How to Buy Properties Subject to the Existing Note

“Who, in their right mind, would sell their house, leave the mortgage in their name, and trust you will make their payment?”

This was the question I asked when I first heard about closing deals subject to the existing note. This method of buying properties sounded impossible!

When I say “subject to,” I mean buying a home, or any property, subject to the existing mortgage. In short, I buy a house from a seller, the deed is transferred into my entity's name, and I agree to make the seller's mortgage payments. However, the mortgage stays in the seller's name until I sell the property to a new buyer.

There are plenty of reasons why I buy properties subject to the existing note, but who would be willing to sell me their house while still being responsible for the mortgage? For a seller, it sounds like a big risk. Where's the guarantee that I will pay their mortgage that remains in their name? When I first started talking to potential sellers about buying their properties “subject to,” I quickly learned that it was my motivated sellers who were willing to take me up on the offer.

Who is my Motivated Seller?

After many years of buying properties “subject to,” I've learned how to review a seller's property information sheet and quickly determine if it is a possible “subject to” deal.

From my experience, the strongest candidates for “subject to” are sellers who are currently behind on their payments. Recently, I bought a house “subject to” from a seller who was four months behind on their payments. If the seller has a mortgage, I talk to them about selling subject to the existing note.

In order to buy a property “subject to,” there has to be a current mortgage in place. Obviously, sellers who own their house free and clear of any mortgages aren't going to sell “subject to.” On a free and clear house, I negotiate to buy with seller financing.

The Most Profitable Deals

Buying subject to the existing note will always provide you with the most profitable deals. When you are buying “subject to,” you will be paying the current mortgage's interest rate. So, if the interest rate on the existing mortgage is only 4%, that's a whole lot better than paying a private lender 8%.

It's also worth noting that houses you buy “subject to” are usually in good condition and need very few repairs. This is because the seller is usually still living in the home when you purchase it. Not long ago, I went out with my acquisitionist to view a property. The sellers had painted, installed new hardwood floors, and updated the bathrooms. There was almost nothing that needed to be done; it was gorgeous!

The after-repair value on that house was $170,000; the seller had already agreed to sell it for what they owed, which was $118,000. “Oh, my lands!” Talk about a $52,000 profit with no rehab needed!

Let's Talk About Attorneys

When you're considering “subject to” deals, it's important to be aware that some real estate attorneys won't close a “subject to” deal. Believe it or not, a lot of real estate attorneys haven't even heard of “subject to.” In fact, on line 203 of the HUD Settlement Statement, it states, “Existing loan(s) taken subject to.” This is a completely legal method for buying properties.

The reason some attorneys refuse to do “subject to” deals is because they have an issue with the due-on-sale clause, which is included in most mortgages. This clause gives the lender the right—but not the obligation—to call the note due when ownership is transferred prior to the mortgage being paid off. Some attorneys feel ethically bound to notify the lender about the transfer of ownership.

Recently, I talked with one of my platinum coaching students who used my foreclosure system to locate a motivated seller. They found a deal ready to be purchased subject to the existing note and were under contract to purchase; however, she couldn't find a real estate attorney that would close her “subject to” deal. I taught her how to locate a real estate investor-friendly attorney, and she now has a real estate attorney that will close “subject to” deals. Lesson learned: Establish a relationship with a real estate attorney before negotiating and getting deals under contract to purchase using “subject to.”

Teach Me How!

Here's how to buy “subject to” step by step:

  • Step 1: Find a real estate attorney who will close “subject to” deals.
  • Step 2: Market to find motivated sellers.
  • Step 3: Fill out property lead sheets when sellers respond to your marketing.
  • Step 4: Make sure you have all the mortgage information. You can't determine if you can buy “subject to” unless you have all the mortgage information.
  • Step 5: Determine if you can sell the property rent-to-own. This allows you to have a positive monthly cash flow by bringing in more rent per month than the underlying monthly mortgage payment and other carrying costs, such as taxes and insurance.
  • Step 6: If the math makes sense, make an appointment to go see the property and determine if there will be any repairs. If you decide to visit the property, have the seller contact their lender and request a payoff instruction letter that's good for 30 days. Prepare the offer to purchase and have it ready to take with you to meet with the seller.
  • Step 7: Prepare the offer to purchase. The purchase price should be the current payoff amount unless you have agreed to pay more than the payoff amount.
  • Step 8: Know what to say and what not to say. Never talk about selling “subject to” over the phone. In my experience, it's much better when you can meet with the seller in person to explain how you will buy the house. Furthermore, don't use the phrase “subject to” with the seller. Here's the exact language I use when talking to a seller:
    • “I can do the deal. We will have a traditional closing, where the real estate attorney will handle the closing and prepare all the documents. The deed and ownership to your property will be transferred to my LLC. At closing, I will be responsible for all the property taxes, insurance, repairs, monthly mortgage payments, and any and all expenses associated with the property. You will sign an Authorization to Release and all correspondence from your mortgage company will be mailed to my office. Your mortgage will be paid off when I sell the house to a new buyer.”
  • Step 9: Email the payoff instruction letter and the offer to purchase to your real estate attorney for a quick closing.
  • Step 10: While at the closing, have the seller call their lender and request a change of address for all their mortgage company's correspondence to be mailed to your address. While your seller is on the call with their mortgage company, have the seller reconfirm exactly to the penny how much it would take to bring the account current if any payments are in arrears.
  • Step 11: Also while at the closing, be sure your seller signs an Authorization to Release form giving you and your attorney the right to talk to the seller's mortgage company any time in the future.
  • Step 12: Send a copy of the Authorization to Release to the mortgage company to get your entire team authorized to talk on the seller's behalf. Have someone on your team follow up with the mortgage company to make sure they receive the Authorization to Release, confirming that you and your team members are authorized to talk with the mortgage company about any details relating to the seller's mortgage.
  • Step 13: Purchase insurance coverage naming your entity as the insured and listing the mortgage company as the mortgagee, and have the seller cancel their property. Keep in mind that you'll get a letter from the mortgage company demanding proof of insurance. When you get this letter, provide proof of insurance to the mortgage company.
  • Step 14: If there are any past due mortgage payments, be sure to bring them current immediately. If you don't have the money available to bring the payments current, you can borrow private money and collateralize the Promissory Note in second position.

And you're done! You have bought a house subject to the existing note.

- Jay Conner

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