Subject To

[DenverJon]

I recently read a book and some course material for a strategy of investment called "subject to". I know some people will have heard of this creative investment strategy, but in case you have not, I'll recap the premise of the strategy. Basically you find a home owner in a difficult situation facing foreclosure and offer to take over the mortgage, but keep the mortgage in the seller's name removing you from risk and them from the immediate danger of foreclosure. Whether you sell ot RTO the house after that, the objective is to limit the risk you as an investor takes while helping a distressed home owner and reaping the profit margin of a future sale.

Obviously when you read a book by someone pushing his own strategy, you have to take the advise with a measure of reservation. I would be very interested to hear what RE experts think of this strategy, have heard of it, or could see to be potentially dangerous with it.

Your comments are very appreciated.

[promortplanner]

Pre-foreclosures and working with distressed homeowners is a tough business. There are a lot of bottom feeders trying to reap financial reward in this segment of the real estate market. Many good people get taken advantage of and taken for a ride. It's why equity purchasing law is so complicated in states like California. If unregulated, it can devistate local economies. "Subject to" is used as a means of limiting liability for whomever comes in and plays the "hero". It can bypass a sometimes difficult road to finding financing when a property has fallen behind in payments with a lender. Usually you hear these terms from weekend & rookie investors who read some book about "lease options". I'm not sure these concepts introduced 25 plus years ago still have any real relevance in todays market. Whatever you do, remember as a licensed real estate professional your fiduciary responsibilities. If you choose to engage in this kind of business, get used to 4 letter words and try to create win-win situation for all parties. It's when people get greedy that legal issues arise. Good luck!

[Codythebest]

I agree. As licensed, I always take the time necesary to explain in plain english to the owner what I do, why I do it, and making sure he's going to sign some paperworks well understood. At that point, It's a win-win situation.
Make sure to explain that you may sell their property with the MLS for them but, however, You can buy it now.
It will be at least unethical to do a "subject to" if you know you can sell the house in 1 or 2 weeks. You should explain you have strong feelings that you could sell in 1 or 2 weeks. You are licensed, you work for the public, not making money on their back UNLESS THEY WANT IT AND UNDERSTAND IT.
That's why it's always easier to do "subject to" as unlicensed.

[promortplanner]

I have many friends that work in the investor arena and the things that I've learned most are:


Most investors aren't licensed real estate agents or brokers; unlicensed people don't have fiduciary responsibilities and are not subject to usery law
They all seem to have their own personal real estate attorney's who are experts in real estate law & real estate contracts; they all get sued.
They all seem to be questionable in their motives between what's truly right or wrong and money.Doesn't apply to everything or everyone but it's definitely easier to operate without a real estate license.

[OneFeePlus.com]

When doing subject to's make sure you understand your exit strategy. You will have difficulty refinancing this property until you have been making payments for a full year. Lenders want the history of the mortgage currently on the property.

You may also have difficulty renewing property insurance, authorizing a lender to get a verification of mortgage on the property. There are also several states that are enacting laws that require you to share the proceeds with the person you purchased the property from

any questions let me know
Danny

[Codythebest]

There are also several states that are enacting laws that require you to share the proceeds with the person you purchased the property from


Share the proceeds?? With the seller??
Any serious source on this, since I'm doubtful about it??

[OneFeePlus.com]

If you look up equity stripping or equity stripping laws in your search engine you will find various information regarding it.

MN requires that an investor pay the homeowner 82% of the market value. If you bought it for .60 cents on the dollar you would be in effect sharing the proceeds.

I have worked with over 3,000 real estate investors throughout the country in the last 5 years and throughout that process I have picked up a wealth of knowledge. I do my best to share it with anyone who will listen

Many states have regulations to protect homeowners from the unethical real estate investor. As they say one bad apple......

With foreclosures on the rise and investors smelling the money I expect more regulations to come

Thanks
Danny

[Codythebest]

Interesting.
Is the appraisal value setting the market value?
So whatever happen, there's no way an investor can make more than 18% profit on any properties, right?

[JChristin]

When I did BPO's more than fifteen years ago, the BPO usually consisted of one page. I would drive past the house and then look at the comparables in the MLS and issue my opinion. Not nearly as detailed as a Comparable Market Analysis. BPO's simply express an "opinion" of the real estate professional based upon their skilled knowledge of the local marketplace. BPO's, generally, do not require the detailed analysis as a Comparable Market Analysis.

Recently, I invited several brokers to prepare a CMA on one of my properties (I work in corporate real estate not residential). Each one was prepared with a CMA program that did not remove the non-comparable properties from the analysis. Needless to say, I wasn't too impressed with their "professionism" and viewed their work as sloppy. Their reports compared apples, lettuce and watermellons to each other (Neighborhood Survey), rather than apples to apples (Comparable Analysis). Here is a definition I prepared about fifteen years ago when I worked in residential:


A Comparable Market Analysis (CMA) is an opinion of the market value range of a subject property, prepared by a real estate licensee. The final “opinion” is ascertained by applying the three common approaches to market value range, all derived from the marketplace, when appropriate. The approaches to value are:

1.)The Cost Approach: Value is what it would cost to replace or reproduce the improvement on a particular parcel of land, as of the date of the report, less depreciation.

2.)The Income Approach: Ascertains the value of income producing properties. This approach provides an estimate of what a prudent investor would most likely be willing to pay based upon the net income the subject property produces.

3.)The Market Data Approach: This approach to value establishes market value based upon other “bench mark” properties of similar size, quality, and location which have recently sold. A comparison is made to the subject property to arrive at a final market value range.

The data involved in the market data approach is based wholly on the actions of the marketplace. It is generally considered the best indicator of value. Market value is the highest price a property is most likely to command on the open market without undue influences placed upon a prudent buyer or an informed seller. The basic premise is: A person will pay no more for a property than the price she would pay to purchase an equally desirable property.

Hope this helps