Photo: Editor B ——
Who says you can’t get rental properties for zero down in 2009 and beyond? I am working on one right now, and I don’t even have to get qualified by a lender, or even get the loan in my name. What? I am working on a “subject to” deal, also called “sub2” and various other abbreviations. What this means is that I will simply start making the payments to their mortgage company. They move out, I rent out the property. There are pros and cons to this type of purchase, so lets break down a typical transaction so you can decide if it is for you.
How the purchase works
When entering in to a sub2 deal,you are basically offering the seller a way out. In most cases they may be slightly behind on their payments (or even far behind), or desperate to move for a variety of reasons. I have also been noticing here in Michigan, a large number of homes where the owner has moved out of state for work and is trying to manage a rental long distance. Many of them, after their first eviction, would be more than happy for a professional investment company to make their payments and rent the property out however they please.
So you find a motivated seller. In the average sub2 deal, they may owe slightly more than an amount you would pay if it was a cash deal, or if you had to get your own loan. But the terms are good, and of course in many cases you are getting in zero down. These excellent terms can often times outweigh the fact that you may have slightly less equity than other deals you may have looked at.
There are several ways to actually structure the deal. I won’t get into all the technical details here, but here are a couple basics. You can use a full purchase agreement, clearly stating that you will keep the current loan in place and make the payments. Or you could set up a lease with purchase option, and have the contract state you will pay the payment directly to the mortgage company.
Why don’t I want you to pay the payment directly to the seller? If you can’t guess the answer, get out of the real estate business fast!!!!! A seller that is having financial problems may take your payments and allocate them towards other living expenses. This means you may be paying them, and they are not paying the mortgage. The property gets foreclosed, you lose. That is the point of the sub2 deal, you pay the mortgage company directly.
TOP 6 ADVANTAGES OF A SUB2 DEAL
- Zero down, or very small amount down to get payments current.
- Fast closings.
- There are many people currently in a position that they will accept this type of purchase.
- No qualifying for a loan.
- No waiting for a loan to close.
- You are not adding another loan to your credit report.
Sub2 deals have their share of risks. The biggest being the risk of the Due on sale clause that is in nearly every mortgage. What this means is that when title transfers from one owner to another, the mortgage company wants to be paid in full right now, or they have the right to foreclose. Should you be worried? I’m not. It is very unlikely for them to foreclose if you are making all the payments on time. There are already too many foreclosures, and most financial institutions would not gain anything by foreclosing on a loan that is being paid on time every month. Many purchasers have tricks they use to cover up the fact that they have taken over the loan, so the lender is not even aware of the fact. I won’t go in to that here, that is something for you to decide on your own.
Another issue you should watch out for is the fact that it is easy to make a bad deal. Especially if the equity cushion is a little tight, or if you are doing sub2 deals because you don;t have much cash to work with. If a major repair comes up, will you have the cash to get it done? At that point, are you in a negative equity position? Be sure you have inspected the property and know what you are getting in to. Also, when you find a buyer or renter, you may want to structure the deal so they are purchasing from you, and make it very clear that they are responsible for all repairs. Just remember, if they default, you have to get the property ready to rent again.
Sub2 deals can be great money makers, especially if you can find a property with some equity, offer rent to own terms, and cash out in 12 months or so. Just make sure to do your homework. And always remember you now have someone Else’s credit on the line. Be sure you make those payments.