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Is "Subject To" for You?

Aug 5, 2008
Taking a property subject to the existing loan, is one of the ways in which real estate investors make a great deal of money. While the process is quite simple, it seems to be a clouded issue for some people.

First let's look at how simple the process truly is. The term "subject to" refers to the fact that you will be purchasing the property subject to the financing that is in place at the time. The loan (and any other liens or encumbrances), that is on the property now stays in place. You will be deeded the property by the present owner. You then take over the payments and send the payments to the mortgage company just as the former owner did. They may or may not get any cash in the deal, but they will get rid of their problem.

Now you're shaking your head! You're asking why would anyone in their right mind hand over a property? There are many reasons.

Deeding Over the Property

The first reason that comes to mind is that the owners may be behind on the payments. Something has happened in their lives that has forced them into a financial bind. They would much rather deed the property to a real estate investor than go into foreclosure.

Another reason could be a divorce situation. When couples split up, it usually means that where were two incomes, now there is only one. Whoever ends up with the house may not be able to afford the payments.

Job transfer might be another reason for the owner to be looking for a quick, easy sale. If the family has already moved, and they have no buyer prospects, and they are making double house payments, you better believe they are seeking for answers - fast.

The fact is, these can be bargain properties and it provides the perfect way for you to get started in your real estate investing business.

As soon as you can verify if the property is one you are willing to take on, you draw up and sign a sales agreement. Be sure to have an "Authorization To Release Information" form for them to sign as well. This gives you the right to call the mortgage company and get the balance on the loan. Once the agreement is secure, now is the time to do your due diligence checking the title and having an inspection done.

Using a Land Trust

Consider having a "land trust" hold the title to the property. This means the seller will sign a trust agreement with you as trustee of this trust. The seller will be the "beneficiary" of the trust. The seller transfers title to the trustee of the land trust which also means there is no violation of the due-on-sale clause.

Once you determine that the information they've given to you is correct, draw up the trust documents which will be signed and notarized. The next step is to file the deed at the courthouse. The property is now yours!

A letter will be sent to the lender explaining the changes. They will be informed that all future correspondence will be sent to the trustee. The insurance can be switched over to the trustee in the same manner.

Cash On Hand

Does this mean you are turning these deals with no cash? The answer is no. This is not an agreement to be entered into lightly. You must always have enough cash reserves to take care of at least three mortgage payments - just in case. (Remember Murphy's Law!)

First of all the house may need a few repairs. At best it will need cleaning up. Some properties may need a couple payments to be paid just to bring it current. You want to have enough cash on hand to consider these possibilities.

Don't think of this as a way to get into real estate investing with not a penny in your pocket. That is dangerous thinking that can lead to disaster.

What you will not need in this scenario is perfect credit. That's another plus for acquiring properties subject to.


Always remember that you have been granted an incredible trust by these homeowners. You hold their credit in your hands. While some real estate investing gurus may teach that you can just "back out" of such an arrangement, don't do it.

If your goal is to build a legitimate real estate investing business, you want to do it by creating an image of honesty and integrity.

Many real estate investors have obtained dozens (some hundreds) of properties by taking them subject to the existing loan. You can too.
About the Author
Iman Yusef-Yahya finds some of the very best
below market deals in the country.
Find out how you can
get instant access
to these below market deals now at http://www.ImanAnd
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