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Subject To Financing
A Winning Proposition For Everyone

By Lou Castillo,

There are three parties in a subject to transaction: (1) the investor; (2) the seller; and (3) the bank. Is this a good transaction for everybody? You bet it is. It’s a win, win, win. Obviously for the investor it is a great situation because the financing is built in. Although the seller is at risk because they are transferring ownership of the property while maintaining the responsibility for the loan, they are in a good situation because the investor is going to catch the loan up and make timely payments. This will show up on the seller’s credit report and actually help them. It is also a quick and easy way for the seller to get out from under this property. It’s a win for the bank because they currently have a non-performing loan. When the investor takes over and starts making payments, it becomes a performing loan again. It is definitely a winning situation for all parties involved.

Let’s look at this from your point of view and see what the advantages are. The most obvious answer is that you have instant financing for that portion of the purchasing price. Whatever amount of mortgage that is left on the property that is how much you have in instant financing. Many times sellers do not want much over the amount of the mortgage. They just want to be rid of the house. In that situation almost 100% of the purchase price has been financed with the subject to. You also don’t have to qualify for this. As soon as the seller says yes, that’s it, you’re done. You do not have to ask permission from anyone else. There is absolutely no new loan cost for this because the loan is already established and in place. The best part is that this loan doesn’t show up on your credit report.

There are some disadvantages to this situation that you should be aware of. One is that the loan you are taking over might have a very large interest rate. Many times the sellers weren’t very credit worthy when they got the loan and therefore had a very high interest rate. One of the things, you want to do is look at that interest rate and determine what your exit strategy is with the property. If you are only going to hold the property for a short period of time while you are rehabbing and then you are going to sell it, then the high interest rate is probably a non issue. If you are thinking of holding onto the property long-term, then you might consider getting rid of that loan soon after. In other words, you might want to buy it subject to, fix up the property, get your tenant in there and after the property appreciates some, then you might want to refinance with cheaper money. What you need to evaluate is the actual amount you would be saving by getting a new loan compared to the cost of keeping the existing financing. Another thing you should be aware of is that some of these loans have an adjustable rate mortgage so your payments could go up. Again, not a big deal if you are only going to hold the property for a short period of time. It could be a big deal if you were going to hold the property long term. It’s just one of those things that should not stop you automatically from doing a subject to deal, but it should be one of those things you look into and just evaluate and make sure that it still makes good sense to take on that loan.

Nancy Geils, Owner Investing with the Stars,

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