Difference B/T Subjet To/Lease Option
Hi:
I wholesale right now and I'm reviewing some other ways to invest with houses to generate cash. With houses, I like to buy/sell- with my investment goals, I see no compelling reason to hold. I have been reviewing retailing/subject to/lease options.
Correct me if I am wrong guys, but there seems to be NO difference between buying a house subject to and buying it by a lease option.
Similarities: Target houses in good condition, take over loan payments, collect a downpayment and rent payments from a tenant buyer, sell for back-end profit in 2 years or so. The only difference I see is that with subject to you get the deed and with lease option you don't--- which may or may not be a good thing depending on how difficult it is to sell the house. Am I missing something here? I was thinking of buying John$Cash$Locke's manual on subject to-but I already own a lease option manual. I am not going to waste my money on more education, if they are really both the same.
Any suggestions?
braveheart,
You might try a search on the web for one. If I remember correctly I think John LV posted some links to LSC's. You might try a search here at TCI also.
They normally charge a $75-$150 set up fee, the $5-$7 dollars per month per check sent to the lender.
For this fee they also send your buyers a year end interest statement for their taxes, the better LSC's have a web site you can go to and check to see if the buyers payments are paid and when they paid them.
Also they will send out notices if they have not recieved the current loan payment to your buyers.
All and all a pretty inexpesive way of controlling your incoming payments.
John $Cash$ Locke
Not the same.
Subject To YOU have the deed and YOU are paying the bank loan.
On a L/O the owner has the deed and you are paying him/her some amount of money that may be more than the monthly mortgage.
In Subject To the bank may see that the deed has transfered and take some recourse, though it may be unlikely.
In L/O the owner has not changed hands.
In Subject To YOU are the owner and if you want to hold the house or sell or rent or knock it down and rebuild it is up to you.
In L/O you may only have an interest for 1 year or 2 (whatever the owner would agree to. After that time if you never exercised your option you lose your deposit and your right to buy and the owner will shop around for a new buyer.
In Subject To you may have put a down payment but never paid a "deposit".
In Subject To if you fail to make the payments your property will be "foreclosed".
In L/O if you fail to pay you will be "evicted".
NOT the same.
There may be other differences but these are most of the major ones.
Hope this helps.
N.
I guess the game plan is generally the same but ownership rights are not.
The seller also may not be around at all in Sub To. He may run and the bank may want to foreclose which leaves you scrambling for financing.
In L/O if the owner stops paying the bank and pockets your payment and then splits town, YOU are out of luck and have NO ownership. So you couldnt scramble to refi even if you wanted to.
Game plan sounds the same.
Time frames. Payments.
Sub To gives you more control.
I'll throw in my pennies.
Sub 2 you own the house and yes you have more control. There is a risk factor involved with L/O and sub 2's.
One: L/O are more risker because if something happens to the seller, it may affect the house and then possibly mess up your deal. Sub to's you get the deed and there is a transfer of ownership.
You are correct when thinking that the concepts are same, but they are totally different structre wise and money wise.
If you want to learn more I would invest in the manual because sub to's are not L/O. There are a list of differences which I will not go into, but know they are different.
I agree with the last post. Particularly with respect to being in control of the property.
If the property owner that you are buying from has issues, (or develops them). IRS Leins, Lawsuit judgements etc will attach to the property that he owns. If you dont have the deed, (as in a Lease Option deal) you will be in a position where you can't deliver a clear title to that property to your Tenant Buyer. We could all relate to the issues that could potentially raise, and the costs associated with keping them as satisfied customers.
If you purchased using sub2 methods, this potential problem will not exist for you or your tenant buyers. Everyone is happy.
If you want to sell using lease option, great. Sub2 is a better way to purchase. (In my opinion anyway).
Good Luck,
Jeff
Thanks for all of the replies, I think I am clear now.
Jeff-You really made me think when you suggested that subject to is a better way to buy, but i can always sell using a lease option.........i rhink that is a really good way to integrate the advantages of both.
Guess this means, I will buy John$Cash$Locke's book after all.....
Thanks
Just one more point on the subject.
