"Subject to" Deal Purchase of Foreclosure
How can you buy foreclosure by "subject to" deal?
In simple terms, you make the payments on mortgage loan on behalf of homeowner. Does it sound crazy? No. Here's how it works for the benefit of all parties:
- Homeowner is happy as there will be no risk of foreclosure as mortgage payments will be made;
- Bank or lender is happy as mortgage payments are being made on time; and
- You are happy as you create an investment opportunity to buy a real estate property without making any down payment.
Is there any risk in buying foreclosures by using "subject to" deals?
Yes, there is. First of all, you are not getting the title while you make payments on behalf of homeowner. You have a risk when homeowner goes bankrupt or changes his/her mind later on.
When is "subject to" deal good?
You make a good investment and make profit if there is an equity in home. If there is an equity, then, you make a deal with the homeowner and get your share in equity for the risk you take. And, you can always sell it for profit when you find another investor. Everybody gets a share of profit depending on the amount of equity in home.
Be careful about due-on-sale clause
When a property changes hands, bank or lender can ask for payment of mortgage loan with accumulated interest. So, it is better for you not to take ownership of the property unless bank or lender agrees that you become the owner of property without triggering "due-on-sale" clause.
Equity in home "subject to" deal
The first thing that you should investigate is whether there is sufficient equity in home subject to foreclosure. Two critical are for investigation:
- Did property lose value due to slowdown in economy or for any other reason? If yes, how much?
- Exact amount of debts owned by homeowner?
House may lose value not only as a result of economic slowdown but also due to problems related to the property and its neighborhood.
Amount of debt by homeowner may indicate whether there is a risk of bankruptcy and amount of home equity left.
Major benefits of "subject to" deals
You may benefit from:
- share of equity in home as a reward for your effort and help;
- you don't need to qualify for a loan;
- you may assume the mortgage loan carrying an interest rate lower than current levels of interests.
Before you take action, review subjects under best foreclosure locations, home appraisal, and foreclosure inspection to make sure that home is worth your effort, effort, and financing.