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”Subject To” A Real Estate Strategy That Works
Let's get right to it, and discuss a strategy that you can "take to the bank"... 

You and I live in the real world - not the ivory towers that the infomercial gurus speak from. 

And in the real world, nobody has an unlimited amount of cash and credit. I know I didn't when I started out. 

And quite frankly, it wouldn't have mattered if I had fifty million dollars in the bank and a sky-high credit rating. The fact is, it just doesn't make sense to use up your own personal resources to invest in real estate, since there is definitely a better way. 

I figured out a great strategy that doesn't require any of my cash or credit, yet still makes serious, consistent cash flow. Here's how it works:

This system is fundamentally simple. All I do is find houses that I can buy without using my own cash or credit (Subject To) and I simultaneously find a buyer who wants to buy that property from me. I buy from one, sell to the other, and I keep the difference. 

Sometimes the buyer I'm selling to can get a loan immediately. When that happens, I get to put all of the cash in my pocket RIGHT AWAY, and I get a nice, fat CA$H profit immediately. 

And if the buyer can't get a loan immediately, but will be able to do so sometime soon, I'll sell the house to the buyer using a lease/option aka rent to own (more about that later ) which is actually a very good thing for three reasons: 

• When selling (not buying) with a lease/option, I make money FAST because I'll get a big down payment from my buyer 

• Lease/Options also allow me to make money each and every month - without any real additional effort from me. 

• A few months (or years) down the road, my Lease/Option buyer will probably be able to get a mortgage, and when that happens I will get paid again!

In case you're wondering: NO, I DON'T FIX TOILETS or do other property maintenance, even though I sell property via lease/option. I demand simplicity, and doing property repairs isn't part of the equation. 

Here's how a typical deal might work out: 

A motivated seller will respond to my marketing. I discover that the seller has a home worth $130,000 with a remaining mortgage balance of $105,000 and a monthly payment of $825. I'll buy the property by just taking over the monthly payments. (Subject To) 
I immediately attempt to re-sell the property using a lease option. I set the sales price at $135,000 (yes, I know that's "too high" - I'll tell you why that's O.K. later) with a monthly rental rate of $1,100. I'll also require an “option” payment from my "tenant/buyer" of about 3-5% of the purchase price. We'll use 4% in this example - so the down payment is $5,400.00. 

That means my up-front income is $5,400. My monthly cash flow is $275 (I'm collecting $1,100 per month and paying out $825 per month). And I'll make a whopping $24,600 when the tenant/buyer gets a loan (that comes from the sales price of $135,000 minus the down payment of $5,400 minus the mortgage balance of $105,000). 
So, all totaled, I'll make $33,300 on this deal (assuming 12 months of cash flow). All in all, not a bad deal!

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The Dreaded Due on Sale Clause..

First what the heck is it?
It's a clause in a mortgage, which provides that at the option of the lender, the entire unpaid balance of the loan is due and payable immediately upon failure to make required payments or upon sale of the property. Also know as an acceleration clause.

A little history lesson…
In the old days when banks loaned money and took back a 30-year mortgage that's exactly what you got. It didn’t matter if you sold the property to someone else that loan stuck with the property for 30 years and could be taken over and paid by anyone.
Well, in the early 70's banks, lenders, state governments and other interested parties were so upset that they were getting stuck with low interest rates, missing out on taxes, assumption and other sale fees, that lenders started adding due on sale acceleration clause to their contracts.
As you can imagine, a lot of borrowers thought this was unfair and brought suit against banks and lenders. Unfortunately around 1979 the United States Supreme Court found in favor of the banks, and today the due on sale -acceleration clause (usually paragraph 17) is found in most if not all conventional mortgages.
For years now buyers and sellers have been trying various ways to get around the problem. The leading real state books and educators teach the following basic approaches to buy real estate creatively. Some good and some not so good. Later I'll discuss the pros and cons of the best creative financing methods so you can determine which to use for your particular situation

Land Contracts
Options, Leases, Options to purchase
AITD's (All inclusive trust deeds or wraps)
Seller carry back deeds of trusts/mortgages
Taking subject to the existing financing
Not recording the deed, which is dangerous if not properly protected
Recording a memorandum of agreement
Trusts: Transfer the property to the sellers trust, get the bank to approve the transfer and then have the beneficiary of the sellers trust changed to the buyer.
Just transferring title into the buyers name hoping the lender won't call the loan.
Equity share

Any of these will trigger the due on sale clause and as a buyer or seller if you haven't put safeguards in place, you are unprotected against claims against the title from showing up and or the lender calling the loan due.
Are you prepared to take the chance that the seller may further encumber the property or resell to someone else? That the loan and taxes are being paid? Or the bank might find out about the transfer and call the loan due in 30 days and you lose your money and investment? It's happened. Unless you've got the credit to get a new loan or the cash in the bank I wouldn’t take the chance

What about the money?
Probably one of the most important issues that is never addresses in creative financing books is how the money is handled…
Money needs to be handled properly right from the inception of the deal. A buyer wants to make sure his hard earned monthly payments go to pay the loan. Sellers want to make sure the loan(s) and taxes are paid.

