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"Subject To" Investing

by: Mark Evans DM

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Q. "Subject to the existing mortgage"....what exactly does that mean?

A. It’s where you take over a property, yet all of the terms and conditions of the original mortgage will stay in place, including remaining in the seller’s name…all you do, as the buyer, is make the payments while respecting the original terms and conditions of that mortgage as it were your own, but you are not required to transfer that mortgage into your name until your contract with the seller expires.

Q. How do I explain to the seller that he/she can still get new financing on their next home even if his/her name is still on the deed/title?

A. Their name being on the deed wouldn't be the holdup…their name still being on the mortgage may be a holdup for them if their income doesn't support both payments. What we've done, in the past, is simply provide all of our signed documentation to the lender as proof of the payment being made now by us so that they don't have to count that payment against them for their new loan. Sometimes, they’ll only allow 75% of the payment to be “ignored” for their calculation purposes, but that’s generally enough to push the new loan through.

Q. The mortgage company…is it ok for me to call them for the mortgage balance and payment information. Is that going to “trigger” anything (like the “due on sale” clause)? Also, the taxes…how do I find out who I should be paying them to, or do I get that information from the county recorder’s office?

A. Go to to get to the county auditor, who I believe will have the tax information you're looking for. If not, you can always find their phone number on the site and call them to ask where you should send your payments to. Don’t worry, they won’t need the address in order to tell you that, so there’s no fear of “triggering” anything that way either.

As to the mortgage company, as long as you fax them the POA you have and verify that they've received it, that document gives you authorization to ask those kinds of questions without the seller's involvement.

Q. A seller asked me, “How does a subject to arrangement affect my income tax return? Will I still receive a mortgage interest statement and have to claim income for payments made by you or the lessee?”

A. They'll need to contact an accountant to answer don't want to give tax advice as a non-licensed person. Whoever holds the deed generally gets the tax benefits, so the seller may actually be taxed on the "sale" the day the deed transfers rather than when the loan gets refinanced. As to who claims the interest paid, let the CPA answer that question.

Q. How do you work with people who have had bankruptcy? Is it reasonable to think they can get financed within our lease option contract period? I know I need to have them work with a mortgage broker to figure it out, but I was wondering about your experience with bankruptcy cases before.

A. Every situation is different...that's where the expertise of your mortgage broker will come in handy. Let them tell you how quickly your buyer could potentially get financed again. Also, see if the broker has a credit repair person to refer your buyers to or if they can recommend some suggestions on how your buyers can get started fixing their own credit.

Three ideas on how “repair” can begin are: getting a secured credit card with a bank, making copies each month of rent checks to show payment history as being on time, getting a gas credit card and/or a small department store credit card. The idea here isn’t to tell them to go out and use credit cards…it’s to make a couple of purchases each month and then make payments to establish a payment history.

Just FYI…a person whose bankruptcy included a property may take longer to resolve/repair than a person who just filed for a regular bankruptcy without any property involved. Recovering from a bankruptcy, though, is not as hard as recovering/repairing the damage done from a foreclosure. We’ve seen people get financed in as little as 16 months after their bankruptcy discharge, though, so it’s not always a lengthy process.

Q. The title company doesn’t understand what I’m trying to do and are saying they can’t do it. How can I explain it to them so that they’ll understand?

A. Unfortunately, most people don't understand what it is that we do as investors. Most people think that you can't possibly own a house that has a mortgage on it that's not your mortgage. Explain to the title company like this: you've been given complete ownership of the property via the deed being transferred into your name, but the mortgage is not and will not be in your name. However, you do need title insurance because you need to make sure that no further debt (liens or mortgages or otherwise) will be taken out against the property now that you're the owner. It has clear title now, and we want it to stay that way. They will probably need to see the documentation to verify everything you're saying, so keep your documents close by.

Q. After the new deed is recorded and I get title insurance...should I then contact the mortgage company and tell them that the statements should now be coming to me?

