Here Is What Works: Buying “Subject To” Deals – Real Estate Investing
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Here Is What Works: Buying “Subject To” Deals – Real Estate Investing


Joe: Hey, it’s Joe Crump. I’ve got another
deal that I think makes sense. And I’m going to show you how these types of deals make
sense. I teach zero down structures. I’ve been teaching you in these videos. I teach
them in my program, pushbuttonmethod.com. Zerodowninvesting.com is my mentor program.
Go look at both of those. There’s lots of free information just on those sites about
how we do some of this stuff and also how you can get involved in those programs if
you want to pay for them. I’ll be happy to teach you.
Joe: But, let’s talk about specific subject-to deals so that you can see the structure and
how it works. I’m going to show you one of the types of deals that I do in my Millionaire
Matrix so that you can see how this process works and how cool it is — where you don’t
have any money, no credit in it and it makes you money for the rest of your life. These
are cool deals and they’re pretty easy to put together if you use the Push Button system
that I’ve got which automates the whole process of bringing your buyers and your sellers to
you; I love it. It’s how I built my rather substantial portfolio doing it.
Joe: Now, this subject-to house is currently in my inventory. I haven’t even advertised
it for sale. I keep it as part of my portfolio. I’m holding onto it as a long term strategy,
but I am willing to sell it as well. So I’ll show you what I do with some of these properties.
The beauty of it is it’s so easy to find these properties. There’s so many of them available
out there that it’s not difficult to sell them. So if you ever want to buy this way
and don’t want to do the work to find the properties, then give me a call and I’ll put
one together for you. It’s going to be an unusual type of investment and you’re not
going to get your head around it at the beginning because at first glance, it’s going to seem
like a crazy idea, especially when you look at these numbers that I’m going to show you
here. Joe: Let’s go into this one specifically.
You can take over this property. I find a homeowner that says I can’t afford to make
the payments any more. I want to move. I’m current on my payments. I’ll make your next
payment for you and then I’ll deed you the property. So they deed me the property and
I take it over. Joe: By the way, if you want to learn how
to do subject-to deals, I teach it in my mentor program at zerodowninvesting.com and you can
learn about that, or you can learn it in my push button method — pushbuttonmethod.com.
And we actually have some automated systems to bring folks in who do this, a complete
FSBO subject-to system that automates the entire thing so that all you have to do is
pick up the phone when the seller’s ready to go and then you sell it to them. They don’t
flood in with that method but they come in enough to get one or two of them a month and
get the process going. But you have to be careful with negative cash flow. And I’m going
to talk about that right now. Joe: Here’s the numbers on this particular
property. This was a brand new property when I got it. You can see the dumpster was still
outside, so it was less than a year old. The current mortgage that we were taking over
was $162,000. That’s a little bit above its actual market value right now. The markets
dropped maybe $10,000 or $15,000 from this value so I’m actually taking it over for a
higher mortgage than it’s worth. I’m paying more for the property than its real value.
But let’s see if it’s a sustainable deal. First of all, it’s got $1,300 a month income
on it, which is market rent for this property. And we’re getting that. I’ve got a tenant
in there who’s been in there for a couple of years that is paying $1,300 a month on
this property. The payment that we have to make for this mortgage is $1,195 a month.
That breaks down to $193 principle, 76% interest, $157 in property taxes and then the mortgage
insurance because they didn’t have 20% down when they got the loan so they’ve got to pay
mortgage insurance for a few more years. And then property management — this is what she’s
charging me — I get a little bit cheaper property management than you would because
I’ve got a lot of properties. So the total payment that I’ve got going out every month
is $2,900 every month. We’ve got $1,300 a month coming in so that manes we’ve got 1$
positive cash flow, right? And in fact, what that means is we’ve got less than that because
there’s always a risk of vacancies. There’s a risk of repairs that have to be done. So
does it make sense to take a property like this if this is the kind of deal that you’re
getting? Some people would say absolutely not — there’s lots of other ways to do it.
But, and this isn’t the only thing that you can have in your strategy, you’ve got to have
cash flow in your strategy as well, but this is a long term investment and it makes a lot
of sense. Let’s look at the rest of the deal here.
Joe: The mortgage that’s on it is a 5.75 fixed mortgage. It’s a 30 year mortgage. There’s
still 27 years left to this mortgage as of the time I’m recording this. Last year, it
cost me $500 to keep this property. I didn’t make it to my 12. It cost me $500 because
we had some repairs that had to be done, so I ended up paying $500 to keep this property,
but I got some benefits from it. I got depreciation on the property, which because I’m a real
estate professional (and you can be too if you work 750 hours a year in real estate)
and if you don’t, then you’d have to take it off of your passive investments, although
you can — well, there’s some other rules on this — I’m not going to get into all of
that. But there is some depreciation on this one. I’m able to depreciate by 27.5 years,
so let’s say $130,000 is the cost of the improvements on this. If I divide that by 27.5 I get $4,700
a year I can deduct from my taxable income. So let’s say your taxable income was $75,000
that year. You could reduce that $75,000 income and only pay income on what? — $71,000$ of
that, or $70,300 actually, because you’d be taking $4,700 off of that. So if you’re in