If you "buy" thru a L/O and "sell" thru an L/O, you have simply created another problem for you at the end of the term in the matter of titling seasoning. In order to sell to your tenant/buyer, you must first purchase from the originall owner. Since most lenders now require 6-12 months of "seasoning" of title, you'd have to have your crystal ball handy to prevent any problems with your tenant/buyer's funding.
Sub-to investing, you're on title from the start, so there will be no seasoning problems in a year or two when your T/B refi's.
I might add that, IF you're the reason, the t/b can't get financed, ie not enough seasoning, you could be forking money back to them in the form of reclaimed option fees/rent overages/damages.
Roger
I recommend acquiring properties sub-to. Use the L/O as a back end strategy to fill the property.
Getting the deed and having control is a "huge" factor for me. I purchased John Locke's course and I found it extremely useful. It shaped my 'attitude' when talking to sellers.
Because of his material, I've adopted the position of 'this is my offer, let me know if you want me to buy your house...' I don't waste time trying to talk sellers into my deals.
The motivated sellers want my help. The wishy-washy ones become a pain in the behind.
Good luck....just remember....." the harder you work, the luckier you get!"
Monty
Does John Lockes course cover land trusts..........for example putting the home in a land trust when you buy it .............Thanks ............
no, he doesn't use them and does not teach it. However he does not say not to use them. If you know the process then it is okay for you to use them...but his course does not cover them. [ Edited by nebulousd on Date 01/20/2004 ]
This might be better posed as a seperate post, but I do have another question in relation to the similarities and differences of these two methods of acquiring real estate.
First off, even though I have not done any deals yet, I can imagine that both of these strategies could compliment each other when you are creatively negotiating with a seller.
My question is - since we all really have kind hearts and love the people that sold us the property- which of these two methods helps the seller out more?? Say the seller goes to buy another house in 1 or 2 years. Obviously in either case, the mortgage will appear on the credit report of our seller. Does presenting a L/O or Sub-To contract offer the seller more ability to now get into another home and move on with their lives?
I would think the one that leaves them in the best position would also help you since you are less likely to have the seller blow the whistle on the DOS clause on your deal...
Any thoughts?
fordecan,
I am so glad you are asking all this questions that I have been thinking about for 2 weeks now, I get the concept of Sub to's but I still don't understand why would someone what to get out of their homes and leave someone else with the deed of thier homes while the mortgage still shows on their name????????? what happens to them if payments are not make on time, or late, or like you say when they want to buy other things and their credit report is pulled out and it shows they are that much in debt when they really don't have the house?????
Can someone please sell me on this????
I am trying so hard to get in the game but my husband tells me not to do it this way because if I cannot sell him on the idea, how am I suppouse to sell it to someone else, and I guess that's why I haven't bought anything yet
suspain,
Glad to meet you.
You must understand that you don't sell them they must sell you on why you should purchase their house. You are the one with the money in your pocket and the ability to help them.
I never look for a house for sale. I look for people who are in pain, because of divorce, behind in payments, job transfer, etc.
It is my job to help these people and cure the pain, when I do I get the house as a natural consequence of curing their pain.
John $Cash$ Locke
John,
Nice to meet you too.
I thank you for your response and although I get the concept, I still don't understand how it works.
The seller gives me the deed of the house for equity money that I pay cash for, right? But the seller keeps the mortgage??? So that means that I have the deed so I own the house because it's now in my name but the seller becomes the bank now because he is still carring the mortgage on his name. So........ who pays the mortgage? and the insurance? and the taxes? and when the seller goes to buy another home, how does he qualify if he already have a mortgage on his mane and so much money in debt????? I guess that's what I don't undestand.
Then it comes the second part..................
you now have the deed, on your name right? so that means you can now sell the property for a profit to a new buyer, so say they buy the house for 200K out of which you are making 10K because you bought the house originally for 185 + 5K for their equity. So if the new seller comes with convenctional financinf to buy the house they will be bring a check from their lender for 200K, I keep 10K and what do i do with the other 190K? I am not the one paying the mortgage right or I am?
