Real Estate Subject To Investing

Buying real estate subject to existing financing is one of the easiest ways of getting 100% financing of investment property . If the seller is desperate enough, they might even pay you to take over their mortgage!

What is subject to real estate? Simply put, it means getting control of the property while keeping the existing financing in place. The homeowner needs to sell and is willing to give you the Deed and let you take over mortgage payments.

Many view real estate subject to purchasing as the ultimate "no money down" real estate deal. But there can be a few traps that can get you in trouble if you are not careful.

The first caution is that most loans are not assumable - they contain a "due on sale" clause. Certain government backed loans like VA loans, are assumable, but since the days of high inflation in the late 1970's to early 1980's most loans have carried a due on sale clause. Back in those days many people would assume low interest rate loans rather then get a new mortgage at 17%. The banks did not like this at all, so "due on sale" was put into most financing to give banks the option of calling the loan and forcing higher interest rate financing.

I actually had this happen to me when I tried to sell my first home in 1980 with a "wrap around" land contract financing. But I have since done a lot of real estate subject to investing and not had a problem. I will share my secret in a moment.

Another caution is assuming a variable interest rate loan. This is another mistake I made early in my investing career. I took over a mortgage that jumped 5% in interest rate within a year after taking over the property. As you might guess, this made a positive cash flow property into a negative one - so make sure you check out the loan details before assuming it.

Finally, the third caution is make sure you are not assuming a loan on a property that is worth substantially less than the mortgage!

To get started in subject to real estate investing you first have to find motivated sellers . You should also look into a pre foreclosure sale as a possible source of motivated sellers. Unless a seller has no equity or is facing foreclosure they are unlikely to Deed over their property to you. Although in some situations, if a seller is motivated enough, they might be willing to accept cash or a note if you will take over the mortgage. The seller has to be in a position that they are not wanting to get a new mortgage in the near future, since the one you assume will still be in their name.

Once you have found the right seller, inspected the property carefully and agreed on terms here the essential steps of real estate subject to investing:

1. Create a Land Trust - the seller will not sell the property to you, but to your Trust


2. Create a POA (Power of Attorney) document in which the seller assigns you the right to handle all matters dealing with the property


3. Have an attorney create the Deed which assigns the property from the seller to your Trust

A Land Trust is a document that allows you to hold property without your name appearing. The Garn - St Germain Depository Institutions Act of 1982 specifically allows one to place one’s property into the type of land trust to which we refer without triggering the due-on-sale clause. That means that one can transfer mortgaged property to a land trust without interference from the bank. I always create a Trust name like SellersName StreetName Trust. My name does not appear on the document - my LLC is the beneficiary and I do not record the Trust.

Having the property in the name of a Trust can also provide protection against lawsuits.

The second document (the POA) gives me the authority to deal with the bank, insurance agency, and municipality when dealing with the property.

To futher protect yourself you could also open up a checking account with the Trust name to make the mortgage payments.

These are a few of the secrets to buying real estate subject to existing financing. It allows you to buy many more investment properties then the 10 currently allowed by Federal Agencies. Not only can you get 100 percent financing for investment properties, in some cases you can get the seller to pay you! If they were going to pay a 6% Realtors commission, maybe they might be willing to give you some money instead of paying an agent!

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