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About This Episode
Episode #313b – Unlock the potential of Subject-To Investing – a creative financing strategy that empowers real estate investors in today’s high-interest market. Learn the advantages of lower down payments and interest rates, but beware of the due-on-sale clause.
Episode Transcript
[00:02:59.460]
All right, folks, we have the man myth, the legend, somebody known as Coach Carson. How you doing, budy?
[00:03:04.180]
Doing great, Michael. Good to be here.
[00:03:05.660]
Thanks. Awesome, man. Well, folks, if you haven’t got his latest book, the Small and Mighty Investor, you are truly missing out. You can get it, I’m sure, on bigger Pockets or now I think it’s even available on Amazon. So do yourself a favor and go check that out. How was that writing that book?
[00:03:20.500]
It was a bear, let’s be honest. But it was a passion project. And the thing that makes it fun is the stories. I love hearing stories about people. So I have the framework and the ideas that have worked for me. But then when you go find dozens of other people who’ve also been able to succeed as small investors, it’s inspiring. And so it makes it fun.
[00:03:39.250]
Yeah. Well, one of the things I want to do in our quick conversations together is highlight creative financing options because I think if we go through a broken housing market, there will be people that are lucky enough to have cash and go get a bank loan and all of that. But I think this is going to be the early 80s. It’s going to be 81, 82, 80. A lot of the transactions, and I think a larger percentage of the transactions over the next two years will be done creatively. There’s a gentleman that I’m sure you’ve heard of that it’s also a bigger pockets. Author Pace Morby talks about subject to all the time. Right. He’s the sub two guy. Why don’t you kind of give your spin on sub two? Because I know you’ve done it, been around it a while, and you have kind of experience there that I simply don’t have. Yeah.
[00:04:23.080]
So any seller financing I’m going to get the subject to. Specifically, though, any creative financing is just thinking outside the box. It’s not just going to the bank putting 20% down, which is great, by the way, if you can do that. Absolutely. That’s great. But we’re in an environment where it’s tough to make deals work using the standard financing. So seller financing, subject to subject to is a type of purchase of a property where you’re just basically using the existing financing on the property. So just give you a real example. You buy a $250,000 property and somebody might owe $150,000 on that property. So you go talk to that seller, maybe they have had to move jobs, maybe they lost their job. There’s situations that cause people to have to sell properties, and they might be motivated. And typically somebody who’s willing to let you buy their property, give you a deed to the property and then take over payments on their existing mortgage has to be pretty motivated, I would think. So that’s not something anybody’s going to do that’s not normal.
[00:05:16.870]
Right.
[00:05:17.360]
So I’ll just say that subject two hasn’t been my number one tool that I’ve used, I use it a lot more early in my career. And one of the benefits was you can find properties and find the right situation where you can buy the property with a lot less down. So that person who has that $250,000 house with $150,000 debt, they might be willing, for example, to let you put $5,000 down and just pay their back payments. Maybe they’re behind on their payments, maybe pay 5000 down. And then maybe they’d be willing to take back a second mortgage. Like a seller financing mortgage for their equity. So let’s say had $90,000 in equity, maybe they’d be willing to let you do a second mortgage to them with zero payments, 0% interest for the next five years or ten years.
[00:05:54.600]
Silent second. Right?
[00:05:56.460]
So then you would take over payments on their $1,200 per month mortgage and maybe you could rent it for $1,800. So that’s kind of the basics. I know there’s a lot of details there, but the concept is you’re taking advantage of existing financing. Maybe that financing is 3% instead of having to go to the bank and get 8%. That’s the plus. The challenge is most of us know that when you get a mortgage, they have a clause in there called a due on sale clause that says if you transfer this property deeding, the property included, just like what we’re talking about here, the bank can call the loan due. It’s their option to call the loan due. And so in most cases people don’t do that. The subject to strategy is do it anyway. And then they typically don’t call the loan due. That’s pretty much just kind of calling chicken, playing chicken. That’s the basic we could talk about, pluses and minus.
[00:06:46.780]
Yeah, I think there’s a lot to unpack there. Right. Again, I’m very clear. I’ve never done one. I’ll look at them. There is a difference between sub two and assumption. Right? An assumption you’re actually working with the bank. Now, in commercial, which is a place I play, assumption is actually a pretty standard clause in the loan. Typically there is a 1% assumption fee, but the buyer will have to qualify and jump through the hoops. But it’s not unheard of. And I would almost say it’s common to have assumptions in commercial loans. I am working with one of my millionaires, my weekly guests. They’re trying to assume a VA loan. Now, apparently VA loans. Again, we’re going through this in real time, so it may change shortly. Anna is her name. Anna’s going through a VA assumption as an investor. Right. And to see if there’s an exception that could be made so that’s possible. You can assume VA loans, I’m sorry, FHA loans. But you have to be an owner occupied. Right. So an assumption you’re working with the bank, you’re playing cards up. Yeah, in my world. Go ahead.
[00:07:51.570]
I was just saying it’s like kind of an application light like you’re applying for a loan, but it’s just an easier application. But you have to qualify and you’re getting to keep the terms. So if you were to go get a new loan, you’d have to get new terms. So if this is a 3% loan, that’s the benefit. You would want to assume that, right?
[00:08:09.540]
Yeah, absolutely. So I think assumptions will go up, but yeah, subject to, again, not done it. I’ve talked to Pace Morbi plenty of times. I think you’re really banking on the and let’s be clear, it’s not the bank. Most mortgages aren’t held by banks. They’re held by servicers. And if you understand a servicer’s business model, they’re not rewarded for paying off loans because they get paid every time a loan is paid. Right. I think the fact that loans are held by servicers versus banks probably helps lack of due on sale clauses being executed. Because I got to tell you, if these loans were held by banks, if I was a bank president, I would be auditing my loans and see who’s not paying them because then I could call due on sales. I could dump a 3% mortgage and get a six and a half or 7%. I will do that all day. That is one of my risks. And again, never done one. So I hear it’s not really a big risk, but man, if I was at like a legit bank, I would be looking at my payments to see who I could do a due on sale clause because I got to dump these 3% toxic mortgage.
