Unveiling the Secrets of Subject To: Navigating Creative Investment Strategies

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Welcome to the On Purpose Investor.

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My name is Eric, and this show is where intentionality meets investing in yourself and your finances.

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And I'm Josh and together we'll explore the strategies, insights, and stories combined with inspiration and motivation to help you live with purpose and make an impact.

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Now, whether you're a seasoned investor or just getting started, join us each week, as we dive deep into the world of intentional investing.

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Hey y'all.

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Welcome back to the On Purpose Investor podcast.

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I am Eric, and in today's episode, we have our amazing new co-host, John and Karen.

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They're gonna be talking about our last deal maker Atlanta meetup that we had last week, May 22nd, 2025, with our amazing friend and just wonderful person and extremely talented investor, Courtney Frickey.

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Courtney is out of New Orleans and she does subject to investing.

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And if you miss that meetup, y'all, it was incredible.

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She really broke down a lot of strategies, what to do and what not to do.

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That's probably even more important y'all.

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So tune into this podcast today to learn a overview of what Courtney spoke about at the meetup and, stay tuned for future, upcoming episodes.

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And if you're not aware of Deal Maker Atlanta, invite you to head over to deal maker atlanta.com and join us at our next in-person event.

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Alright, John and Karen, take it away.

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Navigating the real estate market right now can honestly feel well, pretty frustrating.

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High interest rates have really changed the game, haven't they?

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Oh, absolutely.

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It makes traditional financing a major hurdle and you know, it feels like options are shrinking for a lot of folks, whether you're looking for your first place or trying to invest, definitely seeing that squeeze.

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But here's where things get interesting sometimes.

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These challenging markets kind of force us to look at older strategies, maybe less common ones, but ones that can be incredibly powerful.

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Mm-hmm.

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And that's exactly what we're diving into today.

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Buying property subject to the mortgage.

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A classic really, but very relevant.

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Now think of this deep dive as us sort of pulling back the curtain on this technique.

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It's highly relevant right now, and we're drawing from insights shared at a real estate investor meetup.

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Practical on the ground stuff.

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Yeah, real world experience is key with this.

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So our mission today to cut through the noise really.

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We want to unpack what subject to actually means.

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Uncover why it's such an opportunity today, and crucially, lay bare the risks, the ones you absolutely must understand.

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The risks are critical.

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Can't stress that enough, and we'll walk through the practical steps to do it right.

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We want you to come away knowing what matters, what to look for if this is something you're considering.

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Okay?

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Sounds good.

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Where should we start?

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Let's start right at the beginning, right?

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What is subject two?

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Can you break that down simply?

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Sure.

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So at its core subject two or sub two, as you hear it called, it's just buying a property where the seller's existing mortgage loan.

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Uh, it just stays in place.

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Stays in place, yeah.

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You as the buyer, you take title, you get the deed, you're the legal owner of the house, but that original loan, the actual debt, it stays in the seller's name.

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It's still tied to their credit.

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Legally.

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Wait, hang on.

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So I own the house, but the loan is still the seller's loan.

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That sounds, uh, a little strange.

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It absolutely does.

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On the surface.

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Hmm.

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And that's why understanding the structure is so, so important.

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It's a form of creative financing, right?

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Mm-hmm.

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Because you're not going to a bank.

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You're not qualifying for a new loan based on your income and credit.

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Okay.

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You're essentially stepping into the property's existing financial setup.

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Yeah.

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And you know, while it feels very now because of rates, this isn't some brand new trick.

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It's been around, I.

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In different forms since at least the 1960s, maybe even earlier.

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Wow.

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Okay.

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So it has history.

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Definitely.

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And you need to see it as two separate agreements happening at the same time.

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Mm-hmm.

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First, there's the original mortgage that's between the seller and their lender.

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The bank.

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That relationship, it doesn't just vanish'cause the house sold right then completely separate from the bank.

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You have your agreement with the seller, and in that agreement you promise the seller contractually that you will make the payments on their existing mortgage for them.

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Okay.

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Got it.

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So it's my promise to the seller to pay their bank.

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It's not me promising the bank anything directly.

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Yeah, exactly.

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That's the key distinction.

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And you brought up a good point earlier.

