Subject-To DOES NOT Mean Mortgage Payments and Repairs!

One of my viewers of the videos on my website sent me the following question and I’d like to address that here to share with everyone:

I live in Georgia and am moving to the Atlanta area to pursue that market as there are so many real estate opportunities there. I had a couple of questions and thought I would see what you said about them.

I have found several subject-to deals with TONS of equity. My long term strategy is buy and hold. I may do some flipping but I would probably reinvest the profits into buy and hold properties. If several of these subject to deals come through and they sign the papers all at once there will be no way for me to make all of the payments while making repairs or finding renters.

What would you do?

Is it possible to pull out equity from a property purchased subject to with say a HELOC or otherwise?


Sincerely,

Rich

This is what I would do:

One thing I DON’T do is sign a bunch of contracts and buy a bunch of houses sub-to and have all of these mortgage payments that I have to make. As a matter of fact, I rarely make any mortgage payments on sub-to’s while I’m waiting to find my tenant because I find my tenant BEFORE I close the deal.

I go into the sub-to deal saying, “Here’s what’s going to happen Mr. Seller, I’m confident that it’s going to work this way, but I’m not going to close until I find my sub-tenant, ready to move into the house.” Basically, it’s a standard sub-to contract. We go into the standard sub-to contract contingent upon us finding our buyer or tenant, or subject-to us finding our tenant or finding our buyer.

That way, I don’t make a single mortgage payment on that house until my guy has already paid me, has moved in, or is ready to move in. In a lot of cases, we get to keep the first mortgage payment and then the tenant starts making the second then third.

But in any case, put that contingency in your mortgage and the whole deal is contingent upon the buyer finding a suitable sub-tenant to occupy the property. That way, you get all of the paperwork done and you don’t close until you have the other guy ready to move in and you never have to make a mortgage payment while you are waiting to find your buyer.

Right now, the way the market is, you have a lot of buyers out there and lots of sub-to sellers out there. The sub-to sellers are desperate, and the sub-to buyers are plentiful. When I say “sub-to buyers”, don’t sell it to them sub-to, sell it to them lease with an option to purchase. That is the way I would do it, though note I am making a “Disclaimer” here. As you know there is more than one way to skin a house and more than one way to do this. Make sure you get the buyer lined up before you close the deal, if you can.

Now, if it’s a “home run” and it has $60,000 in equity, I’ll start making that mortgage payment yesterday to get my feet into that little house, because I know that house will make me a bundle. But, most sub-to houses don’t have as much equity as a retail flip.

Now, let me answer his question about repairs. I don’t make repairs on my subject-to houses. I let my tenants do it. Here is what I do. I ask my prospective tenants how much they have for an option fee or option deposit (which is similar to a deposit because it comes off of the price of the house) and whatever they say, here is what I say. If they have $6,000, I say: “You know, I was really looking for $12,000, but I can take the $6,000 as the option fee and get you into the house, if you are willing to take it without me putting in new carpet or paint and my fixing the bathtub. Because I was going to go in and fix that bathtub and put in new carpet and paint and I know I can get $12,000 up front from somebody else. But, if you are willing to take it in as-is condition, I’ll let you in with that $6,000”. And this works almost all of the time.

I have never had a house in which I had to do the repairs that I couldn’t fill otherwise. I have sold houses that looked really bad. Remember, these option people are so happy to get a house of their own, that they are willing to fix these things. And a lot of times, it’s not as bad in their eyes, compared to where they are coming from, as it might be in your eyes or a realtor.

So, make it contingent upon you finding your buyer, and now you don’t have to make any mortgage payments until they have taken over the house. Your buyer will come in, you’ll make your option fee, put it in your pocket, and you are off to the bank. Secondly, you won’t have to do the repairs because you are going to let your tenant do that.

Thirdly, as for asking if it’s possible to pull out equity from a property purchased subject- to, with say a home equity loan, or otherwise. I personally have never been able to put a home equity line on a subject-to house. I’ve never tried and I doubt I could do it.

Here’s what I do: Here is how I pull cash out of almost every subject-to house. I don’t want $5,000 or $6,000. I want to make $15,000 or $20,000. On almost every house I take subject-to, I borrow $10,000 from a private lender when I take over that house and I pay about 15% interest. I tell the lender that I just bought a house with a tenant in there. In a year or two from now, the tenant is going to buy the house from me. I would like to borrow $10,000 from you on that house and I will pay you 15% interest.

I know for some of you, it sounds like a huge amount. But, here is what I tell the lender. It’s a 15% flat interest per calendar year, no payments until I sell it off. So, he gives me $10,000 when I take that house subject-to. I now owe him $11,500. After one year, I’ll owe him $13,000. After two years, I owe him $14,500. I hope to cash it out before then, but I don’ really care. If it’s a good enough deal to take sub-to, and there’s enough equity in there, I don’t mind because I’d rather have that $10,000 up front and pay that $11,500 later or $13,000 later because I want that cash now.

Here’s what I suspect, Rich. I suspect that you are trying to borrow money off of these sub-to’s because you don’t have the money for the mortgage payments and make the repairs. If you follow the tips I’ve given you, you don’t need to borrow money on that sub-to house for mortgage payments and repairs! I hope this has helped you!