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This seems to be the toughest subject for investors to understand,
especially new investors.
What is 'Subject To'?
Here is a section from the Purchase Agreement I use that talks
about encumbrances and marketable title:
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DEED / MARKETABLE TITLE: Upon performance by Buyer,
Seller shall deliver a Warranty Deed joined in by spouse,
if any, conveying marketable title, subject to:
(A) the existing mortgages.
(B) Building and zoning laws, ordinances, state and
federal regulations; (C) Restrictions relating to use or
improvement of the property without effective forfeiture
provisions; (D) Reservations
of any mineral rights by the state of Minnesota; (E)
Utility and drainage easements which do not interfere with
existing improvements; (F) Exceptions to title which
constitute encumbrances, restrictions, or easements, which
have been disclosed to Buyer and accepted by Buyer in this
Purchase Agreement; (Must be specified in writing)
_______________________________________________________
(G) Others (Must be specified in writing)
____________________________
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When
you buy a property and take over the existing mortgages and start
making the payments directly to the bank, you have bought the
house 'Subject To' the existing mortgage.
Example:
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Maplewood, MN
4 BR / 2 BA
The seller had a job transfer and needed to
move in a relatively short time frame. I bought
the house from the seller, and he was able to make the
transfer on time, and with out worries of having 2
mortgage payments.
$60,599.34 - 1st Mortgage
$15,386.71 - 2nd Mortgage
I got the deed, and started making the payments on
both the first and second mortgage. After
putting about $25,000 in rehab work, I sold the
property for $170,000 on a Contract for Deed. I
have about a $400 per month positive cash flow from
the difference between what the Buyer is paying me,
and what I am paying the 1st & 2nd
Mortgages.
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The
mortgages in the above example are still in the seller's name, but
I make the payments directly to the bank.
Why
would the Sellers, sell me the property and leave the mortgages in
his name? The Seller was motivated, and I offered him the
best solution he had available to him at the time.
How
can you buy a house 'Subject To' with the due on sale clause
in the mortgages? Simple,
the due on sale clause says that the lender may call the loan due; it does not say they will.
Click
Here for a detailed look at the due on sale clause.
The
due on sale clause came about in the late 1970's and 1980's
when the interest rates were rising.
Interest rates had gotten so high, that many people started
assuming mortgages with lower interest rates then what they could
get from the banks. The
banking industry figured out that their toughest competitors were
their own, lower interest rate loans.
So they came up with the due on sale clause.
However, they had enough foresight to figure out that if
interest rates were lower in the future, then they would be better
off letting the old, higher interest rate loans in place.
Every
once in a great while, a bank will try to enforce the due on sale
clause when the title has transferred, but I have never heard of
one going all the way through foreclosure.
I have never had it happen to me, and I have never talked
to anyone that has had it happen to them.
As long as you keep making the mortgage payments on time,
why would the banks want to call them due, just because title was
transferred? They
wouldn't.
In
fact, most of the time, when I am talking to the banks about the
loans that are in someone else names, they tell me, they are glad
I got involved with this property, because this is the first time
since they wrote the mortgage, that the payments are actually
being paid on time, every month.
The
other benefit to the sellers is that I actually increase their
credit scores.
One
of my favorite reasons for buying houses 'Subject To' is that
my name is not on the mortgages.
Heck, my name is not even on the deed.
I put every house in a land trust.
We will discuss Land Trusts in one of the next few
articles. As far as
the rest of the world is concerned, I don't own anything, but I
do control a lot.
'Subject
To' seems to be a complicated subject, but it is not as
complicated as most people make it out to be.
There are a few more forms needed when buying a house
subject to the existing mortgage. And we will be talking a lot about this subject in future
articles.
Bob
Meister along with
'Charlie' & Randy France from Indianapolis, IN; have done
a wonderful job of completely breaking down the 'Subject To'
process and creating a home study course as well as a 2 day live
workshop on the 'ABC's of Subject To'.
Their home study course is in a printable eBook format.
Click
Here for more info on their home study course 'Profits While
We Sleep'
Click
Here for more info on their 4-day workshop 'The ABC's to
EZ Workshop'
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Side note - There is a
picture of the students from their very first workshop, and I
am in the front row, kneeling down in the middle (blonde hair,
blue shirt)
To your success,
Mike Jacka
www.realestatepromo.com
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