SUBJECT TO INVESTING FAQs
"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
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.
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. To get to the county
auditor, who I believe will have the tax information you're looking
for, go to
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.
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 this...you 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
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
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
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.
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
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.
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
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
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.
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
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
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
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
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 need...it gets recorded at the county, and the deed then
gets transferred into your name.
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.
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.
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
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 $100k 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.