In todays email:

We will focus on buying single family residential real estate and what I think are the top 3 strategies for doing so. These strategies lower the barrier to entry and are especially useful for those who have a limited amount of capital to deploy and do not want to get funding from a bank.

• 😉 Strategies to embrace: Subject to, seller finance, lease options.

Top 3 Strategies To Buying Real Estate

There are many ways of buying property like using your own cash or getting a loan from a bank or maybe a combination of the two. But is this really the right way to utilize your capital? I think there are much better ways to do so. The ways I will discuss today have the following advantages:

1. You don’t need a downpayment (or very small one).

2. You don’t need your credit.

3. You don’t have to qualify for loan.

4. You don’t personally guarantee it.

5. The interest rates are lower.

1. Subject To (SUB2)

Buying a house "subject to existing mortgage" is a real estate strategy where a buyer purchases a property while taking over the existing mortgage on the house. In simple terms, it means that the buyer agrees to make the mortgage payments on the seller's existing loan rather than obtaining a new mortgage. The original mortgage stays in the seller's name, but the buyer assumes the responsibility for making the monthly payments and takes ownership of the property. This is a way for you to acquire a property without having to qualify for a new mortgage or come up with a large down payment. Also, over the past 10 years there were millions of loans originated at low interest rates that we can take advantage of.

There are various reasons why someone might choose to sell their house "subject to existing mortgage." Here are just some common reasons:

1. Financial Distress: The seller may be facing financial difficulties, such as foreclosure or the inability to make mortgage payments. Selling subject to the existing mortgage allows them to transfer the responsibility of the loan to the buyer without going through a lengthy foreclosure process and ruining their credit.

2. Difficulty Selling Traditionally: If a seller is having trouble finding a buyer through traditional methods, selling subject to the existing mortgage might attract more potential buyers. There are many motivation other than financial distress like divorce, health issues, job relocation, death, etc.

3. Quick Sale: Sellers might opt for this method to facilitate a faster sale. Since the buyer is taking over the existing mortgage, the process can be quicker compared to securing a new loan.

4. Higher Price: Sellers may find a buyer willing to buy the property at a higher price since buyer does not have all the closing costs (loan origination, appraisals, inspections, etc.) required when getting a loan.

5. No repairs: Many sellers do not want to do work on the property and are not willing to spend money to sell the property. They may find a buyer that is willing to take on the work and repairs in exchange for buying it subject to.

6. Move on date of choice: Many sellers need some time to be able to find another property, or get all their belongings out, etc. Subject to gives the seller the convenience of moving on the date of their choice. This way they don't have to move twice… once into a storage facility and a second time into their new location.

STEPS TO BUYING SUB2

Buying a house subject to the existing mortgage involves several steps. Here's a basic outline, but keep in mind that these real estate transactions can be complex and it's advisable to seek professional advice:

1. Find a Willing Seller: Look for a seller who is open to selling the property subject to the existing mortgage. This could be someone facing financial challenges or in need of a quick sale as discussed above.

2. Negotiate Terms: Discuss and negotiate the terms of the deal with the seller. This includes the purchase price, any existing liens on the property, and the specifics of the existing mortgage.

3. Due Diligence: Conduct thorough due diligence on the property. This includes getting the payoff amounts, inspections, title searches, and ensuring there are no surprises that could complicate the deal.

4. Agreement in Writing: Get written agreement that clearly outlines the terms and conditions of the sale. It's crucial to be specific about the existing mortgage, the transfer of ownership, etc.

5. Seek Legal Advice: Consult with a real estate attorney who is experienced in these types of transactions. They can review the agreement, ensure compliance with local laws, and protect your interests.

6. Obtain Seller's Consent: Make sure seller understands that the loan will stay in their name and that there is a due on sale clause in the mortgage. The seller needs to sign a disclosure referencing this.

7. Close the Deal: Attend the closing at title company or attorney office to finalize the transaction and get all docs signed and notarized.

8. Continue Mortgage Payments: The buyer takes over the responsibility for making the monthly mortgage payments. It's crucial to adhere to the terms of the existing mortgage to avoid any issues.

There are many other small but important items that need to be done when buying subject to. For example, make sure that you get insurance on the property with the named insured matching the name on title. You also want to get all the mortgage statements sent to you. It would also be good to get a limited power of attorney from the seller.

2. Seller Financing

Buying a house with seller financing is a situation where the person selling the house (the seller) acts as the lender for the buyer. Instead of the buyer getting a mortgage loan from a bank, the seller provides the financing for the purchase. In a prior newsletter, I discussed the benefits of selling with owner/seller financing. The basic steps are outlined below:

1. Agreement: The buyer and seller agree on the terms of the sale, including the purchase price, down payment, and interest rate, term, etc. This will be written up in a PSA (purchase sale agreement).

