Epic Real Estate Investing - Subject-To | Creative Real Estate Investing for Beginners | 1017

Episode Date: May 13, 2020

In today’s episode, Matt shares how to use the SUBJECT-TO strategy in your creative real estate investing to get all of the upsides and none of the downsides when purchasing an investment property. A great advantage of this strategy is that you will have the opportunity to entertain this idea and up to two-thirds of your creative deals! Sounds good to be true, right? Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

When you hear someone put the word creative in front of the words financing or real estate, that's not the type of creativity they're referring to. They're referring to using a creative idea in place of money when you invest. You see, it's never a money problem that stops you in real estate, but rather an idea problem. You don't need a lot of money to make money here. You just need a lot of ideas. We refer to these creative ideas as terms. terms like equity sharing, options, lease options, agreement for deeds, seller carryback,

Subject 2, Raps, All Inclusive Trust Deeds, and so much more. But right now, I'm going to show you how to use the subject 2 idea in your creative real estate investing. And you'll probably have the opportunity to entertain this idea and up to two-thirds of your creative deals. And it's so damn sexy because you get all of the upside and none of the downside. Let's do it. This is Terrio Media.

Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep looking. If you want it faster, visit R-E-I-A-Ase.com. Here's math.

A subject to purchase is when you buy a property and take official title, but you leave the loan in the seller's name. Sounds like a smoking deal, right? Well, it is. So how do you get more of these? That's what I was thinking the first time I heard about this. The subject two of this type of purchase is short for subject to the existing financing, of which means when you make this purchase, the financing that was there before you ever entered the picture is going to stay in place. I mean, the seller already jumped through all of the bank hoops

and secured the financing for you. Boom. Who needs money to buy real estate when the real estate gets passed along to you with the money already in place? Too good to be true? Maybe, but not really. You just need to find the right situations. And I'm going to show you how to find them in just a few things to note where people are mistaken one this is not a loan assumption that's something else entirely two just because a seller is ready willing and able to give you their property subject to their financing doesn't mean you should take it it still has to be a deal for you there must be equity and or monthly cash flow to be had otherwise you are taking over a property from a distressed seller to soon only find that you are now being the seller in distress

And three, it is not illegal to buy a property subject to. It is not illegal for someone to sell what they own. The legal confusion occurs in that the majority of bank financing has something in the loan docs called the due on sale or due on transfer clause. This allows the lender to call the note due in the event that the borrower transfers title to the property. They almost never do, though. Just because the lender has the right to call the loan due, it does not mean that the lender wants to call the loan due or even or ever will.

It's really pretty rare. You, the buyer, however, should enter every subject to transaction with the full understanding that the lender may call the note due in the near or far future. You should always have a plan B to either refinance or sell the property should the lender come a knocking. You could let the lender in on what you're doing, but if you do, you run a really good chance of just blowing your whole deal to smithereens. I prefer to keep the lender out of the loan.

But should they contact me and ask me about it, I go into full transparency mode. It sounds something like this. Mr. Banker, the previous owners couldn't afford the upkeep of the property or make the payments anymore. So I stepped in to help. I'm fixing the property up and making the payments for them. If you call the loan due, then I'm going to immediately stop all repairs and I'll stop all payments. And then you'll have to go through the foreclosure process.

This approach has yet to fail me. There are ways to hide the transfer from the evil corporate banks, but I'll cover that all by itself in the next lesson. With all that said, seek the advice of a local and reputable real estate attorney with this or any other outside-the-box strategy as local laws may have an impact on how you do creative investing. There are a lot of reasons that you would want to add subject to your investor toolbox. Reason number one, get control of another property.

And that's the name of the game, remember? Reason number two. No bank qualifying. Reason number three, small or zero down payments are required. Reason four, typically you get a better interest rate from the resident owner financing than you could get with an investor loan. Reason five, loan seasoning. The longer the loan has been in place, the better.

And I'll explain why when I show you how the process works. And then reason number six, not on your credit report. There's no recourse nor impact on your own conventional buying in the future. So why would a seller want to do this? Well, reason number one, they've got bigger fish to fry than going for a traditional full price sale of their home. Reason two, a cash sale just won't work in their situation. There's not enough equity in the property. Reason number three, they don't want to do the repairs to cause a cash sale to work. Reason number four, they can't catch up on their payments, but do want to avoid foreclosure.

