This article is the first in a series of seventeen articles that will give people insight into how real estate investors are able to buy and sell real estate with little or no money, no credit and little or no risk. While it may seem impossible, tens of thousands of these transactions are done weekly throughout the country. Most home buyers are familiar with buying a home using the traditional method of shopping with a realtor, finding a home and getting a mortgage to pay for it. While traditional, this method is in no way related to the huge leverage afforded investors doing deals with creative financing.
The first and likely the most common method of an investor buying and holding a property for more than a few days, is to do what is called "subject to" purchase. This method allows the investor to purchase the property from the seller by keeping whatever existing mortgage that is in place at the time. The investor simply takes over the seller's mortgage payments from the date of the closing forward.
Over 30 years ago, lenders decided that they could make more money on refinancing home mortgages than allowing a new buyer to simply assume their existing mortgage on the property. Since the average homeowner only lives in his property for 5½ years, the reissuing of new mortgages became a primary source of revenue for lenders. The lenders ability to later bundle and resell these loans lead to an acceleration of lenders making loans and a huge profit stream.
To overcome the assumption clauses that were common in their early mortgages, lenders inserted what was called a "due on sale" clause. This clause basically stated that if a borrower (mortgagor) sold, transferred or exchanged the encumbered property, the mortgage was due and payable. If the borrower didn't pay off the mortgage at the sale or transfer, the mortgage was immediately subject to a foreclosure proceeding by the lender.
In actuality, as long as the lenders received the mortgage payments, they never pushed the issue of the transgression by the homeowner/borrower selling the property. The investors who do "subject to" transactions were able to control the properties with little or no money because of the financing in place, no credit qualifications by the lender and no market risk unless they had put money into the deal for the seller to leave.
The investor could simply get a warranty or quitclaim deed from the seller and file it at the local courthouse, continue making the mortgage payments and move into the property, rehab it for resale or rent it. In many cases the investor may have re-sold the property to another buyer and allowed the original seller's mortgage to stay in place.
Violating the due on sale clause is a violation of contractual law which would have to play out in the courts, versus criminal law which could result in stiff fines or penalties. Because of this, there is no Due on Sale Jail. In probably over 20,000+ subject to investor purchases there has never been any enforcement of the clause by lenders as long as the mortgage payments are being made. This could change and certain states are trying or may have passed legislation to make subject to purchases illegal. Always check with an attorney familiar with real estate law before you try a subject to.
The benefit to the seller of a subject to is the immediate sale of his property to an investor. The investor doesn't have to worry about bad credit or no major down payment, if any at all. The investor's market risk is limited to whatever equity he puts into the property at the original closing and afterward in upgrades or repairs.
However, the risk to the homeowner/seller is that the investor buyer, or the investor's buyer, will stop making mortgage payments and the lender will foreclose against the seller/homeowner. Even worse, is when a buyer makes late mortgage payments that will negatively impact the homeowner/borrower's credit. Even if the borrower calls the lender and snitches on the investor, the lender can only foreclose if the payments aren't being made or they invoke their rights on the due on sale clause - which they seldom do. The homeowner is left to suffer until the mortgage is paid off at another sale by the investor or until the lender forecloses. The late payments or foreclosure of the loan do not affect the credit of the investor because he is not the borrower.
In summary, investors have a powerful tool in using subject to financing to acquire a property. Common sense and prudence should be exercised so the seller is not exposed to potential credit damaging results of the sale. The benefit to the homeowner/seller can be immense as the relief of getting rid of a mortgage payment and the responsibilities of the property's maintenance in minutes. So, subject to financing can be a win-win for all parties involved if the risks are properly disclosed to the homeowner and appropriate documentation is signed by both parties to protect their interests.
About Author: Dave Dinkel has over 35 years experience in real estate investing which has given him a unique perspective into the real estate market. Dave is the author of the best-selling e-courses http://www.fsbopowersellingsystem.com/ and many other e-courses for investors and homeowners. Dave's focus in the past few years is educating the public in a manner that doesn't amount to paying for a master's degree. His recent contribution to this end is the e-course "48 Ways to Create a Massive Buyers List" which can be seen at http://www.MakingaBuyersList.com.
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