This has for the longest time been considered the “Holy Grail” of real estate investing. It is the fodder of late night infomercials and internet pitch men across the land. Everyone says they have a full proof way of buying properties with no money down and bad credit. So can it be done?Yes. Is it easy to do? Absolutely not. It takes a ton of work. But when you do find a deal it is absolutely magical.
One of the more common ways of buying property with no money down and bad credit is to take a loan subject to the mortgage. Subject to real estate deals are one of the best ways to acquire real estate without worrying about financing and credit issues. Though not the most common form of real estate transactions, subject to is one of my favorite real estate deals.
Here is how Subject to deals work:
Subject to deals allow you to acquire properties by leaving the sellers existing mortgage in place. As an investor, you purchase the property subject to the existing loan or loans. The owner deeds the property to you and you agree to make mortgage payments. The owners name is still on the loan and they are liable for payments.
As an investor, you get all of the gain and very little risk. Where else can you purchase your dream home and many others without ever worrying about your credit, using virtually no cash, and closing in a matter of days? You don’t have to put any money down and your credit is irrelevant since you are not applying for any loans.
So I know right now you are asking yourself, “Who in their right mind, as a seller, would agree to do this??” A valid question. The answer is, someone who is about to lose their home to foreclosure and is completely desperate to avoid having their credit ruined and has nothing to lose.
These are people who have gone the loan modification route and been denied. They have gone the short sale route and been denied. The only choice they have left is to abandon the property and get saddled with a foreclosure and possible deficiency judgment chasing them for the next 10 years. So you approach them and find out all about their existing financing, how much in arrears are they? What is the balance remaining on the loan? What is the interest rate? Even if they are upside down on their equity in the property it may still be a good deal because the house suits all of your needs or with some upgrades would be worth substantially more.
What you then need to do is approach them with an offer to take over not just their current mortgage payments and their arrears as well. This is more commonly known as entering into a forbearance agreement with their lender. Think of it as a new second mortgage. In addition to paying the normal amount due every month, you also agree to make small monthly payments towards the arrears. Once the owner has their forbearance agreement in place with their lender, they deed the property over to you and walk away. They have nothing to lose. If you make the payments every month then their credit has been saved and they will not be subject to a deficiency judgment from foreclosure. If you don’t make the payments, well they are no worse off than if they had abandoned the property anyway. At least you’ve given them hope.
One thing to keep in mind, the bank could call the note. Though rare, a subject to transaction could force the bank to demand immediate payoff of the loan. The bank has the legal right to do this because selling a home with a subject to is often contrary to the mortgage terms. But in this market and economy, banks do NOT want to take back performing notes. So as long as you are making all the payments on time, the chance of the lender calling the note due are slim.
The hard part of this business model is you may have to make 100 offers before you finally get a deal to work but it can be done!