In the previous video, I spoke about seller financing and how to use this strategy when a seller owns a property free and clear.
In this video, I explain how buying houses subject to the existing mortgage works. Many people abbreviate this to “subject to” or “sub to”. All it means is that you are taking over the payments of the seller and buying the house subject to the existing mortgage that is in place. You are essentially assuming their mortgage.
Whenever you encounter a seller that has a mortgage, is current on their payments and has a low interest rate, you should be trying to negotiate a subject to offer where you can buy the house subject to the existing mortgage and take over their mortgage payments.
Many people think that buying houses subject to is illegal. It is not. However, there is something called a “due on sale” clause that you should be aware of. This clause means that the lender can call the loan due in 30 days if the property is sold or conveyed. There are ways of getting around this restriction. Buying houses subject to is perfectly legal and is also a great way to buy real estate because you can buy unlimited amounts of real estate. Traditional lenders will only let you have 10 houses in your own name. However, when you are buying houses subject to you can buy as many houses as you want.
When you are talking to motivated sellers, you always want to know if they are current on their mortgage, how much they owe on the mortgage, how long is left on the mortgage (years) and what the interest rate is. You also want to know what the monthly mortgage payment is (including taxes and insurance). The ideal scenario is a property that needs no work, has a low payment (like $1,000) and could be rented for a much higher amount (like $2,000).
You may think that this is difficult to find but there are many sellers that purchased a home in 2021 or 2022 that have very low interest rates on their mortgages (some are less than 3%). Let’s say you meet a motivated seller who has a mortgage and is current on their mortgage. You should immediately be thinking about creating a subject to offer. The best way to do this is by price anchoring low with your cash offer and then making the subject to offer sound more appealing. If this is absolutely rejected you can go back to the cash offer and increase the offer amount.
Here is an example of buying a house subject to:
A seller wants to sell their house for 200k. They call you from a postcard that you mailed to a list of owner occupied homes. Your cash offer as an investor is 120k cash. They immediately reject your offer.
You ask more questions and find out that they have a mortgage and they owe $150k to the bank. You offer to buy their house and give them $10,000 as a down payment and take over the existing mortgage that they have ($150,000). Your offer is now 160k.
Initially, they don’t like the idea, because they have a realtor that can bring them a buyer at 170k. But you point out to them that even if they sold for $170,000 after commissions and closing costs they would be walking away with 153k and since they owe $150 they would essentially be getting $3,000 (versus your offer of $10,000 cash up front).
They agree and you buy the house with just $10,000 down.
With subject to, in some cases, you can persuade someone to sell their house without putting any money down at all. A true no money down.
For example what if their mortgage balance was $170,000?
And they had an offer they were considering through a realtor for $170,000. If they sell at $170,000 with an agent and pay 6% commission and 4% in closing costs they would only net 153k. but they owe the bank $170,000 which means they would need to come out of pocket and write a check to the title company for $17,000 at closing!
But you are offering to buy their house and take over the mortgage and they get to just “walk away”. Do you see how that could be appealing to some sellers? And if the interest rate on their mortgage is low then that could be a win win and be really good for you as an investor too!
In today’s market, learning how to buy houses subject to the existing mortgage is very important since prices have pulled back around 15% and the typical buyer that put 5% or 10% down is not able to sell and pay off their mortgage. But if they have good credit they may have a sub 3% mortgage which could be taken over! It’s just waiting to be assumed!
I teach creative financing methods like buying houses subject to the existing mortgage, subject to real estate investing strategies and creative financing methods like seller financing at the Foreclosures, Short Sales and Bank Owned Properties Boot Camp.