Reason number five, they need peace of mind. Most people that would consider something like this aren't typically on a winning streak. See reason number one. And as promised, I'll show you how to find property owners like this in just a minute. Now, even with all of those good reasons for the seller to do this type of deal with you, you will tend to still get some pushback. And the most common objection that you're going to get is the seller asking, what if you don't make the payments? Why should I trust you?

So you should be prepared with the response. Here's mine. Mr. Seller, this is my business and it's how I make money to feed my family. I'm going to put some money into this property and I'm going to take on all of the expenses of this property. I can't make any money by not making your payments. And in the event that I can't make the payments, you will have a fixed up property to take back and be in a better situation than you are right now.

Works for me. Another note for when you're talking to sellers, avoid using real estate investor jargon like subject to. Keep it really simple for them and just tell them that you're going to take over the property maintenance and make their payments for them. Now, here's how the process works. Step one, put it under contract.

Use a normal purchase agreement, insert the price, and in the terms, just write, subject to the existing loan balance. It is imperative, though, that you inform the seller that there is no guarantee that the lender will not call the loan due. It's rare, but it's possible. It is important that you have the seller also signed documentation that they have been informed as such, and that brings us to step two. Provide the seller with disclosures, like a distressed sale disclosure and a due-on-sale

disclosure, those two are essential. You will also want to get an authorization to release information. The smart investor, the epic investor, will always conduct their due diligence on the property itself, on the market conditions, and in the instance of a subject to transaction, due diligence on the existing financing as well. The authorization to release information document will give you the ability to talk directly to the bank about the seller's loan. And that leads us to step three. Validate the condition of the loan. Things to look for that could easily and quickly cause complications for you are adjustable interest rates, upcoming balloon payments, and the number of payments that the seller may be behind. None of these are deal breakers, but you certainly don't want

to be blindsided by them as the new owner either. On the positive side, what I call a deal maker is the length that the loan has been in place. The longer, the better. Because at the front end of a loan, most of the money paid to the bank goes to interest. And on the back end of the loan, the more of the payment that is applied to the principal. If you get to step in on the backside of that loan, more of your payments are going to go to the principal, thereby growing your equity faster.

Step four, calculate the amount of equity. That's the difference between what is owed on the loan and what the property is worth. Step five, calculate the expenses that you're going to be taking on, like the taxes, the insurance, the rehab costs, maintenance, and management. Step six, calculate the cash that you're going to need to close. Then step seven, determine your exit strategy.

In most cases, it's going to become a rental for you or a lease option. But maybe it's a rehab job that you can fix and flip. Step 8. Use an attorney to process the transaction and close it for you. Step 9, pro tip. Set up a third party servicing company to manage payments to the bank. Not required, but it's nice knowing the accounting. is being done properly without your direct involvement.

At this point, the next big question is almost always, sounds great. But how do you find subject two deals? Well, it's not that different in how you'd find any other deal. I mean, simply by showing sellers options, other than a low-ball all-cash offer that everyone else is presenting to them, you'll get takers that way. But if you want to narrow your efforts towards subject two deals specifically, start marketing to, one, people in pre-foreclosure.

property owners behind on their payments that either can't catch up or just don't want to at a certain point, but still want to avoid a full-blown foreclosure on their credit report. And that's like a nuclear bomb blowing up their ability to ever buy a property again. There's motivation there. Direct mail and bandit signs with messaging like behind on payments or free help with foreclosure or tired of making payments. All of those messages work well in attracting people headed towards a foreclosure. Two, property owners with low equity. There's less competition here.

Most investors don't market to these people because they don't know how to make money on properties with low equity. But now that you're armed with subject to knowledge, you can. Three, the multiple listing service. Look for properties that are well beyond the normal average days on market for your area. And look for expired listings. Likely, these sellers will be tired of dealing with realtors and will be much more open to creative offers than they would have been when they first decided to sell. Then four, out of state absentee owners of business. vacant houses are likely going to be tired of making payments on these properties.

There's plenty of motivation in that. Now you know what a subject to is, how the process works, and how to find subject to sellers. See you next time. Yeah, yeah, we got the cash flow. Huh? Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. You didn't know home board, we got the cash flow. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com