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People sometimes confuse this with a loan assumption.

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Can we clarify that?

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Yes, please.

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That seems like a crucial difference.

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It is a huge difference.

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Subject two is absolutely not an assumption.

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With a formal loan assumption, you would go to the seller's bank.

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You'd apply.

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You'd have to qualify based on your own finances, your credit, your income, the whole nine yards.

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The whole nine yards, and the bank, if they approve you, officially transfers the loan's legal responsibility to you.

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It becomes your debt.

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Okay.

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It was subject to, none of that happens with the lender.

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You don't create that official legal relationship with the bank.

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The loan stays, the seller's legal problem, their liability to the bank.

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Even though you promised the seller, you'll make the payments.

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That makes sense.

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Much clearer and.

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Just to be super clear upfront, this isn't some magic wand for every deal.

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Mm-hmm.

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It needs the right situation, the right seller motivation, the right buyer understanding.

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It's specific, which brings us perfectly to why this is so relevant right now.

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I mean, look at mortgage rates today.

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The source mentions seeing rates like what, 7.5% on a rental loan?

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Yeah.

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Around there.

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It's a shock to the system for sure, especially compared to just a few years ago.

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It truly is, and that history really paints the picture of the opportunity.

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Think about it, interest rates were below 5% for a huge stretch, like for maybe 2010.

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All the way through 2021.

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Over a decade.

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Yeah, more than a decade.

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Mm-hmm.

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That period created this enormous pool of existing mortgages with rates that look unbelievably low today.

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So people locked in these great rates.

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Exactly.

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And here's a wild statistic from the data.

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Over 56% more than half.

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Of all existing home loans in America right now have an interest rate under 4%.

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Wait, say that again?

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Over half or under 4%.

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Over 56% or under 4%.

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Just let that sink in.

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More than half the mortgaged homes out there are sitting on debt that is dramatically cheaper than anything you could possibly get today with new financing.

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Wow, okay.

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That single stat really shows the potential opportunity, doesn't it?

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So subject two is basically a way to potentially step into one of those super low rate loans.

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That's precisely it.

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This huge pool of low rate loans held by existing homeowners.

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That's the engine driving the relevance.

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Of subject to right now.

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By using this structure, you, the buyer can potentially bypass today's painful rates and access those much, much better existing terms.

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So for someone listening, this is powerful because high rates are boxing people in, right?

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Limiting what they can afford.

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Exactly.

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But accessing one of these low existing rates lets you, um.

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Almost manipulate the marketplace in your favor.

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Hmm.

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You can make deals work.

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That just wouldn't make sense with a new 7.5% loan or structure.

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A much better deal, more profitable by capturing that rate.

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Makes sense.

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You're changing the math.

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You're changing the math significantly.

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And it's not just interest rates squeezing homeowners either.

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We're seeing other costs.

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Soar property insurance is a big one.

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The source material.

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Pointed to New Orleans where average insurance was cited around$13,000 a year.

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The experts own properties averaged maybe 4K to$8, which is still high, and one specific property.

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The payment jumped$900 a month, mostly because of insurance hikes,$900 a month increase.

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That's insane.

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It's brutal.

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These rising costs can push homeowners, especially landlords, maybe without big reserves, right to the edge.

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That creates motivation to sell.

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Maybe quickly, maybe creatively, and that's where people who understand tools like subject two can step in as.

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Well, problem solvers.

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Okay, so the low rates are the big hook, especially now, and rising costs add pressure.

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Let's talk more about the good stuff.

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What are the major benefits?

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Why would someone do this?

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Right?

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There are definitely compelling advantages and for both sides, seller and buyer.

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Okay, let's start with the seller.

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Why would they agree to keep their loan active?

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For sellers, it could be a real lifeline.

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Maybe they're behind on payments facing foreclosure, and this is a fast way out.

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Or they're just a totally burned out landlord with a problem.

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Tenant or deferred maintenance.

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Tired landlord syndrome.

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Exactly.

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Or maybe they need to move urgently.

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Jog relocation, family reasons, and a traditional sale is too slow.

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Or requires repairs they can't afford.

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Mm-hmm.

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Or maybe they even owe more than the house is worth right now, subject two can often close much, much faster because you're skipping that whole bank loan underwriting process for the buyer.