Ok, all you experts REI are probably laughthing at me so much right now, because I don't understand this, but honestly although I get everything else that is invloved in making it in RE, I don't undestand the part of how a deal is made, that's why I think I won't make it because how can I look confident and feel confident if I don't undesrtand!!!!!!!!
suspain:
I am definitely NOT laughing at you because these are questions that ALL of us beginning in subject to should khow. i am anxious to read the responses.....
I am glad I am not the only one that doesn't get this then, I look forward to the guru's and experts in this board to answer this questions then.
suspain & others,
Here is a link to an article I authored.
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=146
Now start envisioning that the Sheriff is on the way to evict you in front of your neighbors or friends because the house was foreclosed on, your spouse walked out and you can't make the house payment by yourself, you just got a tremendous job offer 2,000 miles away, you can't make the next house payment but do not want to ruin your credit, I could go on here all day, but if you think creatively rather than conventionally put yourself in one of these above positions.
Maybe you yourself say, why I would never do this, find yourself faced with a house you don't want or can't take care of and you need out now, who you gonna call except your friendly subject to investor.
Foreclosures are at an all time high, if we can help just these people alone before they become another statistic then we are doing the right thing.
Are any bells going off yet?
John $Cash$ Locke
Dear John,
thanks so much for caring
Here is may take, do I have this right, FINALLY!!!!
You find someone that really really needs to get out they are going to lose their home anyways but now you come to their rescue, you save them from the embarassment of foreclosure or from you being kicked out in the street by the sheriff and you save their credit from being damage. They walk again with a little bit of money perhaps to rent an appartment or like you well put it ( U-haul) money. They sign a sale deed to you, so now you are the owner and they keep the loan in their name so they become the bank. You hire a LSC to ensure the monthly payments will be made on time every month that way their credits stays protected and at the end of the day they get to write off the interest in the loan from their income tax return, an added +.
You know find a Non-qual buyer and sell them the property without having had to do hardly anything to it for a profit, a downpayment of around 6% and perhaps you do owner financing at a higher interest. They make payments to the LSC. Now ...........................................
If the Seller is writting off the interest, then what happens to the new buyer..... are they not considered owners too???
When I sale to them don't I sign over the Sale deed so that they become the new owners of the property?
What happens to the deposit they pay you, obviously I would use it for paying the equity to the Sellers + closing costs etc.... so do I just cash that check?
is that a capital gain? do i pay taxes on it?
Ok , lot's of questions but the good news is that I think I am getting it!!!!!
please FEEL FREE TO CORRECT ME IF I HAVE IT ALL WRONG.
suspain,
You are a quick study.
Q - If the Seller is writting off the interest, then what happens to the new buyer..... are they not considered owners too???
$ - The seller cannot write off the interest because when you take over they no longer are making the payment. Since your are selling using a Contract for Deed (CFD) your buyer can claim the interest paid. This is a plus when selling with a CFD.
Q - When I sale to them don't I sign over the Sale deed so that they become the new owners of the property?
$ - No, you are selling with a CFD meaning when the terms of the contract are satisfied, which could be they are to refinance in 2 years, then they would get the deed. At this time the loan would go out of your sellers name.
Q - What happens to the deposit they pay you, obviously I would use it for paying the equity to the Sellers + closing costs etc.... so do I just cash that check?
is that a capital gain? do i pay taxes on it?
$ - You get a down payment which is yours to keep, yes you would pay taxes isn't that the great thing about America, you can go out make a bunch of money, share a little bit of what you make with Uncle, so he can keep all that burden on his shoulders and of of ours.
Also, remember that you charge a little higher interest for a monthly passive income add a couple years worth of apprecaition on the back side for another nice payday and wella a Subject To deal.
One more thing you help your buyer qualify in two years, not to difficult to do even if they have had a credit problem in the past, lenders look very favorably on how a person makes their house payments. Since you use a LSC you and they have a record.
John $Cash$ Locke
John,
You can't imagine how happy I am right now, I have been reading and studying and investigating on how to get started to be a REI, for over a year now. However I have hit the wall many times when I just didn't get the concept, I can finally say that now I DO!!!!!!