Is there anyway to get safely around the dreaded due on sale clause acceleration clause? While protecting the buyer and sellers interests? You Bet

Here it is in a Nutshell. (This is what I use in California)
The concept is to keep the fact that the property has been transferred private.
The sales transaction remains unrecorded i.e. the deed is not recorded or the contract of sale or the financing agreement.
The transaction is maintained in the records of a settlement /escrow management company
Enough documentation is recorded to protect the seller and buyer in the chain of title without making the fact that the property was transferred public record
Existing loans, taxes, insurance are paid by the buyer into a collection account, which in turn pays all the accounts required to service the property
Recording a deed or contract is not required in most states to make a valid transfer
Not disclosing the new sale to the underlying lender is not illegal in most states
Keeping the transfer from the lender is not a crime or against the law. The act of the transfer is a breach of contract and only cause for the loan to be accelerated

OK sounds good, just how do we do it?
Let's put it all together

Seller signs a deed giving buyer ownership
The seller would agree to execute a grant deed (warranty deed, whatever its called in your state) in favor of the buyer
The deed is held unrecorded by the escrow management company until the loans in the seller's name have been paid or assumed.(If the seller doesn't like until paid try this. Buyer agrees to use best efforts to pay off existing loans that are in sellers name within five years of close of escrow.)

Protection for the seller
Buyer will execute a quitclaim deed back to the seller, which is held in escrow unrecorded

How to protect the buyer in the chain of title and potential future creditors of the seller.
For the buyers protection a lien of some percentage (I like to see at least 20%) of the purchase price in favor of the buyer executed by the seller will be recorded a "Sellers Performance Deed of Trust" The buyer will appear to be a juniors lender for public record purposes.

The seller is protected
For the sellers protection a reconveyance of said deed shall be executed by the buyer, which would be recorded in the event of a default upon request of the seller, which remains uncured for sixty (60) days upon written notice of default, has been mailed to the buyer
This would allow the management company to unilaterally remove buyers cloud on the title by using the pre-signed reconveyance if the default was not cured as outlined.

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Underwater Mortgage Borrowers Struggle to Come Up For Air

Negative equity is down to 13.1 percent nationwide, but is still a nagging problem choking real growth and limiting new inventory, according to a new report by Zillow.

Wednesday’s report found that six million homeowners were underwater in the Q4 of 2015. And while that number is still a problem, it is significantly lower than the peak 16 million underwater homeowners that existed in Q1 of 2012, and the 8 million underwater homeowners of a year ago.

According to Zillow, the millions of underwater homeowners who have resurfaced over the past year have led to a $75 billion decline in negative equity, which has helped keep the U.S. housing market jogging along steadily. But while the overall picture is vastly improved from even just a year or two ago, there are still 820,000 homeowners who owe more than twice as much on their mortgages as their homes are worth.

“Some owners are so far underwater that positive equity may be several years away, leaving them stuck in their homes unable to sell,” the report stated.

Las Vegas and Chicago have remained especially hard it. According to Zillow, a fifth of all homeowners in these cities remain underwater. Atlanta, Baltimore, and Cleveland still have 17 percent of buyers upside down on their mortgages.

In contrast, San Jose has the lowest number of underwater homeowners, with 2.8 percent. Its closest competitor is across the Bay in San Francisco, where 4.4 percent of homeowners are upside down. Denver and Portland, Ore., each have about 5.5 percent underwater homeowners.

Svenja Gudell, Zillow’s chief economist, said that the effects of this nagging negative equity on the overall housing market could be subtle but serious.

“Over time, negative equity can act as an anchor on a housing market, preventing underwater homeowners from listing their homes and reentering the market,” Gudell said. “It is more prevalent in less expensive areas that are affordable to first-time buyers. Without these homes available, many potential buyers are sidelined and unable to take advantage of mortgage rates that remain near historic lows.”
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