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Speed is a big factor then huge.

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And if a seller is behind on payments, you, the buyer can catch those up immediately.

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Stop the foreclosure clock ticking.

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And here's a big one, if you then make all the future payments consistently on time.

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It can actually help prepare the seller's damage credit over time.

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Ah, that's interesting.

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So getting out of a bad spot and maybe even getting a credit boost down the line.

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Potentially, yes.

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If payments are made perfectly and sometimes because you're bringing this valuable solution, taking over their payments, potentially solving their problem quickly, you might be able to offer a price closer to what they wanted.

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Maybe even higher than a low ball cash offer because the terms you're offering are so beneficial to them.

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Okay.

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Makes sense for the seller in certain situations.

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Now, what about the buyer?

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We talked about the rate, right?

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The low interest rate in a high rate world is the obvious huge win.

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You're essentially, like we said, manipulating the cost of money.

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Hmm.

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Big advantage.

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What else?

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You also largely sidestep that whole painful, complex, traditional bank qualification dance.

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Mm-hmm.

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You know, gathering pay stubs, tax returns, explaining every deposit.

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Ah, yeah.

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Instead, you're leveraging the seller's existing loan.

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You're using your credibility with the seller and really solid paperwork, not necessarily your personal credit score to get the property, but remember crucially the loan does stay on the seller's credit report.

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Right.

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Always back to that.

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Okay.

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Low rate, easier acquisition.

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Anything else?

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Yes.

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And this one is often underestimated.

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I think it's the amortization benefit.

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Amortization benefit.

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Explain that.

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Okay.

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So with a brand new 30 year loan today, mm-hmm.

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Especially these high rates, almost all of your first few years of payments go straight to interest.

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Very little chips away at the actual loan.

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Balance the principle, right?

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The bank gets paid first pretty much, but when you step into an older loan, using subject to say, one that's already 10 or 15 years into its 30 year term, a much bigger chunk of that same monthly payment a.

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Goes towards principal pay down right from your first payment.

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Ah, because the seller already paid down a lot of the early interest.

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Exactly.

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You're essentially jumping ahead on the amortization schedule.

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You are in a way manipulating time.

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Mm-hmm.

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You can build equity and reach payoff much faster than if you started a brand new 30 year loan today.

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The source used a great example, buying a house built in 2012, taking over its original 2012 mortgage.

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Boom.

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You're starting 12 years into that pay down schedule on day one.

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So I'm hitting the principle harder, faster just by taking over an older loan.

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That's really interesting.

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Do you pay the seller extra for that benefit?

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Generally?

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No.

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That amortization benefit, it's valuable to you, the buyer, assuming you hold the property long enough, it's kind of baked into the structure of taking over an older loan.

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It's part of your long-term return, not usually something you add extra cash for in the offer to the seller.

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Okay, got it.

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That's a hidden plus.

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It really is.

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And when you're looking at any potential subject to deal.

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The source highlighted five key things to analyze.

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Yeah.

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You need good cash flow, right?

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After all expenses, remember PITI principle interest, taxes, and insurance, and those last two can jump up, right?

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Like that insurance example.

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Exactly.

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You need equity.

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What's the gap between your purchase price and the property's real value?

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Maybe after repairs the rv, you look at the amortization, where are you stepping into that pay down curve?

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Mm-hmm.

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You look at the interest rate, obviously, and fifth.

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Something called the probability of performance.

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Basically, how likely are your numbers, your projections for rent, repairs, et cetera, to actually pan out?

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Mm.

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Is this realistic?

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So a low rate is awesome, but it's not the only thing.

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The whole deal needs to make sense.

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Is it precisely a fantastic rate on a terrible deal is still a terrible deal.

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Okay.

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Those benefits sound really compelling.

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Accessing low rates, the amortization thing, faster closing.

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It almost sounds like a cheat code in this market, but.

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You mentioned risks, and this is where we really need to like pump the brakes, right?

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Absolutely.

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And honestly, this is the most important part of the conversation.

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You have to be brutally honest with yourself and especially with the seller, about the downsides, hiding risks.

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That's not just shady, it's terrible business.

00:12:52.315 --> 00:12:54.174
It will catch up to you as the saying goes.