A. No need for you to contact them about anything. The sellers will have to give the mortgage company that change of address – they’ll have to sign off on it to authorize the statement mailing address change. The statements will still have the sellers’ names on them, but they’ll come to your address instead. If/When they want to check to see that you’re making payments on time, they can do that via phone or the Internet.

In the beginning, you should always get a copy of the current mortgage statement from the sellers so that you can verify the payment amount as well as the approximate remaining balance of the loan – do this as part of your due diligence.

Q. And I should do the same with the various utility companies?

A. Yes…for phone, water, gas, cable, etc. You need to get all these moved into your name and the bills coming directly to you. Not only that, but make sure that lawncare is taken care of too, if necessary.

Q. Why can’t I just shut off all of the utilities until I get someone in the house or is this how it works?

A. Strangely enough, utility companies will charge you more to shut off the service (because they charge to shut it off AND to turn it back on later) than to just switch the service…that’s just the way it works. Plus, with water, depending on the property’s location and the season, it could cause damage to the plumbing to completely shut the water off.

Q. I was informed that the insurance current owner/policy holder will need to cancel the existing policy and then I would need to apply.

A. Many times, that will probably be the case. What normally happens in these cases is that the new policy has a different/slightly higher premium because of being a "landlord" policy rather than if the property were your primary residence. It makes sense...there are more liability concerns when the actual owner of the property isn't the one living there. For us here, in our local market, it equates to about $100 extra per year to have a landlord policy, but I'm not sure if it translates the same in other parts of the country, so you’ll have to call around to find out.

As to the current policy holder having to cancel…the Power of Attorney that you have will allow you to do that for them without them having to sign anything or make any phone calls. Any unused, previously paid premiums that are refunded will be due back to the sellers…those aren’t for you to keep (just making this clear as the check will be sent to you now that your address is “attached” to the property).

Also, see if the insurance company will quote you with "loss of rent" coverage - ask what the cost difference is with and without. What this does is this: say something happens that causes you to have to have the tenants move out while whatever is getting fixed...they'll pay you the monthly rent you lose while the repairs are being done, plus pay for the repairs. I think you'll have to cover the cost of putting your tenants up at a hotel or whatever while repairs are done, but this certainly limits your out of pocket expenses should something like that happen. I'm almost positive this is the way it works (ask them to verify for sure)...I first learned about that type of coverage about a year ago in Ohio, so see if it exists where you are as well.

Q. I've been calling property managers within the area to see if they can help me fill the property with a tenant/buyer. Some of them are hard to get a hold of. Do you have any property managers that you can recommend?

A. They certainly can be hard to pin down. Unfortunately, we can’t make any formal recommendations, as that could be a conflict of interest. Just keep calling and leaving voicemail messages for every one that you can find…and maybe mention in your voicemail that you’re looking to hire immediately so that you can create a fire under them to get back to you faster. Most people are money-driven, so if you let them know that calling you back could get them cash in their pockets today, well… Maybe even offer a “bonus” of a few hundred bucks if they can bring you a buyer within the next two weeks. You can find tools on how to look up property managers on our website at

Q. I was unclear about how to get the title transferred. Do I just use the General Warranty Deed that gets notarized?

A. Yes. That's the only thing you gets recorded at the county, and the deed then gets transferred into your name.

Q. On the contract under “terms” we wrote in “a new mortgage created for the above purchase price”. I didn't realize that we were creating a new mortgage…I thought we were keeping the existing mortgage in place and just paying $40,000 for the property, with a determined monthly amount and a balloon payment that’s due after 5 years.

A. Yes, that’s true. But, in this case, you’re taking over the existing payments (only $26,000 is owed) AND have to create a new mortgage for $14,000 – to get to the $40,000 – because you’re getting the deed...doing it this way solidifies the seller collecting his full $40,000 when you refinance instead of just the $26,000 that's owed.

