Financial Freedom Group Blog

Buying Subject to the Existing Financing: Owner Financing Part 3

This is part three and the final installment of buying with owner financing.  You can check out parts one and two. 

In this installment we are going to discuss my favorite way of purchasing property.  Buying subject to the existing financing (or commonly refereed to as "buying subject to" or "getting the deed").  We will get into why it is my favorite buying strategy in a little bit. 

Buying a property subject to the existing financing is the most complicated of the owner financed transactions that we have discussed so far.  There is a lot of paperwork that needs to be done but is still simple if you understand the flow of the documents. 

The owner deeds the property to you when you purchase a property subject to the existing financing.  They have no more ownership interest in the property.  This is different than buying on a lease option or a land contract.  In those cases the seller still has some ownership interest in the property.  When buying subject to the owner gives up any interest that they have in the property at the time of closing. 

When you meet with the seller you are going to sign a purchase agreement.  This is going to lay out the terms of the purchase and also spell out that you are buying the property subject to the existing financing.  You do your due diligence to make sure that the deal is still worth doing and then you have a closing and sign all of the paperwork.

So now we know what it takes to get the deal signed up, how do we profit from buying subject to the existing financing?

Here are some numbers:

• Purchase Price to Seller: $180,000
• Payment to Seller: $1000.00
• Down Payment to Seller: $0.00
• Term: 27 years

• Rent to Own Sale Price: $215,000
• Payment to Investor: $1200.00
• Down Payment to Investor: $5000.00
• Term: 2 years

Bonus profit centers.

• Annual Depreciation Amount: $6,666.67 (you can write this amount off of your taxes.  So depending on what tax bracket you are in you may get to realize 30-50% of this amount as a tax refund)
• Interest Write off: $12000.00 (for this example we will assume that the monthly payment is interest only.  You will get 30-50% of this amount as a tax refund as well)

Purchasing the property subject to and selling it on a rent to own basis you will receive $200 a month cash flow, $5000 up front money and $30,000 as back end profit (the $5,000 gets deducted from the total equity).  Then you can have up to another $9333.34 in tax savings.  The profit equals $44,133.34 for using your specialized knowledge to put this deal together.  If you noticed the numbers are identical to buying on a land contract because you own the property in each scenario.

Also just like buying the property on a land contract you get to take advantage of all of the tax benefits.  That works out to be an additional $9333.34 in tax savings as compared to buying on a lease option as we described in part one. 

Now on to the documents.

1. Purchase Agreement
2. Memorandum of Agreement.  If you feel that the seller is going to try to sell the property to someone else before you close the land contract.  You would want to record the memorandum of agreement and you get this document signed and notarized when you sign the purchase agreement. 
3. Affidavit of Ownership  This document states that there are no other liens attached to the property other than the ones discussed in the purchase agreement. 
4. CYS (Cover Yourself Letter). This letter is an addendum to the purchase agreement.  It spells out all of the risks to the seller and that you are in no way, shape or form taking over responsibility for the payments on the loan.
5. Trust Agreement.  This document is created so that the property can be deeded into the trust.  You create the trust to protect your name from being on the public record.  As investors we don't want to show up on public record with many properties.  It makes you an easy target for a law suit.  The trust is also a vehicle that allows you to transfer ownership without making it public. 
6. Warranty Deed to the Trustee of the Trust.  This is the document that transfers the ownership from the seller to the trust.  They still maintain the ownership rights in the property because when the trust was created they were the beneficial interest.  The Warranty Deed is the only document that gets recorded out of the closing paperwork.  Remember that you may have recorded the memorandum of agreement after you got the deal signed up.  You want to have the trustee be someone that will keep your ownership confidential and only spill the beans when they have been subpoenaed.  An attorney is a good trustee.  There are also people that will be a trustee for a fee.
7. Assignment of Beneficial Interest.  This is where the sale actually takes place.  The seller sells the property by assigning the beneficial interest to your company.  This is just a document that stays in your filing cabinet.  This document doesn't get recorded which keeps the sale off of the record.  The only people that know there was a sale is you and the seller. 
8. Power of Attorney for each seller.  This document allows you to act on behalf of the seller to handle any issue that comes up with the property.  Everything from insurance to home owners associations.
9. Authorization to Release Information.  This document allows you to talk to the lender on the sellers behalf.  The lender won't release any information to you unless you have this document.  Initially you will use this document to get all of the statements sent to you.  Now you can log on to the lenders website (in most cases) and change the mailing address so that the statements come to you.
10. Lender Letter.  This document is just about obsolete because it informs the lender that we have put the property into a trust and that the statements need to be sent to a new address.  The Internet allows us to change this information on the web. 