00:12:54.325 --> 00:12:54.955
To be clear.

00:12:54.955 --> 00:12:55.735
Is to be kind.

00:12:56.304 --> 00:12:57.865
You owe them that clarity.

00:12:57.924 --> 00:12:59.365
Okay, so let's get clear.

00:12:59.424 --> 00:13:01.375
What are the risks for the seller?

00:13:01.674 --> 00:13:03.445
We touched on it, but let's hammer it home.

00:13:04.355 --> 00:13:07.115
Their credit is still tied to that mortgage.

00:13:07.595 --> 00:13:16.865
If you the buyer miss a payment, pay late or heaven forbid default, and the loan goes into foreclosure, it hits their credit report severely.

00:13:17.345 --> 00:13:24.875
It can absolutely trash their credit score, and that can make it incredibly difficult, maybe impossible for them to qualify for another mortgage later on.

00:13:25.115 --> 00:13:27.455
Especially if this was their main home they just sold you.

00:13:27.664 --> 00:13:30.125
Imagine trying to buy again with that, hanging over them.

00:13:30.350 --> 00:13:34.669
So even though they sold the house, the bank still sees them as responsible for the debt.

00:13:35.149 --> 00:13:38.120
That's a massive risk for them to take on faith in the buyer.

00:13:38.269 --> 00:13:43.700
It's huge and goes beyond just getting another mortgage for sellers in certain jobs.

00:13:43.700 --> 00:13:44.059
Think.

00:13:44.455 --> 00:13:56.034
Military law enforcement, anyone needing security clearances or working in finance, having late payments, a default, a foreclosure pop up on their credit that could seriously jeopardize their career.

00:13:56.245 --> 00:13:58.735
You have to talk about these heavy potential consequences.

00:13:58.794 --> 00:13:59.245
Wow.

00:13:59.365 --> 00:13:59.815
Okay.

00:14:00.054 --> 00:14:00.955
That's serious.

00:14:01.225 --> 00:14:01.315
Mm-hmm.

00:14:01.554 --> 00:14:02.904
Now, what about risks for the buyer?

00:14:02.904 --> 00:14:04.434
It's not all gravy for them either.

00:14:04.465 --> 00:14:05.004
Not at all.

00:14:05.065 --> 00:14:06.774
The risks are significant for the buyer too.

00:14:06.985 --> 00:14:09.115
I think the biggest, most unpredictable one is.

00:14:09.370 --> 00:14:12.129
The human element, you're now tied to the seller's life.

00:14:12.159 --> 00:14:19.779
Yeah, because that loan is legally tied to an individual person, their major life events can directly impact your property and that loan.

00:14:20.320 --> 00:14:25.269
What if the seller passes away, oh, or goes through a messy divorce or files for bankruptcy.

00:14:25.809 --> 00:14:32.320
Any of these things can pull the property and the loan into the legal system, probate court, divorce court, bankruptcy court.

00:14:32.350 --> 00:14:32.440
Mm-hmm.

00:14:32.710 --> 00:14:35.590
Suddenly, you're dealing with attorneys, judges.

00:14:36.100 --> 00:14:38.559
It can make simply paying the mortgage complicated.

00:14:38.799 --> 00:14:47.019
It could potentially jeopardize the loan staying in place, or at the very least, turn into a really messy, expensive legal headache for you to sort out.

00:14:47.620 --> 00:14:52.149
So their personal drama can become my financial problem because the loan connects us.

00:14:52.149 --> 00:14:53.980
That sounds unnerving.

00:14:54.070 --> 00:14:54.279
It is.

00:14:54.279 --> 00:14:55.299
You have to factor that in.

00:14:55.360 --> 00:14:55.600
Yeah.

00:14:55.659 --> 00:14:57.071
And then there's the big one everyone talks about.

00:14:57.625 --> 00:14:58.825
The due on sale clause.

00:14:58.825 --> 00:14:58.914
Right.

00:14:59.335 --> 00:15:00.715
The bank calling the loan.

00:15:00.804 --> 00:15:01.254
Exactly.

00:15:01.254 --> 00:15:06.024
It's a clause written into pretty much every standard mortgage contract and it gives the lender the right notice.

