Real Estate Investing Myths That Steal Profits From Your Pocket
By Joe Brillante & Lou Castillo
of the things that distresses us about our industry is the amount
of wrong or incomplete information available to investors. Some
myths block what otherwise would be a great deal, while others
would have you believe that a bad deal is actually great. For
example, we encourage purchasing homes “subject-to”
the existing mortgage as an option to finance the purchase of
an investment property. This means that title to the property
is transferred to the purchaser, but the loan remains in the
original borrower’s name with payments made by the purchaser.
Unfortunately, many myths exist around this method which could
rob you of your profits. Let’s take this opportunity to
dispel 5 of the most common.
Myth #1: Buying A House “Subject-To” The
Existing Mortgage Is Illegal.
Absolutely not true! Most mortgages have a “due-on-sale”
clause which states that if the house is sold without paying
off the mortgage, the lender has the “right” to
call the entire loan due. The key here is that they have a “right”
– not an “obligation”. In other words, it’s
their choice. We asked several attorneys in town who represent
lenders to see if they had ever heard of a bank call a loan
due because of a sale. In every instance they said not as long
as the payments were made timely. Why? Because banks are in
the money business – not in the real estate business.
If they call the loan due, and it goes into foreclosure, they
have a poor performing loan on the books (for which they have
to increase their reserves), they incur additional costs, and
they inherit a property. Or, they can just accept the timely
payments from the new owner. Which makes more sense?
Myth #2: Buying “Subject-To” Is Complicated
And Requires A Ton Of Paperwork.
The truth is that all you have to do is write it into the Purchase
and Sales Agreement (PSA). We write it in right next to the
Purchase Price. Here’s an example using our PSA:
Total Purchase Price to be paid by Buyer is $80,000.00, payable
as follows: “subject-to” existing first mortgage
with a balance of approximately $77,500, and monthly PITI payments
of $695; remainder of Sellers equity to be paid in cash at closing.
That’s it. You and the Seller have now agreed that you’ll
purchase the home subject-to their mortgage. As a precaution,
we have the Seller sign a disclaimer that they know that the
loan has a due-on-sale clause, and that we make no promise as
to when the loan will be paid in full, or how long it will remain
in their name. We also prepare a letter from the borrower informing
the bank that all future correspondence should be forwarded
to us, and we have the right to act for the Seller in every
way regarding the loan so they’ll disclose loan information
to us in the future.
It really is that easy. After closing, you just start making
the payments. We don’t hide our identity. We send in our
own checks, and the house insurance is in our name.
Myth #3: No Homeowner Will Ever Sell Me Their House
And Leave The Loan In Their Name.
If you’re dealing with a seller who has no problems with
his house, this may be true. But when you deal with motivated
sellers – ones that either have financial, personal, or
house issues – this will not be an issue. Motivated sellers
need a way out – quickly! Often, they’re already
behind in their payments, and facing foreclosure. When you tell
them that their worries are over, and you’ll catch up
their back payments, and make all the subsequent payments on
time they’ll jump at the opportunity. As a bonus, their
credit will even improve.
The key to successful negotiating lies in your confidence. Realize
that you’re providing a viable alternative solution which
allows the highest price to be paid, with the quickest closing,
and immediate relief for the Seller’s situation.
Myth #4: Kitchen Table Closings Are Perfect For These
Investors love to say that they “got the deed” at
the kitchen table while they presented their offer. The concern
is you have no validation of what you purchased. Without a title
exam, there’s no guarantee the correct owner even signed
the deed, nor whether any other loans or liens exist on the
property. You also have no title insurance to protect you from
any unanticipated title problems. Finally, the actual payoff
on the loan must be validated with the lender by requesting
a statement of account. Do not use the principal balance payoff
shown on the monthly statement because it does not include past
due payments, other interest accrued, fees and penalties, and
any prepayment penalties. We’ve seen actual payoffs tens
of thousands of dollars greater than the principal payoff.
You could argue that what difference does it make if the loan
isn’t in your name and you gave the Seller no cash. The
problem is that you may not discover any of these issues until
much later in the transaction – maybe not until you try
to sell the property. By then, you will have invested time,
energy, and money in the property only to see it all lost, when
all of these problems could have been avoided by conducting
a standard closing with your attorney or title company.
Myth #5: I Can Always Just Walk Away If I Can’t
Pay The Mortgage
This is technically true, but not a great strategy for the successful
investor. Legally, you are not responsible for the payments.
But you do have your credibility and reputation to consider
– which are critical to your long term success. You definitely
don’t want an angry seller defaming your reputation in
the community, or submitting a complaint with the Better Business
Bureau. Not to mention that you probably have cash invested
in the house, which will all be lost. We recommend treating
“subject-to” mortgages just like any other with
your name attached – make timely payments.
Joe & Lou
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