The reason that I like buying subject to the existing financing the best is that I have all the tax benefits and that I am totally protected from the seller doing anything that attacks the profit in the deal.  I have the deed to the property.  No other liens or judgments can be attached to the property because of the seller's financial incompetence.  The only thing to be aware of is the seller calling the lender and letting them know that the property is sold.  The only reason that they would do this is because they are tired of the loan in their name and they want to get it off.  If the lender calls the loan due you can either let the loan go to foreclosure (that is what the CYS letter is for.  You tell them that if they notify the lender the deal can go to foreclosure), you can try to work with the bank if they call if due, you can encourage your tenant buyer to buy or you can get new financing if the deal still works.  If you owe the seller money, they have a very strong interest in not informing the bank because they don't get their equity until you get your profit.  Also it actually helps them build a strong credit reference with you making the payments on time.

There are tremendous profit centers in buying a property subject to the existing financing.  You can use any exit strategy that you want when you own the property to maximize your profits.   You are also totally protected when you purchase  the property.

That is the conclusion of the three part series on buying with owner financing.  Post your comments or questions in the comments section.  I will be happy to address them.

How to Buy "Subject to"

There is big money buying property subject to the existing financing. 

For example, this weekend students of ours, Proeun and Amy, signed up a deal subject to the existing financing that has about $25,000 in equity and at least $200 a month cash flow.  Oh yes, they also have 342 months (28 1/2 years) to pay off the loan.  The seller is selling the property for exactly what they bought it for even though they have remodeled the kitchen and added 2 bedrooms.  All of this for only $1000 down.    

What does it mean to buy a property subject to the existing financing?  Well, here are the details.

1. The investor gets the deed to the property.  She owns it.

2. The seller's loan stays in place.  The investor does not assume the loan or take any responsibility for the loan.

This is a great strategy to reduce your risk in investing in real estate.  It doesn't doesn't require much money down and you didn't sign personally on the loan.

So why is it called subject to?  Well, you are buying the property subject to the existing financing.  This means that you are buying it with the existing financing still in place.  If the statement "subject to..." doesn't make sense just replace "subject to" with "with".  So, you will be buying the property with the existing financing.

OK, now we are going to get into the "how to" part of the process. 

Step 1. Have the seller sign a purchase agreement that spells out that you are buying the the property subject to the existing financing.  This can easily be explained in the purchase agreement with the following language. 

"Approximate principle balance of first mortgage in the amount of _________________ which conveyance shall be made subject to, if any.  Mortgage holder is _________________."

Repeat this for any other mortgages or liens that you are going to be taking the property subject to.  You really want to have a good purchase agreement.  We have one that you can purchase in our forms CD that will also include all of the other docs that you would need to your investing from A-Z.

The rest of the steps would be considered the closing.  This can be at the same time you are signing the purchase agreement.  Typically you spend a few days doing your due diligence and then you close the deal when you know it is worth going forward with.

Step 2. Create a land trust that names the seller as the beneficial interest.  Name the trustee (someone that isn't going to spill the beans on who owns the property.  A lawyer is a good fit)

Step 3. You have the SELLER deed the property into a land trust.  Make sure the seller has the warranty deed notarized.  Record the deed Warranty Deed (or the equivalent in your area) that transfers the property into the land trust.  This is the only document that you need to record.  Don't record any other documents except the deed.  (The only exception to this may be the power of attorney, but that may not be necessary)  You put the property in the land trust so your name does not show up on title to the property.  This shields your identity from people that may want to sue you a wide variety of reasons.  A land trust does not protect your assets, the land trust just shields your identity.

Step 4. You transfer the beneficial interest in the land trust from the seller to you the investor.  This document does not get recorded, it gets filed in your filing cabinet.  The only people that know you own the property are you and the seller.  This document is what transfers the ownership to you.

Step 5. Have the seller give you a power of attorney so that you can deal with insurance companies, the mortgage companies, home owners associations and any other parties that you may need to contact with regards to the property.

Step 6. Have the seller fill out an authorization to release information about the loan.  Make sure you have one for every loan.  Next you want to transfer all of the statements that the seller receives to your address. 

Step 7. Get any and all paperwork that the seller has pertaining to the house.

These are the steps to buying a house subject to the existing financing.  It makes sense to check with a local attorney to find out what types of deed you use and how ownership is transfered into the land trust.  Both of these items can change from state to state.