Step by step, how to own a home without credit and only the cost of closing.
I was in my 20’s and also exploring my hippie phase, don’t judge. More accurately, my friends from my teen years had morphed in to Phish Heads and I occasionally had to throw on a flowy skirt and a ruffled shirt. In retrospect, I looked a lot like an extra for Pirates of the Caribbean.
Now, I was doing alright financially for a 20-something but most of my friends were not ambitious unless it came to “scoring” Phish tickets or weed. So that sets the scene for how I acquired a new buddy.
This is where I came in…. I could afford to buy dogfood and had time to walk a dog. I was too busy making moola to have time to do fun stuff so a quiet companion was welcome. This is how I came to be the proud owner of a dog named Indica.
The transaction worked for all parties. Daisy was free of a dog that she had grown to see as a burden. I had a new fluffy friend. Indie, had a new home that was not the back of a van with 14 other humans reeking of patchouli.
How does this relate….. Daisy transferred full ownership of indie to me. This is similar to a Sub to or purchase Subject to the Existing Mortgage. Allow me to continue…
I was roughly 21. I spent my spare money on running ads in the newspaper stating “Don’t let foreclosure ruin your credit! I will buy your home TODAY even if you owe more than the value.”
I received a call from a woman named Terry. She was a single mom going through a horrible divorce. She “won” the house but couldn’t afford it. She was now over a year behind on payments and in panic mode. The amount due on the home was now more than she originally mortgaged as a result of the year of arrearages. Luckily the mortgage company was willing to work with her if she was able to pay three behind payments and the current. They would defer the remaining balance to the end of the loan.
This was a great offer. For about $5,000 Terry could avoid foreclosure on her credit and save the house. The problem is, to Terry, $5,000 might as well have been a million bucks. She just didn’t have it. I bought the house from her subject to the existing mortgage. This was my first sub to. Over the years I abandoned the idea that money upfront aside from closing cost was an option.
Sub to = buying a home by agreeing to pay off the mortgage they already have.
This method affords you the same rights as any other home owner with a mortgage. When you enter into a Sub to purchase, your real estate attorney is going to close this house for you and title will transfer. You, by you I always mean your company, will be the owner. The title will transfer into the name of your LLC. The mortgage remains in place and in the name of the original owner.
Who is the ideal Sub To seller?
It is the right time to make an offer to purchase a home Sub To when the seller has the following problems to overcome:
The seller NEEDS to get rid of the house. This can be for a multitude of reasons although the most common are that they cannot afford it for whatever reason or that the location is no longer convenient (the seller is stationed in another state or took a job in another area).
The house lacks equity. Typically, one will not consider a subject to purchase if there is a chance to sell the home conventionally. You are offering an option when there seems to be none. The lack of equity can be attributed to the fact that they owe close to, or more than the average sales price of other homes in the area. There can also be a lack of equity if the home is disrepair therefore requiring a capital investment prior to being able to sell the home.
You want to be sure that you have the following things in your benefit:
The home either is in pretty good shape or the amount of repair is not above 5% of the ARV. This is not always the case but it is a good general rule.
The monthly payment is at or less than the average rents for the area.
What are the benefits to the seller?
Typically, when a seller comes to you they have either been dealing with the struggle of making a payment, vacancy, or another problem that has forced their hand to the decision to sell. If they have been falling behind, you will be able to improve their credit by making the payments on time. Additionally, they no longer have the burden of maintenance, repairs, taxes, or insurance.
What are the benefits to me, the investor?
You are able to purchase a home with only the cost of closing. The closing cost on this house will be considerably less than that of a conventional purchase. This is an asset you own.
What are the risks?
All newer mortgages have a clause called due on sale, with the exception of some VA loans. This means that you are not “allowed” under the terms of the mortgage to transfer ownership of the property without paying off the mortgage. This is a clause that has scared many investors from this type of transaction. I can say with all honesty, in almost two decades, I have never seen or even heard of this happening. Neither have any of my investor friends and colleagues. However, that said, you can still take steps to caution against the closing raising a red flag. You can form an LLC for each property and name it after the family from which you are buying. For example, if you are buying a house from Mr. and Mrs. Smith, your LLC is named Smith Family Trust LLC.
Above we touched on this but I’ll say it again…… The mortgage does not transfer. This can affect the eligibility of the sellers to qualify for another mortgage. And of course, they have to trust that you will make that payment.
How much cash do I need?
It cost about $700 to close a sub to purchase.
What is my exit strategy?
You have options for how you plan to make bank here.
Rental. You rent the home to tenants for as many years as you chose. You will make a residual income monthly for as long as you have paying tenants. Each year you can expect to be able to raise the rent. You will have to factor in vacancy and maintenance when weighing out this option.
Lease Purchase. As an investor offering a lease purchase you will allow the tenant/buyer to lease the property with the intention of buying it at the end of the term. We will discuss this in more detail in the article on lease purchases. You will set the sales price to meet projected equity, meaning what you think the value will be at the end of the term. You will ask for a non-refundable down payment equal to 5-10% of the sales price of the home. This amount should not be less than $5,000. I have found with amounts less than that, they tend to default on the contract very quickly. You will set the lease term for at least 2 years. You will set the monthly payment for a little above market rent and offer them a monthly concession towards purchase. I generally offer $150-250 per month depending on the amount of the payment. This just a credit, you do not have to escrow the funds. The tenants generally default after 18-24 months despite their best efforts.
Owner Financing. You can offer owner financing on the home to a buyer who does not qualify for a conventional home loan. This option is very similar to the lease purchase except you will actually sell the property and just collect the payment form the buyer. You will ask for 10-20% down, non-refundable. The payments will be calculated via amortization based on the interest rate you set.
How do I find these leads?
Back in the day I took out an ad in the newspaper which was rather costly. Now I am able to generate leads with less of a financial commitment.
I will start with the method that cost the most. You can buy a list of homes that are pre-foreclosure, purchased during the peak of the housing bubble, or not owner occupied. There are several companies that offer this and a simple google search will assist you in this. Simply send these people a letter stating that you would like to buy their home.
This next method is inexpensive but not free. Signs. You’ve seen the “We Buy Houses” signs. Do that.
The rest are free….
Advertise your desire on social media. Put it out on your pages but also join groups and put it on there too.
Troll social media sites for people trying to sell or rent out their homes without a realtor. Contact them.
Use sites like craigslist.org, Zillow.com, and FSBO.com to contact the owners.
If you see a vacant house, get the address. Look up the owner via the tax records for the jurisdiction. Guess what? Contact the owners.
So, there you have it!!! This is just one of 5 ways I will break down in full detail over the next few weeks illustrating how to make money in real estate with little or no cash!!!
The last two articles were just an overview. You can view the five styles of creative financing part 1 and part 2 here.
Happy Investing My Real Estate Junkies!!!!
I was born an entrepreneur. I am pretty certain that I was peddling passies in the hospital when the nurses left the room.All of the other kids in the neighborhood were riding bikes and playing with dolls I was selling jewelry out of a catalogue and creating a back yard consignment shop. At 21 I became a real estate investor and fell in love. This was/is/ and always will be my passion. I have been madly in love with flipping, holding, and writing offers on real estate that seem crazy for 18 years. Ladies and gents I am willing to share the love of my life with you. Maybe its polyamory maybe its jut because I can’t shut up about it. Either way I will be sharing every mistake I ever made and the lesson that came from it. I love questions. Please ask away!!!