I am often asked the best way to acquire investment properties; my answer is usually, “It depends.” Those who know me know I have a sense of humor… but this answer is not intended to be either evasive or funny.
My favorite acquisition technique is with owner financing, but that usually requires a free and clear property. How many of those free and clear properties come along with a motivated seller attached? Certainly there aren’t as many as I’d like. Then there’s buying with cash…I’d rather save that resource for the killer deals that have to be closed quickly in exchange for a massive profit.
For houses with an existing mortgage, my favorite way is to purchase the property “subject to” the existing mortgage. It’s a great way to buy pretty houses without spending a pretty penny. Simply put, I step into the seller’s position and begin making their payments at an agreed upon date. The ownership of the property is transferred to me or my entity and the mortgage remains in the seller’s name until I, or more typically my tenant/buyer, pays it off when they obtain new financing and purchase the home.
Close in a matter of days.
Why is this a good deal for the seller, you ask? The first thing you have to remember is that successful investors only deal with motivated sellers! This is a good deal for the seller because I can close within a matter of days as there’s no lengthy loan qualification and approval process. Additionally, I can typically pay them a higher price because I don’t have any financing costs.
Banks want payments, not houses.
When a loan, which is an asset, becomes delinquent, the lender’s income stream is interrupted. When their assets become non- performing, the lender is required by the Fed to increase their reserves. These reserves reduce the amount of capital available for new loans. So, does the bank prefer payments or would they rather foreclose and take the house back? The easy answer: with foreclosure costs running at about $40,000 per house and defaults at historically high levels, banks want payments, not houses!
Broadest range of exit strategies.
Finally, why is it good for the investor? First, we have no funding cost. Second, since the loan is not in our name it doesn’t appear on our credit report. Third, our creditworthiness doesn’t come into play because we are not qualifying for a new loan. But the best reason is that “subject to” transactions offer you the broadest array of exit strategies!
Additionally, even if you have a super credit score, most lenders will limit you to a maximum of number of 4 loans (if you can get them) and you’ll be required to make a substantial down payment (25$– 30%). If the loans aren’t in your name and you don’t have to qualify for them, just how many of these transactions will you be limited to? That’s right, no limits! I met an investor from Ohio who has over 200 properties; not a single mortgage was in his own name. That’s quite a retirement portfolio he’s built.
My preference is to be a “transaction engineer” rather than a specialist in any one area of investing. I love finding profit opportunities in all types of transactions from pre-foreclosures, renovation projects, owner financing to split funding. But a core element of my acquisitions strategy is using “Subject to” transactions and it should be a critical part of yours.
To your success…