I am so happy because I finally feel the confidence to start my marketing and hit the road, it is time to put into place everything that I have learned from all of you guys, specially YOU, JOHN.
I will continue to ask questions and learn if you all allow me too
Thanks so much!
John,
why do they have to refinance in two years???
suspain,
We add two years worth of appreciation to the selling price of the property. So this is a payday for us when they re-finance.
We are not buy and hold investors, albiet it can be done if you want to hold the property for a longer period.
If you are in a strong market you could make the re-finance period longer. However, certian markets change because of economic conditions so I have always felt that in and out of the deal lessens the possibility of the risk factor biting you in the butt.
If you are in a solid financial condition credit wise you might want to re-finance the property yourself in two years if your buyer does not re-finance, then you could pull the equity and still sell using a CFD.
There are many exit strategy's open to the Subject To investor, I had one student take his port folio of houses to a bank, the bank gave him carte blanc to purchase up to 25 houses using the banks money based on his port folio.
He then started purchasing houses for cash (of course it was the banks money) so his bargaining power was awesome and he was looking for super deals with plenty of equity.
John $Cash$ Locke
I was assuming that I was selling the home with a CFD to the new buyer, that meant that they pay me a down payment plus make the mortgage payments every month for say 2 years and at the end of the 2 years is when they apply for a home mortgage through a lender the conventional way, hopefully their drecit has improve because of making on time payments for 2 years and they get the mortgage and the house on their name, I get the equity money so it's pay day for me and the Seller get's their name of of the mortgage because the rest of the money will pay off the precious lender.
You are talking about refinancing the current loan????
Why not the other way?
And how do they refinance a loan that is not on their name? I know that I will have a power of attorney so i can re-finance myself the loan even tho it's not on my name, right???
But how do they do it? I thought re-financing meant, getting better terms on a loan that's currrently on your name?
Where am I going wrong with this?
suspain,
So let's look at it this way.
You do have a CFD with your buyer, which when looked at you have become the lender, your buyer signs a note with you. This note to you needs to be re-financed.
In turn your loan and the sellers loan is paid off when your buyer gets a new loan.
This is one of the reasons your buyer can claim the interest deduction on their income tax.
The lender does not care whose name the property goes into only that thier loan on the property is paid off.
John $Cash$ Locke
suspain,
Let's take a look at an example:
You, without a credit check, without filling out a stack of paperwork four inches high, find a motivated seller.
Let say that you get the house for $200,000.00 You gave the seller $1,000. for their equity (U-Haul) money.
Here is the fun part you use LEVERAGE
You have just taken title (got the deed) to this property. The existing loan is in place in the your seller name. So you control $200K for $1K. Now you sell this property because you own the property.
You ask $12K down, you factor in the appreciation rate and add a few points to the existing interest rate for a passive monthly income.
So you sell the property for $225K. You will get $12K up front, $13K on the back side (when your buyer gets a new loan) plus let's say $200 a month passive income from the increased interest rate.
So for your $1K investment when everything is done your Gross Profit is $28.8K.
Gee what the heck am I doing here posting I should be out doing deals. Now I remember I already have done a few thats why I can sit here and post.
John $Cash$ Locke
Suspain,
I loved all of your frank, easy-to-understand questions and I really learned a lot. I do have one question for you though. You mention that you hire a LSC to ensure the monthyly payments will be made by your buyer when you sell. What is a LSC? THANKS!
Loan Servicing Company. They handle the payments on the house. They collect the payments, make the payment to the bank, and what's left over gets deposited in your trust account.
Hi John,
thaks for your time trying to explain this very thick person ( myself ) the concept of buying " subject to", I do now get the concept however I am affraid to confess something to you because you must think I am retarded , since I keep on asking the same question over and over but I still don't get the re-finance part.
Let me explain, I do understand that you need to add about 5% of appreciation for each year you have the contract for in order to cash in at the end and make money. I also understand that's when the seller gets their name of the mortgage, basically their lender would be paid off so they would not longer have anything to do with the mortgage. I also understand why is a tax write off for me as a business expense and also a tax write off to the buyer as mortgage interest. Now, the part I don't understand is why RE-FINANCING, why not just financing?
