In an earlier article I mentioned a big factor in building your wealth is using leverage. A great form of leverage for obtaining real estate is using seller financing. There are several ways to get seller financing for your deals. The seller can take back a second mortgage, you can take over the property 'subject to' the sellers existing financing, write-up a wrap-around mortgage, and if you are investing in commercial properties you may be able to assume the existing mortgage. Assuming a loan does not exist in residential loans anymore. In this article, I'm going to focus on 'subject to' financing.
As you start to invest you made need to educated certain professionals along the way because they tend to only know one way of operating real estate transactions.
Case in point: I was showing a group of people how to fill out my contracts so they can start making offers on deals. First thing they did was take my contract to their attorney for him to review for accuracy and legitimacy. I'm glad they did this. Trust but verify. I love it! In our next session they came back telling me their attorney had an issue with some writing on my contract. Their attorney told them no title company will close on a deal 'subject to' the sellers existing financing.
The group happened to have their laptop with them. I asked them if they had a HUD 1 Settlement statement in their word documents. After hearing yes, I asked them to open it so I could show them their attorney was wrong. The HUD 1 Settlement statement is a document with all the numbers and closing fees for a real estate transaction. Page 1 of the HUD, Left Column, Line 203 it clearly states 'subject to sellers existing financing.'
I told them to call their attorney and point this out to him. His rebuttal (of course) was "I wanted to make sure you are covering your bases." He was simply saying he didn't know this existed. Imagine how many more transactions he could have closed for his business if he understood this strategy. Title companies issue the HUD 1 for closings and attorney's use them every day.
The more education you have, the more benefits you will receive!
In a 'subject to' transaction you negotiate with the seller to quit claim the deed of his/her house to you but keep the financing in their name. You are now morally obligated to make their mortgage payments. If this is an investment strategy for you, you should have already complied a list of sources to put renters into the home to cover the mortgage payment.
With the transfer of deed, you now own the property and the equity that exists. You must ease the sellers mind ensuring them you will pay their bill every month. As an investor you are not going to put forth all this effort to close the transaction and not make the payment. However, as the investor, you need an exit strategy in case you cannot make the payment further on down the line if you have a shortage of cash or no renter.
My business partner and I put a clause in our contracts every time to get rid of the property if we cannot pay the mortgage because of depleted funds. It doesn't matter if we have $500,000 in our accounts, we still put a clause in for our protection and that of the seller.
If you want to be successful, you must treat this as a business and run it morally and ethically. This will result in building a positive reputation as an investor and more referrals will come your way. There are a lot of people not operating their investing business in an ethical way. The seller suffers and eventually the investor gets caught and is shut down.
I cannot stress enough the value of the right education and who is teaching you. Nouveau Riche's real estate investment college does exactly this. Also, there is a huge community of other investor's in NR that you can talk to and generate more ideas. I'm constantly learning new ways to invest, negotiate and profit on my deals because of the people I associate with. In turn, I do the same for new people getting involved who want to make a difference not only in their life, but the lives of others.
To learn more about Nouveau Riche please contact me in the Contact Us section of my blog.
Happy Investing!
Tony