the 35% tax bracket, that means that you’ve got 35% of that. That means your actual savings
is about $1,600 a month. So if it costs me $500 to keep that property, with just depreciation
alone, I made $1,100 above what it costs me. Now I might have had a vacancy so it might
have cost me a month or two of payments. So you have to be aware of that and make sure
you have enough cash flow to handle it. I’m in a position to where I do. Fortunately,
if you advertise a bunch of properties, you’re not going to have too big of a problem.
Joe: There’s also the mortgage buy down. Let’s go back to this other page here and show you
that the principle, $193 a month, is being paid towards principle; about $2,300 a year
is going toward principle. So with the $1,600 plus the $2,300 that brings us to about $3,900,
minus the $500, so now I’m at $3,400 a month if I paid that $500. So now it’s not too bad
even if I had 2 or 3 months of vacancies, that property would still be paying for itself
every month and I’d be okay. Also, eventually this property is going to appreciate in value.
Even though I paid a little more for it than its current market value, I did it in a time
that’s kind of depressed right now. That’s one of the reason it’s so easy to get subject-to
properties right now — because of the people who are upside down in their property and
they can’t go and sell it with a realtor. So it makes a lot of sense for them to do
it this way as well. Joe: If you wanted to buy it from me, you
could pay me $5,000. I wouldn’t give you the deed to the property. Remember I talked about
staying in control of the transaction? I would stay in control of the transaction by staying
on the deed and selling it to you on a land contract but on the same terms that the current
mortgage is. So all you have to do is make the current payment on the mortgage and as
long as you do that, this property will be yours. You’ll be able to keep it and you’ll
be able to get all of the deductions and appreciation and all of the value from that. Now, there’s
going to be a vacancy eventually on this property because we rented it to a tenant, not to a
lease option buyer. And by the way, tenants can sometimes stay for 15 to 30 years on a
property. On average, people move every 2 to 5 years, but I’ve had an awful lot of properties
that people stayed in forever it seems like. Anyway, if they moved out, then if you wanted
to, you could go out there and lease option that property. I use a professional property
manager, and I don’t want to screw with going out and finding a lease option tenant and
I don’t need the extra $3,500. But if I did, and I wanted to make a little extra capital,
and let’s say I was having to release this thing or sell it every year or every 2 years,
if I could make an extra $3,500 a year on this property, it could pay for any expenses
that I had on it and it would offset my negative. Again, you don’t want to do this without some
reserves. You’ve got to make sure you have some money in place but if you have some reserves,
it’s a pretty good bet that you’re going to come out ahead.
Joe: You don’t want to lose this property back to me. You don’t want to stop making
your payments and then have me coming in and having to take it over. And if you bought
it from me, I’d require that you use my manager because it’s somebody I trust. I want to make
sure it’s managed properly because I have an obligation to the owner of the property
to make sure that it’s paid for properly. Joe: Anyway, that’s subject-to deals. You
can go in there and learn how to do them and how to find them yourself and use a lease
option fee. By the way, I’ve seen people make 3 or 4 lease option fees on one property in
one year because the people would be in it for 2 or 3 months and then stop paying it,
then they’d go lease option it to somebody else. So in a way, it’s kind of a benefit
to you if they default if you’re selling it on a lease option because you’re going to
make more money than you’d make on your rent. Now, it’s not my desire ever to have somebody
fail in these situations but at least you know that if they do, you’ve got a way to
make up for it. Joe: That’s subject to. Subject-to is an exciting
way to buy properties and I think most people had no idea they could buy this way until
somebody said, ‘Hey, just have someone deed you the property and you can take it over.’
Joe: By the way, you can buy anything subject-to. You can buy multifamily buildings. You can
buy commercial properties. You can buy automobiles; anything that’s been financed can be purchased
subject-to. You can buy Earth moving equipment. You can buy anything this way. You just have
to be able to make the payments on it. But you don’t have to use credit — you only use
down payment. You just get people out of the situation they’re in that want to get rid
of those properties and then as long as you have a good exit strategy, and I think hopefully
by now, after listening to all of these videos about analyzing deals, you know that exit
strategy is the number one issue of this whole process. If you have a good exit strategy
and you know where it’s going to go, and you’ve got multiple options for your exit, you can
make a lot of money. And subject-to gives you all of those things.
Joe: By the way, I do sell some subject-to properties, too — turnkey packages that already
have tenants in them that are pretty much break even. It’ll cost you $5,000 to take
them over from me and then you’ll have a property that is essentially at market value, and maybe
in some cases the mortgage is even a little higher than market value, but it’s pretty
close to break even. You’ll be able to hold that thing for 20 or 25 years, be able to
get the tax benefits through the year, be able to pay it off over the years and then
retire and get the income for life for it. And be able to pass it onto your kids. So
if you’re interested in seeing a really high return on that money, let me know and I’ll
show you how to buy some of these subject-to properties that I’ve got. We’ve got professional
management to handle that stuff for you too, so that you don’t have to worry about that
stuff (I don’t). Thanks, now. Bye bye.

