| This article is the first in a series of seventeen | | | | for resale or rent it. In many cases the investor |
| articles that will give people insight into how real | | | | may have re-sold the property to another buyer |
| estate investors are able to buy and sell real | | | | and allowed the original seller's mortgage to stay |
| estate with little or no money, no credit and little | | | | in place. |
| or no risk. While it may seem impossible, tens of | | | | Violating the due on sale clause is a violation of |
| thousands of these transactions are done weekly | | | | contractual law which would have to play out in |
| throughout the country. Most home buyers are | | | | the courts, versus criminal law which could result |
| familiar with buying a home using the traditional | | | | in stiff fines or penalties. Because of this, there is |
| method of shopping with a realtor, finding a home | | | | no Due on Sale Jail. In probably over 20,000+ |
| and getting a mortgage to pay for it. While | | | | subject to investor purchases there has never |
| traditional, this method is in no way related to the | | | | been any enforcement of the clause by lenders |
| huge leverage afforded investors doing deals with | | | | as long as the mortgage payments are being |
| creative financing. | | | | made. This could change and certain states are |
| The first and likely the most common method of | | | | trying or may have passed legislation to make |
| an investor buying and holding a property for | | | | subject to purchases illegal. Always check with an |
| more than a few days, is to do what is called | | | | attorney familiar with real estate law before you |
| "subject to" purchase. This method allows the | | | | try a subject to. |
| investor to purchase the property from the seller | | | | The benefit to the seller of a subject to is the |
| by keeping whatever existing mortgage that is in | | | | immediate sale of his property to an investor. The |
| place at the time. The investor simply takes over | | | | investor doesn't have to worry about bad credit |
| the seller's mortgage payments from the date of | | | | or no major down payment, if any at all. The |
| the closing forward. | | | | investor's market risk is limited to whatever |
| Over 30 years ago, lenders decided that they | | | | equity he puts into the property at the original |
| could make more money on refinancing home | | | | closing and afterward in upgrades or repairs. |
| mortgages than allowing a new buyer to simply | | | | However, the risk to the homeowner/seller is |
| assume their existing mortgage on the property. | | | | that the investor buyer, or the investor's buyer, |
| Since the average homeowner only lives in his | | | | will stop making mortgage payments and the |
| property for 5½ years, the reissuing of new | | | | lender will foreclose against the seller/homeowner. |
| mortgages became a primary source of revenue | | | | Even worse, is when a buyer makes late |
| for lenders. The lenders ability to later bundle and | | | | mortgage payments that will negatively impact |
| resell these loans lead to an acceleration of | | | | the homeowner/borrower's credit. Even if the |
| lenders making loans and a huge profit stream. | | | | borrower calls the lender and snitches on the |
| To overcome the assumption clauses that were | | | | investor, the lender can only foreclose if the |
| common in their early mortgages, lenders inserted | | | | payments aren't being made or they invoke their |
| what was called a "due on sale" clause. This clause | | | | rights on the due on sale clause - which they |
| basically stated that if a borrower (mortgagor) | | | | seldom do. The homeowner is left to suffer until |
| sold, transferred or exchanged the encumbered | | | | the mortgage is paid off at another sale by the |
| property, the mortgage was due and payable. If | | | | investor or until the lender forecloses. The late |
| the borrower didn't pay off the mortgage at the | | | | payments or foreclosure of the loan do not |
| sale or transfer, the mortgage was immediately | | | | affect the credit of the investor because he is |
| subject to a foreclosure proceeding by the lender. | | | | not the borrower. |
| In actuality, as long as the lenders received the | | | | In summary, investors have a powerful tool in |
| mortgage payments, they never pushed the issue | | | | using subject to financing to acquire a property. |
| of the transgression by the homeowner | | | | Common sense and prudence should be exercised |
| borrower selling the property. The investors who | | | | so the seller is not exposed to potential credit |
| do "subject to" transactions were able to control | | | | damaging results of the sale. The benefit to the |
| the properties with little or no money because of | | | | homeowner/seller can be immense as the relief |
| the financing in place, no credit qualifications by the | | | | of getting rid of a mortgage payment and the |
| lender and no market risk unless they had put | | | | responsibilities of the property's maintenance in |
| money into the deal for the seller to leave. | | | | minutes. So, subject to financing can be a win-win |
| The investor could simply get a warranty or | | | | for all parties involved if the risks are properly |
| quitclaim deed from the seller and file it at the | | | | disclosed to the homeowner and appropriate |
| local courthouse, continue making the mortgage | | | | documentation is signed by both parties to |
| payments and move into the property, rehab it | | | | protect their interests. |