payments and not have to worry about the due on sale clause and not have a problem.
Joe: I have one time where I got a call on one of my subject tos from Bank of America and Bank of America said to me I understand that you’re making payments on this loan, because the checks were coming from me, and you don’t – you’re not on this loan. You’re not on this mortgage. I said that’s correct. They said well you have to qualify for the mortgage in order for you to be able to continue to do that with us. And I said, well, that’s not how I work. I understand that’s what you guys would like but that’s not how I work. And I won’t be able to do that.
Joe: And they said, well, I’m sorry, then, we’re going to have to take the property back from you. And I said, I understand that too. I just want you to know that the person I bought it from is not going to be able to make those payments if I don’t make those payments for them. And I also want you to know the day that I get the notice of default from you guys, is the last payment that I’m going to make on that property. So if you decide to do that I’m not going to make any more payments on that property.
Joe: And she said, I’m sorry, we’ve got to do it that way. And so I got a call fifteen minutes later and she said, I just spoke with my supervisor and he said, please keep making your payments, we’re not going to foreclose on you. I said, that sounds great to me. So I continued to make those payments and I’ve not have a problem with that mortgage ever since. And that’s going to be probably your experience.
Joe: Now, I’m not an attorney, this isn’t legal advice, you know, I can’t give you any of that. If you want to talk to an attorney they can give you their own opinion of it. I’ve got an attorney that I work with that knows a lot about subject tos and he’s not a big fan of them although he’s seen how much money I’ve made off of them. And he acknowledges that as well. But they have their own issues. But most of the time those issues can be resolved and we rarely run into problems with these types of deals as long as you do the paperwork properly in the first place.
Joe: We’ve even started doing subject tos where we’re able to get title insurance that writes a title insurance around the mortgage. And that happens in some areas, not every area that we’ve worked with. So subject to is a wonderful thing.
Joe: Now we’ve got this property, we’ve taken control of it. We feel pretty secure in it. All we have to do is make the payments on it. So we go in there and make sure we get it ready to show. And by the way, if you don’t have any money at all and you want to do it this way you don’t have to take the property until you have a buyer for it. You could set it up with a purchase agreement. Instead of having them deed it to you do it with a purchase agreement that gives you 90 days to go out and find a lease option tenant. And as soon as you find the lease option tenant and you have their lease option fee in your hands, then you can go back to the seller and say let’s close the deal, he deeds you the property.
Joe: I know that when I’m going to take a property like this I can fill the property. If you haven’t had that experience yet you don’t know that for sure so do it with a purchase agreement instead of the deed at the beginning. But I like to take it with the deed immediately. I have them pay at least the next month’s payment because interest is paid in arrears not in advance so January 1st payment pays December mortgage. And so that’s how I can sell that concept.
Joe: Sometimes we’re able to get them to pay two or three or four months. I’ve seen people get as much as six or eight months of payments from the seller to take over the property. So you can negotiate whatever you can negotiate. Remember it’s not what you deserve that matters, it’s what you negotiate. So make sure you negotiate the best you can in that deal and the more you do this the better you’ll get at it. But get at least 30 days so that way you won’t have to make a mortgage payment for, you know, if you bought it on the 3rd or the 5th you won’t have to make a payment on the following 1st. You’ll have to pay a payment the month after that. That’ll give you some time to find a tenant, get somebody in there and get some money and maybe make even a little bit more money on the deal.
Joe: So you’re going to take this property and you’re going to go fill it with a lease option tenant. You go out there and you raise the price. So you bought for $100K. You raise the price to $110K or maybe even $120K. And you put it on the market and you ask for a down payment. And you try to get $5,000 or $10,000 or $20,000 as a down payment. On something like this, on this price range, for you to get $5,000 in cash is pretty normal. And maybe another $5,000 as a promissory note. So you’re going to get $1,100 a month of income on the property. You have an $850 a month mortgage payment to make which is PITI, principal, interest, taxes and insurance. So you have $150 of positive cash flow there.
Joe: You’re also going to get $5,000 in cash on that deal as your lease option fee which is nonrefundable. It’s not a deposit. It’s nonrefundable. And you’re going to get another $5,000 promissory note that they’re going to give you $200 a month on which is going to raise your $150 a month up to $350 a month of positive cash flow on that property.
Joe: Also, the monthly payment that you make of that $850 probably about $100 of it is going to go towards principal since you’ve got interest. It’s a bank loan. So $100 of that goes towards principal. That means you make another $1,200 a year because of that. You’re also going to get tax depreciation on that property because you can depreciate it and that’s going to work out on this price range of property about $3,600 in tax depreciation which means for most people about $1,200 a month of income or fewer taxes during that year.
Joe: You’re also going to get appreciation on that property. So you’re going to get maybe another let’s say 3%. It goes up 3%. So another $3,000 a year doing that. So now you’ve gotten, you know, $4,000, $5,000 $6,000, $7,000, $8,000 a year of income on this property even though some it’s hidden because it’s paying down a mortgage or in taxes or wherever. Plus you get your positive cash flow and that positive cash flow is going to be close to $4,000 right by itself.
Joe: So now you have this extra $5,000 that you made on the lease option and every time you lease option it you’re going to get another lease option fee, you know, because the likelihood is that they’re not going to exercise the option. If they do you’re going, if you sold it for $120K you’re going to make another ten grand right then and there as they pay off the money that they owe you. So there’s lost of great ways to have this property.
Joe: You can also buy these properties inside a Roth IRA because they’re nonrecourse loans. Because the bank has no recourse against you to pay this loan. Because the mortgage is in somebody else’s name.
Joe: Now, when you are making these payment, you know, five years will go by, six years will go by, sometimes I’ll hear from my seller and say, are you ever going to pay off that loan? And I say, well, it’s not been profitable to me to do that yet. I’m going to pay for it eventually, though. And you know, if it takes me 30 years to pay it off that’s what our agreement was for, to pay it off when that loan pays off. And they accept that and I’ve not had a problem with that. I have paid off properties earlier because I sold them or a lease option was exercised or something along those lines happened and then I’d let that seller know that their mortgage was paid off and they’re excited.
Joe: And in the meantime I’ve been able to make their payments on time. I’ve never missed a payment for any of my lease option tenants and don’t you ever do it either. Make sure you keep a reserve for these properties. Don’t ever put them into a position where you screw up their credit. That’s not a good thing. You want them to look at this and know that you have taken care of them during that whole time and I have actually helped my tenants improve their credit over time because I’ve made that payment and it hasn’t kept them from buying other properties because this on is being paid for and the mortgage company doesn’t count it in their debt to income ratio.
Joe: So it’s been a great thing for me, it’s been good for the sellers who are trying to get rid of the property. It’s been good for the buyers who couldn’t have bought a property any other way than lease option. And it’s worked out for me in the long run being able to have a property that’s gone up in value and given me tax benefits all these years to do that. Subject to is a good way to buy properties.
Joe: All right. If you like this video hit the subscribe button. Go to ZeroDownInvesting.com and check out my six month mentor program where I teach you personally and walk you through the process on how to buy these properties and talk to you about them and you know, we have conference calls and we have a buying event that we do three times a year where we spend the whole weekend together. We’re doing it on Zoom now. It’s been pretty effective. We just did the first one recently and that’s working out really well.
Joe: Also you can go to JoeCrumpBlog.com and sign up for my free newsletter if you can’t afford the mentor program, or you can’t afford the Automarketer then get the free information and you can do this on your own even without my help. It’s just a few more you know, it’s a little bit harder to do it without personal help but it’s still doable. So don’t give up, and make this thing happen for you.
Joe: All right. Take care.