Today, Dave Payerchin shares the basics on how a subject-to deal works and what you need in order to make it happen.
Dave explains how a subject-to deal is different from other types of financing.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Dave: Hey, everybody, it’s Dave P. with Columbus Turnkey Houses and I’m your host of the REI Classroom. Today, we’re going to be talking about subject-to deals and the documents you need to complete a subject-to deal.
Mike: This REI Classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.
Dave: All right, everybody, this is Dave Payerchin, Columbus Turnkey Houses in Columbus, Ohio. Today, we’re going to be talking about subject-to, taking over a property, buying a property, subject to the existing financing. This is a great technique and a great strategy for you investors, for all of us. Right now, the way the market is, there’s a lot of cheap fixed-rate financing out there on the street.
We just took a property subject-to last week and that’s why I’m hot about this topic. There was a lot of good 6% and cheaper money out there. If you have a motivated seller, they need to sell, you very easily could just go in and say, “Hey, we’re going to take over the property, you’re going to sell us the property, we’re going to leave the loan in place until we sell the property and get it paid off.” Basically taking a property subject-to is very much like private money in disguise. It’s cheap money and there’s already a loan in place.
This is how you do it. First things first, you need a purchase and sale agreement with the seller. This is a purchase and a sale, so you’ve got to have a purchase and sale agreement. The purchase and sale agreement we use . . . and by the way, I’m happy to share any of these documents. You contact Flipnerd about that. Get a purchase and sale agreement. That kind of outlines the general, “We’re taking the property as is,” and kind of talks about the loan a little bit as far as what the general loan balance is and just kind of a standard purchase and sale agreement.
Then, you get that signed. You take it over to the title company. The title company is going to run a title search just to make sure that the only lien on the property is the one that you’re planning on taking subject-to so you’re not getting into some situation where you’re taking over a property with all sorts of liens.
The next thing, it starts to get a little . . . it’s not complicated but it gets a little tricky, especially for a new investor is . . . You want to establish a land trust. Your title company should be able to do this for you. You bring the documents to the table. You establish a land trust. Basically, the seller then is going to be deeding this property and selling the property to this land trust. They’re deeding the property, putting the property into a land trust, and then they are going to assign the beneficial interest of the trust over to you, the investor.
So a couple more sets of documents here. You’ve got to get the land trust agreement. You’ve got to get that assignment of beneficial interest, and then we have a basic disclosure. It’s a subject-to disclosure that just completely tells the seller, “Look, you are selling this property, the loan is staying in your name. If we didn’t make the payments, it would go on your credit.” You have to completely disclose everything. If the seller’s motivated enough, they’re going to be all on board here, too, to have you do this, especially if you present yourself in a professional way.
The next thing you need is a change of address and insure it for the insurance and the mortgage company. What we’ve been doing is right at the closing table, since everybody has online banking pretty much now, we just pull up the mortgage on the computer and we change the address and we basically set up auto payments right there with the seller that we’re going to be taking over the payments. We set up the auto payments right there online.
The last thing is you need a limited power of attorney. What that’s going to allow you to do is do things like utilities. You get this limited power of attorney just limited to this property. This way, if you ever have to collect some escrow money, if you ever have to make a call to the utility company, anything like that, all of that, you’re allowed to do with that limited power of attorney.
That’s pretty much it in a nutshell. Get out there. Buy as many houses as you possibly can. There’s a lot of good financing to be taken over subject-to.
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