[00:09:27.890]
Yeah.
[00:09:28.160]
And if we go eight years like you’re talking about, where there’s all of a sudden interest rates are floating at 8% to 10% in the market and there’s a bunch of 3% loans, you better believe a lot of banks are going to be squeezed for profits, and.
[00:09:38.260]
They’Re going to want to exactly be like, hey, where can we go? Yeah, where can we go? Oh my God. 12% of these loans are not paid by the original person. Wonder what’s going on there.
[00:09:50.320]
It’s a real risk. It’s one of the reasons I’ve been less bullish on subject to I like it, I like the tool, but it’s like any tool, I’m not going to go use the hammer hundreds and hundreds of times on the same deal. It’s just a toolbox and it’s one tool. It’s a great tool in some cases. But for me personally, I have some kind of boundaries of my subject to deals. I would want to do it where there’s a lot of equity in the deal. I know a lot of people talk about doing no equity deals. Like, no, I’m not taking the risk. The loans call due even if it’s a tiny risk, I’m not going to take that risk where I couldn’t go to a private lender and say, hey, private lender, let’s pay this off, let’s cash it out. So you need to have a simple refinance and not take over a payment on a 90%, 95% upside down loan.
[00:10:32.400]
That’s not something not where I’m playing. Not where I’m playing. Yeah. Because at the end of the day, if you’re in a deal and the note is called again, how likely is or not, we’ll see. And you can’t perform. That goes back on the seller. Right. If you’re not performing because the loan stays in their name, and it ultimately.
[00:10:53.130]
Goes back to you, the investor, because the seller is a person who may or may not be able to understand that whole transaction. You try to disclose, you try to explain it. But let’s put this on the front page of the paper. Do the old Warren Buffett test. The transaction that you did. If a hard journalist came to you and interviewed you and said, hey, who’s the bad guy in this situation? Is it the seller who was behind on their payments that didn’t know what was going on? Or was it the investor who did 20 of these and they took advantage of the seller? That’s just bad. It’s bad possibilities. So that’s why you just want to be cautious. You want to be transparent. I even like the idea of disclosing to the bank that I’m taking it subject to. Don’t be sneaky putting in trust and all that stuff. Send a certified letter. Say, hey, bank, if you want to call the loan due, here’s my name, here’s my number. We’re buying this property. I’m making payments to you. Call me. That’s best practice, but that’s not typical.
[00:11:44.660]
Yeah. So one of the things that, again, I avoid risk. I avoid risk, and I let the upside take care of itself. Where I’ve gotten comfortable with subject to is I would consider doing a subject to deal if I could get in and out of the property in six to nine months. Right. Maybe you’re taking up a fixer. Maybe you’re taking on some kind of value add, and I don’t want to pay cash. Right. Because that’s something you always could do, because maybe there’s not the equity. But if I can get into a deal for six or nine months and then either sell it or refi out, that’s kind of where I would be comfortable deploying it.
[00:12:23.060]
Yeah, that’s an easy use case, for sure. I think that’s low risk. If they call the loan due, you still have time even to do it. That’s a super good that’s like, plan A all day long.
[00:12:34.280]
Yeah, because I see people going there’s a lot of people pushing the whole idea. I’m getting into subject to deals, no equity. I’m renting by the room to kind of maximize rents. And I’m like, you stack on stack. That doesn’t feel great to me.
[00:12:57.760]
There’s layers of risk. There some that you know, some that you don’t know, and especially if you’re going around talking about it, I don’t feel comfortable with that. And you don’t have to. That’s the other thing, the big picture. There’s other ways to do it. There’s private money, there’s seller financing. It’s just one tool. That’s one tool in the toolbox. Don’t get so enamored with the tool. There’s nothing magic about it. Real estate is real estate. Numbers are numbers. This is just a tool that helps us get into a deal with lower interest rates, lower down payments. That’s great.
[00:13:24.860]
Right.
[00:13:25.020]
But let’s not get it too carried away with it.
[00:13:27.820]
Yeah. To me, subject to is a skill or experience or a vehicle, whatever you want to call it, that I am comfortable deploying, but only in unique use case. It’s kind of like a torque wrench or a router. When you need one, you need one, but you don’t always need a router. Right. One of the things I did in high school is I sold Craftsman tools, and the number one tool that was sold, never used, was a router. Right. So you sold a lot for Christmas and Father’s Days, but they always ended up in the box. But, boy, if you ever found somebody that knew how to use a router, they can do some pretty special things. So to me, that’s what subject two is. If I ever need it, I’m using it.
[00:14:04.070]
It makes a good demonstration video. It’s like, watch this router. Watch this subject, too. Isn’t this amazing? I wish I could do that.
[00:14:11.060]
Just buy my router.
[00:14:12.560]
Yeah, just buy my router right now. Well, you can do it, too. You could do it, too.
[00:14:16.180]
You could do it, too. Awesome. Folks, at the end of the day, I do think we are going to go through a three to five year period where I think it would behoove all of us to skill up and understand that terms are just as important to understand and play with as price. For the last couple of years, it’s been price and price only and maybe speed. But now terms as the market slows down is going to be important. Coach Carson, thank you for all you do. Keep it up, man.
[00:14:40.290]
Great to be here. Thanks, Michael.
[00:14:41.760]
You got it.
Links
► My full breakdown of Subject-to: https://youtu.be/ydN34A1VjBg
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