One of the things that concerns us about our industry is the amount of incorrect or incomplete information available to investors. Some myths block what would otherwise be a great deal, while others make you believe that a bad deal is actually a great deal. For example, we encourage the purchase of homes “attached to” the existing mortgage as an option to finance the purchase of an investment property. This means that title to the property is transferred to the buyer, but the loan remains in the name of the original borrower with payments made by the buyer. Unfortunately, there are many myths surrounding this method that could rob you of your earnings. Let’s take this opportunity to dispel 5 of the most common ones.
Myth #1: Buying a home “on” the existing mortgage is illegal.
Absolutely not true! Most mortgages have a “due at time of sale” clause that states that if the house is sold without paying the mortgage, the lender has the “right” to call the full maturity of the loan. The key here is that they have a “right”, not an “obligation”. In other words, it’s your choice. We asked several attorneys around town who represent lenders to see if they had ever heard of a bank calling a loan past due due to a sale. In all cases they said no, as long as the payments were made on time. Why? Because banks are in the money business, not in the real estate business. If the loan comes due and goes into foreclosure, they have a poor-performing loan on the books (for which they have to increase their reserves), they incur additional costs, and they inherit a property. However, they can only accept timely payments from the new owner. Which one makes more sense?
Myth #2: Buying “subject to” is complicated and requires a lot of paperwork.
The truth is, all you have to do is write it down in the Purchase and Sale Agreement (PSA). We write it right next to the purchase price. Here is an example using our PSA:
The total purchase price to be paid by Buyer is $80,000.00, payable as follows: “subject to” existing first mortgage with a balance of approximately $77,500 and monthly PITI payments of $695; the remainder of Sellers’ principal will be paid in cash at closing.
That is all. You and the Seller have now agreed that you will purchase the home subject to your mortgage. As a precaution, we have the seller sign a release stating that he knows the loan has a maturity clause at the time of sale and that we do not promise when the loan will be paid in full or how long it will remain in force. your name. We also prepare a letter from the borrower informing the bank that all future correspondence should be sent to us, and we have the right to act on behalf of the Seller in all respects with respect to the loan so that they disclose the loan information to us in the future.
It really is that easy. After closing, you simply start making payments. We do not hide our identity. We send our own checks and the house insurance is in our name.
Myth #3: No owner will sell me their house and leave the loan in their name.
If you’re dealing with a seller who has no problems with their home, this may be true. But when dealing with motivated sellers who have financial, personal, or home problems, this won’t be a problem. Motivated sellers need an outlet, fast! Often, they are already behind on their payments and facing foreclosure. When you tell them your worries are over and you’ll catch up on your missed payments and make all subsequent payments on time, they’ll jump at the chance. As a bonus, your credit will even improve.
The key to a successful negotiation lies in your confidence. Keep in mind that you are providing a viable alternative solution that allows you to pay the highest price, with the fastest closing and immediate relief for the Seller’s situation.
Myth #4: Kitchen table locks are perfect for these transactions
Investors love to say that they “got the deed” on the kitchen table while submitting their offer. The concern is that you have no validation of what you bought. Without a title exam, there is no guarantee that the correct owner has signed the deed, or whether there are any other loans or liens on the property. You also don’t have title insurance to protect you from any unforeseen title problems. Finally, the actual loan payment must be validated with the lender by requesting an account statement. Do not use the principal balance payment shown on the monthly statement because it does not include late payments, other accrued interest, fees and penalties, or any prepayment penalties. We have seen actual payments tens of thousands of dollars greater than the principal payment.
You might argue that what difference does it make if the loan is not in your name and you did not give the seller cash. The problem is that you may not discover any of these problems until much later in the transaction, perhaps not until you try to sell the property. By then, you will have invested time, energy, and money in the property only to see it lost, when all of these problems could have been avoided by going through a standard closing with your attorney or title company.
Myth #5: I can always walk away if I can’t pay the mortgage
This is technically true, but it is not a great strategy for the successful investor. Legally, you are not responsible for payments. But you must consider your credibility and reputation, which are critical to your long-term success. You definitely don’t want an angry seller to smear your reputation in the community or file a complaint with the Better Business Bureau. Not to mention, you probably have cash tied up in the house, which will be completely lost. We recommend treating “subject to” mortgages like any other with your name attached: make payments on time.
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