The Science of Flipping - Subject To Financing

Episode Date: December 8, 2020

I get a lot of question about subject to financing and how to get started or why someone should take advantage of the strategy.

What is up, everybody? What is up? Welcome back to the Science of Flipping. I am your host, Justin Colby, and this podcast is all about the right strategies, tools, systems, processes to implement right now in your real estate investing business so that you can be profitable and help scale your business. This is a show that I am going to be talking about one of our favorite subjects, which will be creative financing. And to that level, even deeper, I want to go into the subject to world. It is a very popular topic and I want to talk more about it and how I utilize it in my business and where to find the right subject to properties. If you have not, I'd love a review on this podcast, as well as if you have not jumped over to YouTube, I'd encourage you to go over to

YouTube. I do a YouTube video a day about real estate, business, and entrepreneurship. Go to YouTube and just look me up, Justin Colby, and you will love those videos as well. So first, let's define what a subject to is. And it is simply you are buying a property subject to the existing loan that is in place. That loan is in the current homeowner's name, and it is going to stay in the current homeowner's name, and it is going to stay in the current homeowner's name, and you are going to start to pay that mortgage payment. That is different than assuming the loan and transferring the loan over into your name. Totally separate. What we are talking about is subject to, and what that means is you are buying a home subject to that homeowner's loan, and it's

leaving the loan in the homeowner's name. And you are now going to be responsible for that. Now, there's a lot to dive in here. And we're not going to do a massively deep dive. But I will tell you a couple good tips and tricks when dealing with subject to's. First of all, what would be a good subject to property? Well, first, I always look at like, if they don twos. First of all, what would be a good subject to property? Well, first, I always look at like, if they don't have a lot of equity, but you're right around the right price point for the home, that could be a good subject to where there's not much equity to wholesale it. There's not much equity or margin or value add to rehab. Flip it could be a great property to subject to. Another good reason to potentially

do a subject to is if you want to keep it for your own portfolio, you would likely say, hey, you know, I would rather a three or a 4% interest rate, which Johnny homeowner has because he bought it with that loan, then to go, you know, go buy the home, get a loan from the bank currently in the investor model will probably be closer to 6% interest. I'd rather save that money. So why don't we just do a subject two with the existing loan in there? That would be another good reason to do a subject two. Thirdly, another good reason you'd want to just do a subject to is ease of the property, right? Like it, it just, it makes it easier to actually buy the property because you don't actually have to, uh, go out, get money, raise money, et cetera. Right. Um, and so those are

some good reasons that you would want to be, about it. You know, one of the things that you should always think about is why would the seller want to do this? One reason is they maybe are in a tough spot now. You know, they can't make their payments anymore. Maybe they're on their way to foreclosure. Maybe they need to sell quick and don't have equity in their home, as I just mentioned. That's why they would maybe do it. Maybe they need repairs that they can't afford. They don't have money for it. And they need to just get rid of the home.

The repairs are too big. They want to avoid foreclosure. Or maybe they just need to move fast. And this is the fastest way they can get it done. So that's a lot of the reasons why you will find a seller that would be willing to leave their name on the mortgage. One of the things that the next question usually is people will say, well, why are they willing to leave their name on the mortgage? And then what is the risk? Well, the risk would be is if the bank calls the note due. This happens very, very rarely, if ever, although the bank has the right to do it.

And one of the things that I would say if that ever did happen, one of the things I'd say to the bank is, hey, you know, I came in, stepped in to help the homeowner out to help make payments, I'm going to be, you know, rehabbing the home and making a lot of improvements on the home and making payments for the homeowner. And that should do the trick. The bank's like, hey, as long as you're, you know, making payments on time, they likely don't want to call the note due. And because you're stepping in because the homeowner couldn't pay the note. So they likely don't want to have to do that. That's what I would say to the bank if I was approached by the bank with a due on sales clause. One objection you might have from a seller

would be, what if you don't make the payments? How's that going to affect me? And you say something in the regards of like, Mr. Seller, this is my business. I'm a real estate investor. This is how I make money. And if I'm willing to buy your home and make improvements on your home and pay for all the holding costs of your home, I need to make some money. So it does me no good to not make your payments because if I don't make your payments, I don't make any money.

And that's really the truth. And most, if all homeowners that I've ever said that to, they totally get it. They realize that is the truth that you wouldn't be making the investment to, you know, repair the home, rehab the home, cover all the holding costs. If you couldn't find a way to pay the mortgage and make some money in it. Right. And, and the last thing I would tell the homeowner is, Hey, even if I did stop, even if something happened and I couldn't make the payment, you now have a home that has been remodeled or rehabbed or repaired, and you're left off in a better situation than you were before I came in. And so you can sell the property at that point

because you'll likely have enough equity based around the rehab that I did. So that usually will calm the nerves of the seller. And then the last question I usually will get with subject twos is where do I find them? Where can I find good subject twos? And so the first answer to that will be most everyone understands the pre-foreclosure list. These are people that have not been making their payments. They're in a tricky spot. Could be a good opportunity for some subject twos. I've also been able to find deals on the MLS, which is kind of a shocker, but they have really high days on market. And so essentially you're talking to a homeowner who still wants to sell, has interest to sell, doesn't seem to be highly motivated because it's high days on market. So that would be a good

person to sell. Landlords are also good. They like the ROI of a property, but might be tired of dealing with landlord type issues. So finding landlords in your area and or a low equity list, people that don't have equity. those are grade lists that most investors are not going after. Most investors are going after high equity lists. And so going after a low equity list would put you in a position to find more properties that quite honestly, most of your competition won't be looking for.

So I was able to answer some questions there. Obviously, this is a deeper subject in the paperwork, et cetera. But we went over what list should you be going after to find those properties. We went over what the objection from the sellers would be, why the sellers would likely want to do it, and what a subject to is. You're buying the deal subject to the existing loan. I encourage you to get out there, start marketing for these deals. These are great deals. And as we go into 2021, there will be some opportunity with low equity lists and pre-foreclosures. However, with the moratorium, with everything going on, I don't believe there is going to be a tsunami. As a lot of people are saying. I do believe there are going to be opportunities. I just don't believe it to be a tsunami and they won't be everywhere.

So that's why you got to market for them. Find them. Market for them. If you like this and you want some more free goodies, go over to thescienceofflipping.com. Thescienceofflipping.com. More free goodies over there. In fact, I am more than willing to have a strategy session call with you. If you want, just go to the science flipping.com book yourself a call. I personally

will jump on a call with you to help you overcome any challenges you may be having in your business, whether that's maybe just getting started or you're trying to scale your business or anywhere in between. So go to the science flipping.com and I'm happy to have a conversation with you. Also get over to YouTube. Check out all the videos I put up. Every single day you have a new video. Talk to you guys soon. Peace.