Buying Subject To

​One of the Most Powerful Techniques in Real Estate

​This is probably my favorite strategy in property investment.

Buying "Subject-To" or "Sub-To", as it’s known in the business is one of the most powerful techniques in all of real estate.  

It’s where you can buy a property for as little as zero down and zero out-of-pocket.  And basically, the way it works is this, you are making an agreement, a non-binding agreement to make somebody else’s loan payments going forward in exchange for the deed.  

So, it’s that simple.  

It’s a great way to pick up rentals, renovations, homesteads, etc.

Always Close at a Title Company

​​Now, the details can get a little complicated and in Texas, because the Texas House Bill 2207. That bill says that you have to either get the consent of the lender to buy a property subject to, which you’re not going to get. Or complete the transaction at a titled company with titled insurance which is easy to do and highly recommended.  

To do it legally in Texas, you do want to close these things at a titled company.  But it’s a great way to buy property.  Usually, when you see these late-night commercials, it says, “I buy properties with no money out-of-pocket, zero down, etc.”  Usually they’re talking about "Subject-To."  

For anybody who is reluctant or doesn’t quite get it or understand it, I think the best way to explain it is this...

If you own a home, every month you write out a check and you put it in an envelope and you mail it off and the lender gets the check and they open it up and they say, “Oh, money” and they cash it.  

And the question to ask is, does the lender care who wrote the check?  In other words, do they care if you mailed the mortgage payment?  Do they care if your father mailed the mortgage payment?  Do they care if I mailed the mortgage payment?  

And the answer is, no.  All the lender looks at is, to see that somebody made the mortgage payment.  As long as those mortgage payments keep getting made month after month after month, the lender is very happy and they will continue to collect those payments indefinitely.  

When you buy something "Subject-To", you’re basically just telling the owner, “Look, I will make your mortgage payments going forward if you agree to deed the property over to me so that I own it.”

​For Long-Term Holds

​​​Now, if you’re buying properties that are going to be rental properties or properties that you’re going to hold for a long term and resell maybe with wraparound mortgages for example, you want to look for low, fixed interest rate loans.  
Low interest rates, you want to make sure there’s no balloon payments on the loans.  But I also love to buy properties that are short term buys.  In other words, I like to buy renovation projects "Subject To."  

Why not use money that’s already on the home, the financing is already in place?

For ​Short-Term Holds

​​​​For a short-term "Sub-To" deals, you want to look for no prepayment penalties but really nothing else matters.  

In other words, it doesn’t matter what the interest rate is.  I’m only going to have it for a short amount of time anyway and it’s going to always be a lot cheaper than going and getting a new loan.

A little example of a deal like this, I did a little house on a street called Gernsey.  

Here was the deal - four guys each renting this house and the four tenants were each paying $400 a month rent.  In other words, the house is generating $1,600 a month rent.  

Now, the homeowner was collecting that $1,600 a month and pocketing it and not paying the mortgage payment.  It turns out, the mortgage payment was only $1,100 a month.  The home was going into foreclosure.  Now, the home is worth $150,000.  They only owed a $110,000 on the note.  There’s $40,000 in equity but because the homeowner stopped paying the mortgage, the house was about to be foreclosed on.

I went to the homeowner and I said, “Look, I can save your credit and I can stop this foreclosure if you simply deed the property over to me.”  

She deeded me the property and I caught up the payments which cost me about $4,000.  

For $4,000, what did I get?  

For $4,000, I got a $150,000 house that’s generating $1,600 a month rent.  I’m paying the $1,100 mortgage payments so I’m getting $500 a month in a positive cash-flow.

And I get $40,000 of instant equity because I only owe $110,000. Or I should say I’m only paying the mortgage on somebody else’s loan of $110,000 on that house and that house will just keep going up and up and up in value.

All the while I keep collecting that $500 a month positive cash-flow until I finally someday want to sell it and take the full profit out of it.

That’s an example of buying a property "Subject-To."  

My question to any new investor that’s curious about this, I would say, “Would you take that deal?  Would you take 10 of those deals?  Would you take 20 of those deals?” you know.  Get enough of those deals under your belt and essentially, you’re done.