What I mean is, when I sign the CFD with the buyer and I tell them in order for the contract to come through they much re-finance at the end of the term, they are going to ask me, re-finance what? we don't have a mortgage in our name, we are just making payment to you ( so I am the lender ). You must mean, Mrs Investor, that we need to find a lender to finance our new mortgage in which ( using your example above), they are going to lend us the money for you sold us the house for????
( then I get that money I keep the equity and pay off my current lender, which the previous owner lender and we are all happy)
How can they re-finance?, I mean I am their lender, right? so who is going to cut them a check?
suspain
The buyer has a note with you. This is a balloon note and they are required to pay off this note at the end of a specified period.
They will need to find a lender to give them a new loan, when they get the new loan your note gets paid off and the dollar difference between your sellers mortgage being paid off and your note goes to you.
As your note (loan) is paid off so is your sellers mortgage (loan).
The new lender does not care who gets the money. The money from the lender is distributed by the title company to all parties having a secured interest in the property, the new lender only wants thier loan secured by the property with them in 1st position.
John $Cash$ Locke
I see, so as far as they are concerned they just need to qualify for a loan with a lender of their choice as the end of the contract.
I call it re-fiance because I am the lender for the time being, lending them money with a ballon payment at the end of the term.
Thanks so much John for your helf and your patience
John,
You are in Tampa Now? No more properties in Vegas? Uh Oh FL.....lol
[addsig]
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I recommend acquiring properties sub-to. Use the L/O as a back end strategy to fill the property.
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As sad above it sounds like the seller have no say in the given transaction...
Let me see if this may help some more: What is the Creative RE? It is he transaction between buyer and seller in which most of the time bank is not involved. In hart, such transaction or transactions are based on creatively put in contract form OPTIONS.
THE CREATIVE OPTIONS represents the creative RE and the more motivated or anxious thee seller is to sell, the greater the chances are that you'll settle for better options, which may include you getting the house deed. Congratulation, you got yourself your first Subject To deal!
However, what would you do if the owner is not comfortable giving you the deed (requires some smoothing of the rough edges for seller to deed you the house) you won't just loose otherwise good deal, you'll settle for L/O that allows you to put the tenant in your place or if the seller got the problem with that, you'll simply ask for the option to sell his or her house gor the pre determent price so in essence, you rather know how the ropes work or you may lose a 50K deal, just like that... it happens but it cant be prevented with the right set of steps:
If you want to get a good grip on Subject To, get John $ Cash $ Locke's course and you'll be all set. John is the one of the few people in this industry that I know personally taking responsibilities for student success and one who regularly and promptly returns his email messages. network right and you'll make money with one option or any other for that effect.
Good luck!@ filed...
Quote:
On 2004-01-28 13:30, suspain wrote:
John,
Nice to meet you too.
I thank you for your response and although I get the concept, I still don't understand how it works.
The seller gives me the deed of the house for equity money that I pay cash for, right?
My answer: Correct, although depending on your negotiation skills, you may or may not have to pay any cash for the equity.
But the seller keeps the mortgage???
My answer: Correct
So that means that I have the deed so I own the house because it's now in my name but the seller becomes the bank now because he is still carring the mortgage on his name. So........ who pays the mortgage?
My answer: You do, because you signed a contract with the seller agreeing to make the payments.
and the insurance? and the taxes?
My answer: You do, you own the property, so you're responsible for the payments.
and when the seller goes to buy another home, how does he qualify if he already have a mortgage on his mane and so much money in debt?????
I guess that's what I don't undestand.
My answer: You can provide the seller with a closing statement showing you are responsible for the payments. You could also provide him with a payment history, e.g. cancelled checks, showing that the payments have been made on time and as agreed. Reality is that it could be tough for the seller to get another mortgage if the new lender considers the old mortgage as debt only. You should let the seller know this upfront.
On the plus side though, since you will absolutely make every payment on time no matter what, the seller's credit will most likely benefit from the on time payments.
Then it comes the second part..................
you now have the deed, on your name right?