2. Promissory Note: The seller and buyer sign a promissory note, which is a legal document outlining the loan terms. It includes details like the loan amount, interest rate, repayment schedule, and consequences for non-payment.

3. Mortgage or Deed of Trust: You need to have attorney or title company draft a typical mortgage for that state which serves as collateral for the loan. This means that if you as buyer fails to repay the loan as agreed, the seller has the legal right to take possession of the property through a process known as foreclosure.

4. Ownership Transfer: The buyer gets legal and equitable title to the property upon closing.

5. Monthly Payments: Instead of making payments to a bank, the buyer makes monthly payments directly to the seller based on the agreed-upon terms. It is best to use a servicer especially if there is an underlying mortgage (you want to make sure the seller is making the mortgage payments or you have an issue down the road when selling the property).

Some tips when structuring such seller finance deals are:

1. Interest: Many times you can negotiate little or NO interest for the right price. Make sure the seller is sending you a 1098 INT to write off on your taxes.

2. Down payment: The downpayment can be small and must be negotiated with the seller. Find the seller’s hot buttons since it is not always the largest amount down that they are looking for.

3. Right of first refusal: Get a “right of first refusal” to buy the note if seller ever wants to sell the note. You may get a significant discount on the note purchase which can dramatically increase your profits.

4. Non-recourse: Try to get a non-recourse loan, which essentially states that you're not personally responsible for the loan.

Summary: There are benefits for the buyer and the seller. The benefits for the buyer are that this arrangement can help you buy a property quickly with less money down and not have to go through the process of getting a bank loan. Sellers find it advantageous if they need to sell the property quickly or if they prefer a steady income from the sale. In addition, some sellers like this arrangement since sellers may avoid capital gain taxes. If they sell property with seller finance it is considered an installment sale which will significantly reduce their tax bill.

3. Lease Option

Buying a house with a lease option is a real estate arrangement that combines renting and the potential for future ownership. It is not as desirable as the prior to methods discussed above because you do not get title to the property. I usually use this strategy when I cannot get the seller to carry back a note or sell the house to me subject to the existing mortgage. This strategy can be as profitable when executed correctly and definitely is low risk. The documents and things to consider are outlined below:

1. Lease Agreement: The buyer (also known as the tenant or lessee) leases the house from the seller (landlord or lessor) for a specific period, usually several years.

2. Option to Purchase: The lease includes an option clause that gives the us the right, but not the obligation, to buy the property at a predetermined price within a specified time frame.

3. Lease Payments: You pay rent to the landlord during the lease period, just like in a regular rental agreement.

4. Upfront Payment: In some cases, you may pay an upfront fee, known as option consideration, for the right to purchase the property at a later date. This fee is typically non-refundable but is negotiable.

5. Fixed Purchase Price: The purchase price is agreed upon at the beginning of the lease, and it remains fixed regardless of any increase in the property's value.

6. Rent Credit: When I buy I ask for rent credit which basically is a portion of my rent payments going towards the purchase price. You want to get as much of the rent to go towards the equity as possible.

7. Building Equity: You also have the opportunity to build equity in the property, especially if the home's value increases over time.

8. Lease/Option Term: You want to negotiate the longest lease term as possible since typically you can exercise your option at any time and this gives you additional time in case something happens and you need more time.

9. Decision Point: Before the lease/option term ends, you (the tenant) have a decision to make. You can choose to exercise the option and buy the house at the agreed-upon price or walk away without any obligation to purchase and forfeit your option consideration.

10. Flexibility: This arrangement provides flexibility for you. If you decide not to buy, you can simply move out at the end of the lease.

When you buy a house on lease option, your exit strategies are limited. The main reason is that you do not have ownership or title to the property. Therefore, you are limited to the following exit strategies:

1. Sublet/rent it.

2. Assign your lease option.

3. Sell it to someone else on lease option (called sandwich lease option).

4. Outright sell (little tricky…typically a double closing required).

SUMMARY: In all of the 3 strategies discussed above, it is important to make sure that you clearly define the buying terms and structure the purchase so that you have the most control. These 3 options for buying are ways to get into properties without a lot of money and not having to go to some type of lending institution. It's all about finding a motivated seller that can mutually benefit from such a transaction. Finally, it is super important to make sure you structure the deal so that you have positive cash flow each month.

Please sign up for our advisory/consultation service if you need someone to hold your hand through any of these 3 strategies.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. Just respond to this email directly 😌 or email [email protected].

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