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The potential advantage of making an offer
"subject-to" the existing mortgage is financial. You will not have
to qualify for a new loan. You will save thousands in loan
origination fees, points, etc. that you could have to pay in
conjunction with a new loan. This improves your potential profit
margin.
We decide we are willing to offer the seller his
payoff, if he is willing to agree to sell, subject-to his existing
loan. If the seller is truly motivated, the fact that you can close
a "subject-to" very quickly can be a big selling point.
In our example, the seller agrees to the
"subject-to" arrangement, but says that he wants this loan off his
credit within 24 months. At that point, the buyer must cash the
seller out by getting new financing or selling the property.
Some sellers will be smart enough to ask for
"perks", like a cash down payment. Other sellers will be too
motivated or won't think to ask for anything down. You have to go
with the flow of each deal.
When we write a "subject-to" offer, we want to be
as specific about our agreement and terms as possible.
The contract form that I use for writing offers
has plenty of space on page one, near the blank where you enter the
purchase price.
The form used is not important. To be binding,
any offer to purchase real estate must be in writing. But there is
no standard form. Contracts range from the generic variety that you
can buy at the office supply store, to the official forms approved
for use by sales agents in your state.
The form that licensed sales agents use, has a
"stipulations" section. You can put the terms of your offer in the
stipulations section of your contract, or on page one if space
permits. It does not matter, as long as the correct terms are
spelled out somewhere. The seller could decide to counter-offer,
mark out your stipulations, change them, or add new ones.
Below are some clauses that I would write into this offer:
Purchase Price: $195,000 "Subject-to existing
mortgage of $195,000, with payments of $1232.53 per month, principal
and interest. Buyer agrees to pay off existing mortgage anytime in a
period not to exceed 24 months from date of closing of this
agreement." (these are the basic terms of our agreement)
"Buyer to purchase adequate insurance protection
valued at or above the purchase price of property."
(you want to have insurance anyway, but I like to
put this in to make the seller feel more comfortable)
You want to be clear about any and all terms of
your agreement with seller. It may be very simple, as in the example
above, or there could be other terms that you and the seller will
negotiate and agree to.
When negotiating, you will not always be able to
discuss terms with a seller prior to making an offer that is
"subject-to" their existing mortgage. But, if the seller is not
willing to discuss the situation and is not forthcoming with
information, then chances are you are talking to the wrong seller.
Those who are truly motivated, or have a problem they need to solve,
will usually be willing to get into a meaningful discussion of the
details. If a seller is difficult to deal with, chances are they are
not that motivated.
I don't waste a lot of time in such cases. I
explain to sellers that I need certain information in order to
determine if there is a way that I can help them. Otherwise, I move
on.
Your most likely source for creative deals are
those who really need to achieve a specific, sometimes urgent
objective, like getting out of debt, or avoiding foreclosure. But
there are many reasons for doing a creative deal.
There is nothing really complicated about writing
"subject-to" offers. You just need to be clear. It is essential that
the language is not confusing. Your objective in writing the offer
is to dictate the terms of the existing mortgage. In so doing, you
are stating how much you are willing to pay, and how you intend to
pay it, and when. Think of the "who", "what", "when", "where", guide
to writing, when documenting the offer.
I have also done "subject-to" deals with sellers
who were not in financial trouble, but just the opposite. There are
sellers who will consider "subject-to" offers because of the tax
benefits for them. I have had sellers who did not want to collect a
large chunk of cash all at once. Or, a seller who does not want to
collect the funds in a particular tax year. "Subject-to" offers can
be used to address many different kinds of issues.
We tend to associate creative financing with
desperation. And in many cases, sellers are desperate. But in some
cases, a "subject-to" deal is merely the most beneficial means to an
end for both parties.
Every situation and offer are different. Writing
creative offers is a skill that you will develop with time and
experience.***
NOTE: This article is intended only for general
information purposes, and should not be construed as legal advice.
If you need help filling out a real contract, please see your
favorite real estate attorney first!
Donna Robinson is a real estate investor, author,
and consultant located in Atlanta Georgia. You may read more of her
articles on her website at
http://www.realestateinvestorhelp.com/
or you may contact her by email at
drobinson@reihelp.com or call 404 542-9903. |
How
to Structure a "Subject-to" Offer