29 Comments

  • vendici

    Joe, do you live in Indiana? I live here in Indy and I'm working with a math teacher I had in middle school that owns a dozen properties or so. I'm twenty, which is how old my teacher was when he got his first house, and I'm getting into investing now, too. He actually lives in Avon. You can imagine my surprise when I saw this was in Avon. Anyway, if you find the time and are available and willing, I'd like to take you to lunch and just get some insight. I'm just trying to surround myself with as many successful local investors as possible and I'm hearing a lot of great things from them about the market here in Indy. Easiest way to reach me is at [email protected] Thanks for any consideration Joe. Daniel

  • Mike G

    You didn't really explain who the property goes to, in a subject to deal, if the lender exercises the "Due on Sale" clause. Even if you got the seller to sign a disclosure on the "Due on Sale" clause. If the balance of the property becomes due from the seller, it seems the buyer would have to give the property back. This could be a big deal if the buyer has had it for 5 years and has built $50,000+ equity into the property. It leads me to believe the seller could conviently tip off the lender down the road because he knows he'll get the property back with a bunch of equity built into it. This could spell disaster for an investor. Please explain.

  • Lawrence Reid

    Joe, I'd like to buy a property from you. I am in your mentor program and my LLC is three years old this year. It has not made me a profit. I am afraid that the government will call this a hobby rather than a business if I don't show some progress. I sent you an email a few weeks ago.
    Lawrence , Lancaster , CA

  • Ari Shp

    Hi there, couple of questions please;
    1. do you have any subjected to deals in CA that you can introduce or sell?

    2. in a subjected to deal, if I pay mortgage for say 10 remaining years (on a 30 fixed loan), does it mean that I will build equity of whatever the total principal payments would be ? also,
    also, what happens in such subjected to deal when I buy the property after 15 yrs of mortgage payment . say the house worth 100k and the seller has already built 40% of the equity when the buyer takes over in a subjected to deal. once the property is being sold in a regular transaction , how does the proceeds split work?

  • Don Carlo

    Jee… if I can do this type of deals here where I live you let me know. I just dont think this is possible at all. You basically need a real desperate seller who will be loosing the house in foreclosure (ok thats is possible) but the owner must call you first after you do some mailings. I just dont think this is the most efficient way to buy houses. Is just my opinion on this!!!

  • michael weber

    ok there is a few things that dont add up….
    firstly this is a bran new property, less then a year old…. and you have a tennent that have been there for a couple of years. so how long have there been people living in this home ?
    also insurance.. how much is that ? i might have missed it, but surely you have insurance.
    all in all i do like your videos, there is some good info, just dont think all your numbers add up

    regards
    michael

  • Random is Oliver

    bet on/buying on appreciation. risky! More for the financialy well off. vacancy rate could kill anyone with short pockets. sounds like a buy and hold & flip or flip on appreciation. thanks for sharing.

  • Mystic Rivers

    a bit contradicting. Af first you said it is a new property less than a year and then you said the tenants been there for a couple years ?

  • Sue Cozza

    hi Joe, I want to buy from you, but do you have any property for sale in northern California? can you email me to let me know? thank you

  • Tutoring, Services, LLC

    Joe you are spitting golden nuggets here. Love your analysis. Would be cool to have your system on my site in the form a review. Let me know Joe if you offer affiliate program.

  • H B

    Joe great video but, i my area Hunterdon County,NJ the prices haven't appreciate much in 17 years maybe location rural. I will wait for the crash.

  • MG Tairu

    why is this not taught at schools & wju is no one saying the obvious about the miseducation we send our children to receive? do we not care what the govt allows as far as lying & misleading us? are we all scared to call it out when election time comes & we are asked to vote & make changes? why dont we do away with a system that lies to us to extort us? huh?

  • Heiress and Harper Investments

    If this is my first subject to and I do not have money for closing fee, how can I complete the process? Do I find a tenant before closing, have them to pay the down payment and then have the attorney take the fees from that? If not, how can I do this? I am ready to go forward but I do not have money for the closing.

  • Heiress and Harper Investments

    Lease Option: What happens when you do a sandwhich lease, you find a tenant buyer, they move in and the seller quits paying the mortgage with the rent given to them?

  • Sue Cozza

    hello Mr. Crump, I'm just wondering if you have any subject to existing mortgage in San Francisco bay area California can you let me know please thank you

  • thieng syhasak

    You said on one of your comments that you can close on a subject to without having to pay for closing cost how is that possible?

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