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Today's Topic: Buying Subject To
Issue #003
June 30, 2004
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Also In This Issue: Greg Pinneo - July 8th

Buying Subject To (part 1)

Buying Subject To is a lot more complicated that many gurus want to tell you at seminars. This is that sometimes the sale of their products is predicated on the fact that using their stuff makes 'subject to' so easy.

It's a good idea to take the time to learn what you're dealing with before you non-chalantly stick that tool into your creative real estate investing tool belt.

The Devil Is In The Details

It seems that the biggest causes for making mistakes in real estate investing stem from these:

==> Being too hungry and chasing a deal too hard

==> Being too busy and forgetting what you promised in your purchase and sale agreement

==> Not understanding the contracts you are using fully, their legal implications or filling them out incorrectly

This is particularly true of 'buying subject to existing financing' deals. The reason is that at some point you become responsible for the payments and holding costs of the underlying debt.

Ron LeGrand always said to students at seminars (related to all quick turn real estate, but particularly subject to):

Paraphrased...

'I don't want you running out there and agreeing to take over someone's payments unless you're sure you have them covered first. Always tell the sellers that you are not going to make their problem your problem. And always do what you say you are going to do and this will eliminate almost all of the potential problems.'

To take that idea a little further, your job as a real estate investor is to help the seller solve their problem and make a profit doing it. You're in the profit business - and the problem solving business - not a charitable problem assumption business.

A good contracts rule of thumb regarding details:
Earlier is almost always better than later.

Use your head and get good advice if you are not sure about something.

Problem Areas In Subject To

1) Problem: The seller owes more than they told you.

This happens in subject to deals because often the sellers are really motivated to get out from under the debt and they are desperate. Sometimes they will say anything to get rid of the house.

And I'm not so certain that it is always intentional. Many times people who are having money problems have so much confusion in their financial lives that they honestly do not know their financial position.

And other things come into play they may not be consciously aware of - like:

==> Liens from water bill companies
==> Large prepayment penalties
==> Denial

The point is that if you find surprises related to the overall debt on the property, like a second deed of trust they forgot to mention, it could easily turn the deal from a profitable one to an unprofitable - or marginal - one.

Solution:

Part 1: Always make the purchase and sale agreement subject to a title report. Part 2: Run the title report early in the game.

In other words, make the terms of the agreement subject to verifying the amount owed against the property by running a title report and checking. You can get out of the contract - or renegotiate it - at that point.

Many times, I hear attendees at seminars (or real estate investing club members) make comments like 'that costs too much money' or 'I've never run a title report on a subject to deal.' From my perspective and experience, $200 for a title report is cheap and it's simply a cost of doing business.

If you give yourself and out when you draw up the agreement and then don't run the report, you have no excuses.

2) Problem: The property is worth less than you thought.

It's easy to get caught up in the excitement of doing a deal and 'talk yourself into' believing the subject property is worth more than it is.

Sometimes sold comps will verify the 'self-talk' too - particularly if you use online data to make these decisions.

What this really means is that you don't have a handle on the value of your target area and you need to do some homework - or better homework.

Solutions:

Step 1: Get a print out of sold comps from a local title company or a real estate agent who can get them from the MLS in your area.

Step 2: 'Drive the comps'. That means take the list and a map and drive around and look at all the houses that have sold recently in the area. Make notes on your list about each house.

Open Houses: If you have the time - and there are any open houses - go in and see for yourself - how the listing price relates to what your seller is offering.

Step 3: In the neighborhood directly where the house is located, talk to the neighbors and find out what's going on there. This step in itself may be the very best way to learn about the 'relative value' of your subject property and find out other information that may help you - that you can not get anywhere else. Sometimes you can find more houses for sale in the process.

It is always better to do these steps before you write up an offer and a purchase and sale agreement. You should have a pretty good idea whether the deal is worth your time before you ever make an appointment to go to meet the seller. But in the event you haven't done these things prior to your meeting, do them promptly thereafter.

In the meantime...

Start reading about buying subject to. Take some courses and attend a seminar or two. There is also a lot of information on the internet.

We'll continue this 'subject to' discussion next time...

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For Those of You In Or Near Seattle
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Greg Pinneo will be speaking on July 8th.
This is a free event, but you must register in advance.
Please email for details.

See you next time.

Best regards,

Michael Barrett