You see, he’s the “lender” on the new mortgage being created, so when the debt against the property is paid off at or before our 5 year mark, this new mortgage will be required to be paid off too…hence, the seller getting his full $40,000 (the 1st mortgage will be paid off first and whatever else is left goes to him).

And, yes, the existing mortgage does stay in place, just as it is…he’s basically owner-financing the difference between $26,000 and $40,000 with it written this way. This new mortgage we’re creating does get recorded, by the way.

Think of it this way, if you purchase a house the “traditional” way, the deed transfers. Every time a deed transfers (as it will in a subject to deal), a new mortgage is created (since most people can’t pay cash for houses). In this case, though, we’re just not replacing the current mortgage until the contract is exercised – we’re just adding another mortgage onto it instead.

Q. I have a deal where the insurance and taxes are not escrowed. How do I get both of those in my name – and do I find my own insurance? Do the taxes stay in the owner's name if I don't have the deed? My understanding is that they do, but should I have the tax bill sent to me through the city or through the owner?

A. If you don't have the deed but you do have a land contract, then it depends on what you both agreed to. If it's in writing anywhere that you are to pay the taxes, then you can do a simple change of address letter to get the tax billing address changed with the county. A simple, 2-3 sentence letter that the seller signs will suffice…and then the county will start sending the tax bills to you once they receive the letter and make that change.

If you did a lease with option, then you're likely not going to be taking over the taxes. Again, though, it depends on how your deal is structured and the laws of your state, etc. It's been my experience that you can't get credit (a tax writeoff and/or depreciation deductions) for paying the taxes and owning the house unless your name is on the deed or on a recorded land contract (but we’re not lawyers or accountants, so please verify this). For this reason, the county tax office may not be able to remove the seller's name from the tax bill, so it may come addressed to them but be delivered to you (if your contract states you will be paying the taxes, that is – which I would hope not, since you won’t be getting credit for it). Every county has different laws/rules on how they do things, so check with them to see what their procedure is, but it's usually pretty simple. If you're not liable for the taxes per your contract, though, there's no need to have anything sent to you regarding them...the seller will continue paying them as they always have.

As to the insurance...sometimes, an insurance company will let you take over the existing policy and just put your name on it instead (or your company name, etc.) or they may require you to take out a new policy. If they tell you this is the case, I'd shop around to make sure you're getting the best rate. The reason they may make you get a new policy is that a non-owner-occupied property has to be insured differently than a typical primary residence, so the insurance company is not always able to just “convert” it to your name without issuing a new type of policy (typically called a “landlord policy”), which will have different coverages and different rates.

Q. I’ve got a deal that needs to be bought for what is owed ASAP. It is three months behind on mortgage payments and the seller needs a little bit of cash for moving expenses. After the back payments and $1,000 for them is paid, there is about $20,000 - $25,000 or more in equity remaining. Is this a property you can put out to the VIP Club?

A. How far behind are the payments (how much cash is needed to bring them current)? Are they open to a Sub-2 if we can A) catch the payments up and B) get them the cash they need to move?

What is the house valued at? $25,000 in equity is good if it's a $100,000 house (75% LTV - $75,000/$100,000) but not very good if it's a $400,000 house (94% LTV - $375,000/$400,000). So, sometimes, $25,000 can seem like a lot of money, but it’s really not, as far as how an investor looks at it. In the latter scenario I just mentioned, the only way an investor would look at this is if they could take the deed and take over the payments…a cash deal just would not happen.

The way you could approach it, though, is this: If the house can command a lease option fee that will be enough to bring the payments current, then you’re still looking at a no-money-down deal. It's sometimes worth it to "give up" your option fee at the beginning like this if the backend is attractive enough. For instance, in the case where there’s $25,000 in equity on a $100,000 property…it may be worth it, depending on your investing strategy.

So, then what you would do is charge $1,000 higher assignment fee than you normally would so that you can give the sellers the $1,000 that they need to move. In a deal with this much equity, that $1,000 won’t usually make a difference in how good of a deal it is to your end buyer.

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