My answer: Correct
so that means you can now sell the property for a profit to a new buyer, so say they buy the house for 200K out of which you are making 10K because you bought the house originally for 185 + 5K for their equity. So if the new seller comes with convenctional financinf to buy the house they will be bring a check from their lender for 200K, I keep 10K and what do i do with the other 190K? I am not the one paying the mortgage right or I am?
My answer: You agreed to pay the mortgage and you are the one responsible for paying the mortgage so yes you do pay the mortgage off.
Ok, all you experts REI are probably laughthing at me so much right now, because I don't understand this, but honestly although I get everything else that is invloved in making it in RE, I don't undestand the part of how a deal is made, that's why I think I won't make it because how can I look confident and feel confident if I don't undesrtand!!!!!!!!
My answer: I'm no expert so I'd suggest buying a good sub2 course to make sure you do it right. And imho don't do it unless there's a lot of equity. You could be that one in a million that has the loan called due! Of course, if your financial status is strong enough that you can refinance regardless then it may be worth the risk.
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I have noticed a few times in this thread, that the buyer should have better credit because of making payments on time to you, if that is correct how do you go about reporting this to someones bureau. I know that keeping moneyorders,checks and such will help with the lender but how does that help with their credit?
dajackhammer,
Glad to meet you.
I recommend using a Loan Servicing Company to collect your payments as they keep a record of how your buyer paid their loan commitment to you.
The LSC can forward this information to a lender, which is accepted by the lender as an accurate record.
The lender wants to know how timely your buyer paid their payments, so even though it not reported to the Credit Bureaus it plays an important part in granting the loan to your buyer by the lender.
John $Cash$ Locke[ Edited by JohnLocke on Date 02/04/2004 ]
John,
Where can you find a loan servicing company and how much generally do they charge for their sevices?
Thanks,
Brenda
Thank you John ...
Suspain
I had all these questions a few months ago before I took John Locke's class. I suggest you do the same/ al least get the manual. This is how it would work for your example:
Value of house is $200K
Mortgage: $185K
You paid: $5K
The seller gives you the deed; the loan stays on their name. Dont try to analyse too much; this happens all the time!
Now you find a buyer and say you sell for $210K/10K DN owner financing/ lease etc.
You keep the 10K down payment; the buyer pays you the remaining $200K as monthly payments; send a part of monthly payment to the original lender and keep the difference.
Go do it ...............
Am I understanding this correctly? If I obtain a property Sub-To, do I ever have a mortgage in my name?
kepetty,
Glad to meet you.
No loan in your name unless you purchase the property conventionally, otherwise the loan stays in your sellers name in a subject to transaction.
John $Cash$ Locke
Would this work on a foreclosure property?
We have located a property that has a loan balance of approx. 105K and needs some rehab (i'm not sure how much because the owner has not allowed us to inspect inside--she sounds like she is still in denial about the foreclosue, but we plan to follow up with the owner on Thursday). ARV will be approx 200K. Trustee sale is on 2/24. I went to the courthouse today and it appears that the only lien on the property is a homeowner dues=about $515.00. Would a Sub To work in this situation?
Hey guys im a newbie from Australia, so my question may make no sense as the laws here may be different.
With the concept of "subject to" how do you aquire the "ownership" of the property if the mortgage is still in the name of the previous owner?
When you "purchase" the property paying a nominal relocation fee, what documentation are you actually signing which gives you ownership of the property? (this is where the laws may differ)
Are you actually signing a "sales contract" whcih goes through a settlement process, or is it another "agreement" which give you control of the property.
Again sorry if these questions make no sense due to different laws in Oz.
Cheers,
Battz
OK I just spent the past 45 minutes reading through this thread and WOW! This sounds like a wonderful way to aquire property in the right situation.
I do have only one concern however - obviously I would have to make the mortgage payments until I find a buyer - so what is the very best way to advertise and could you give me a sample ad if that's your recommendation??? Thanks so much for all of the great investment advice.
Question, what are the risks of the DOS clause being called? Is this information the lender would have to research or are they informed when directly when the transaction takes place? What do you do if DOS is enforced?