One thing that’s a little bit moooney about subject to investing is that the properties don’t show up on your credit report. You don’t pay closing costs, there’s no qualifying, no 20% down payment. Kind of sweet, kind of sweet. Does not mean there are no risks? Hell no. If you don’t pay the bills you’ll likely end up in court. What if you can’t sell, or if there are vacancies, or if there are repairs needed? It costs money. The truth is, it may take one, two or three lease option tenants. And if you don’t pay the bills you could end up in court. Can’t have the sweet without the sour (Oh god did I just quote Vanilla Sky? Has anyone seen my man card?)

After all you may have signed hold harmless agreements, but judges no likey investors. I’ve never had to go to court, because I do my best to take care of the homeowners. But if you don’t pay the mortgage, and you agreed to, you deserve what you get if you get sued. I put serious thought about whether you can handle the payments on any house I take over subject to (I do very conservatively). Don’t bite off more than you can chew! Its impolite!

Some states frown upon subject to. Shady investors give a bad rep for the good guys. The Even though the deed conveys ownership, subject to has the appearance of being illegal. Attorney general of North Carolina has been working to make them illegal. Check your state law before going forward. As a side not, the con to doing making subject to is that many motivated sellers will now get foreclosed upon. Think about it, what if the owners were 3 weeks from foreclosure, a typical 30 day closing won’t do, but can be fixed with subject to. Bummer dude.

Most loans have a due on sale clause. It’s a scary little clause in a mortgage that gives the mortgage company the right to call the loan due if the deed is transferred. The owner must sign that they have been made aware of this risk, and that you won’t qualify for the loan. I have never heard of this happening, if the bank is getting paid, they’re happy. Especially nowadays.

Good lord that’s a lot of risk! Good news is these are worse case scenarios that you need to know about. Frankly they’re the exception. Do any to closings with an attorney that knows the paperwork and cover your butt language and your good. I pay mine $250 a pop, and they earn every penny. And don’t bite off subject to homes more than you can chew.

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Who would sell at these prices?

You need to find houses that need work, and the owner is MOTIVATED or has to sell.  There are a number of different groups to find these types of homeowners.

1)      Homes Ineligible for Conventional Financing-  These homes can only be purchased for cash, and there are very few cash buyers.  If the property needs significant repairs, the banks won’t lend!   Therefore only cash buyers, people with hard money, private money, or wholesalers can purchase them.  Fewer buyers = Negotiating power.

2)      REO – homes that the bank has foreclosed from homeowners.  The bank is flooded with inventory they have taken back.  These can be found on the MLS.

3)      Pre-foreclosure – Owners who have missed payments, and the bank has not yet foreclosed

4)      Auction – The bank foreclosed, and are trying to recoup their property at auction.  If it is not bought, it becomes an REO.

5)      Probate- Owner died, and passed the property to relatives who then also inherit the loan.  Property is also vacant.

6)      Vacant – homes are vacant and often need repairs.  These homes often have a mortgage that has to be paid, although the owner does not live there and is receiving no rental income.

7)      Divorce – These homes often need to be liquidated quickly, and the owners are more concerned with ending a painful situation rather than getting the most possible cash for a home.

When selling a property rent to own, there are several mistakes that if they are avoided, it can make you 10s of thousands of dollars more than a traditional home sale.