Hi all -
I am new to the investing arena and had a question about acquiring a property "subject to the existing loan". I know about the banks and their due-on-sale clause, but the real estate investment "gurus" all seem to say it's no big deal - just work the deal, get the homeowner's paymnet book and you will not be bothered by the bank.

I am wrestling with the logisitcs of this -
If I was the homeowner, I don't think I would trust just anyone to make payments on my behalf, so handing over my paymnet book would be a problem. (Plus I keep seeing banks sending out monthly statments and not a coupon book).
In this day of high speed computers..do the banks really not flag changes in payment sources, changes of addresses, changes in insurance, etc. and follow-up on these? seems easy for them to do..

any comments are appreciated...
Brian

Tread lightly in this area as a rise in interest rates will likely increase enforcement of due-on-sale clauses.

John T Reed has a good article on this subject here:
http://www.johntreed.com/dueonsale.html

Reed is very anti Sub 2... and anti most Creative Real Estate systems and programs.

Sub 2 does work... it did last night and I expect it to work again next wednesday afternoon. The key to Sub 2 is "motivated Sellers". A Motivated Seller will only care about getting Out of an imminent problems.

They should be careful in the selection of who they Sub 2 but typically are not... this can cause a problem.

I frequent use Sub 2's,, but typically for less than 6 months when I flip and a max of 24 months when I Lease Option a Sub 2. A lot depends on the quality of the property.

Deal honestly with sellers and have a plan for the length of time your holding sub 2's and you can still work them with relative ease. Even if/ when a lender does an acceleration or Due on Sale demand... it will typically take 3 months or more to even have an initial hearing if you object.

Remember Due on Sale clauses are a civil matter that can be resolved many ways including assumption, Mortification, one time assumption (even on non-assumable loans), and refinance. If you buy Sub 2 correctly from motivated sellers, you will often be able to immediately do a HELO, pay off the 1st and even take some money out.

It all depends on the deal.

But... do not follow the glum and doom guys like Reed... he probably doesn't like his dog or mother either... look at his web site... it is all anti this or that .. unless it is what he claims is his idea.

Doom and Gloom vs. Text-books and Reality? I would also like to say if you can bamboozel or take advantage of people such as the elderly and the usophisticated than mabye you can get them to take back a mortgage or promise a balloon pmt which will never come. Creative Finance is a "false"! Like I found out (mostly from reed) that taking advantage of people is a big business- just ask SHEETS and WHITNEY and all their "creative finance" no-money down followers. There are lots of instances where you can cheat a deal with the numbers, but if you filter out mass quantities (50-1000) of bargain opportunities you will find one or two when the numbers work. I'm not even a proffessional Investor like the people that post in this forum, but I research the "truth" in such serious things as Real Estate.

Good Luck, DM

Montana.. Evidently you are rich beyond everyone's dreams as you have lots of cash and nothing else to do with it... Now as for your comments... Subject To's do work.. They are not for everyone nor should they be used in every circumstance.. I have seen many many many deals go through... As a developer, a real estate investor, and as a very successful Real Estate Professional...

In these times of low interest rates, not everyone can qualify for a loan.. and In alot of circumstances a Subject to or a Lease option is a wonderful alternative to conventional financing...

Now I am not saying that people don't sometimes takes advantage of other people, but for the most part, maybe one bad deal out of several hundred that I have been around...

It also seems that you have been tainted by a deal like this.. My apologies if you have, but there is a very good time and place for deals like this...

Have a great day...
Duane

Example of Short Term Sub 2:

Deal just completed: Owner was 8 days away from Court Ordered Foreclosure sale(with no possibility of stopping it) and then contacted us.

We did a sub 2 with unrecorded title, arranged a forbearance with the bank in the borrowers favor. He had owed $57,000 with an additional $6,500 in late/ penalty/legal fees tacked on.

Made repairs and conversion from a residential 3/1 to a commercial office. (4 weeks part time). Made 2 months of payments.

Located a buyer and placed under contract for $104,900 with an agreement he would contract an additional $5,000 in modifications from our associated remodel contractor. Full Conversion to a Law Office.

Instead of asking the lender for pay off amount, we requested and proposed a Short Sale. After supplying a supporting BPO with pre repair photo's and other supporting documents we arranged a Short Sale of $37,800 for full forgiveness.... which happened to be the actual amount the individual had borrowed several years ago.

The lender got all his investment back ++... except for the trash fee's they add to foreclosed properties, the seller got a Satisfaction of Mortgage with forgiveness of over $25,700 with no 1099 being issued.

After repairs and closing cost, Our investor partnership cleared just over $40,000 of which we gave $2,500 to the original seller as Keys for Cash/ Moving expenses.

Now the original seller has a documented satisfaction of mortgage, $2,500 in cash, no foreclosure and no bankruptcy... and a fair credit raiting.....MMMmmm Boy did we take advantage of him????

Do sub 2's work... well yes.

Absolutely... if you're not sure, just email me any leads you get or Realty Check, we'll take them!

Real Estate Investing for the Rest of US

Subject 2s do work. Banks are interested in having performing assets on the book. Raising rates may make them want to tighten the grip and call more loans with the due-on-sale clause, but the main thing is to keep paying the bills on time.

You can get around this problem by just deeding the property into a land trust. This is an accepted estate-planning tool, which circumvents the due on sell.


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