00:15:06.024 --> 00:15:14.004
I I say right, not obligation to demand the entire remaining loan balance be paid immediately if the title to the property changes hands without their official permission.

00:15:14.095 --> 00:15:17.754
So just because I bought it subject to, they could technically demand the full payoff.

00:15:17.904 --> 00:15:19.705
They have the contractual right to Yes.

00:15:20.215 --> 00:15:21.384
Now in practice.

00:15:21.595 --> 00:15:22.495
Is it common?

00:15:22.764 --> 00:15:23.335
No.

00:15:23.485 --> 00:15:25.254
Especially if the payments are current.

00:15:25.794 --> 00:15:29.965
Lenders generally want performing loans, but does it happen?

00:15:30.235 --> 00:15:30.835
Absolutely.

00:15:30.835 --> 00:15:31.134
Yes.

00:15:31.134 --> 00:15:31.794
It can happen.

00:15:32.245 --> 00:15:42.715
The source shared that story about Steve bought a property, sub two, doing everything himself, and boom, three days later, the lender called the loan due three days.

00:15:42.804 --> 00:15:44.004
Wow, that's fast.

00:15:44.004 --> 00:15:44.875
So he had to scramble.

00:15:44.875 --> 00:15:45.445
Had to scramble.

00:15:45.450 --> 00:15:45.720
Big time.

00:15:46.399 --> 00:15:49.789
Either find cash to pay it off or get a new loan super fast.

00:15:50.059 --> 00:15:51.169
It's a real risk.

00:15:51.379 --> 00:15:53.539
Maybe a low probability, but high impact.

00:15:53.539 --> 00:15:54.980
If it happens, you cannot ignore it.

00:15:55.100 --> 00:15:55.370
Okay.

00:15:55.700 --> 00:15:56.929
Do on sale, what else?

00:15:56.929 --> 00:16:00.620
Well, you also have just the normal risks of using leverage of having debt.

00:16:00.649 --> 00:16:00.860
Yeah.

00:16:00.860 --> 00:16:03.470
Like any finance property, you've got that monthly payment obligation.

00:16:03.740 --> 00:16:09.500
What if the property sits vacant longer than you expect, or you uncover some huge expensive repair you didn't budget for.

00:16:09.710 --> 00:16:12.080
You still have to make that mortgage payment every single month.

00:16:12.169 --> 00:16:14.870
No excuses if payment doesn't stop, just because rent isn't coming in.

00:16:15.149 --> 00:16:15.450
Nope.

00:16:15.990 --> 00:16:22.019
And one more, maybe a bit more theoretical, but worth noting, potential future regulatory changes.

00:16:22.590 --> 00:16:32.279
History kind of shows us that when creative financing techniques get really popular, sometimes regulations follow to, you know, tighten things up, usually to protect lenders or consumers.

00:16:32.340 --> 00:16:33.659
Like what happened in the past?

00:16:33.750 --> 00:16:34.110
Yeah.

00:16:34.110 --> 00:16:37.889
Back in the seventies and eighties, something called non-qualifying assumptions were common.

00:16:38.365 --> 00:16:40.615
Similar idea, easier to take over loans.

00:16:41.034 --> 00:16:50.904
That eventually led to the Gar Saint Germane Act, which standardized how lenders could enforce due on sale clauses and handle assumptions with subject to getting more attention.

00:16:50.904 --> 00:16:53.485
Now it's possible new rules could come down the line.

00:16:53.485 --> 00:16:53.965
Eventually.

00:16:54.235 --> 00:16:55.975
Not guaranteed, but possible.

00:16:56.125 --> 00:16:58.855
Okay, so definitely not something to jump into lightly.

00:16:58.945 --> 00:17:06.144
Given these pretty serious risks, the seller's credit, their life events, the due on sale clause, how do you actually do this safely?

00:17:06.144 --> 00:17:07.615
How do you mitigate those dangers?

00:17:07.974 --> 00:17:10.464
Great question because it's not risk-free.

00:17:10.585 --> 00:17:14.095
You absolutely need safety nets and incredibly thorough due diligence.

00:17:14.454 --> 00:17:17.214
The source highlighted three really crucial safety nets.

00:17:17.275 --> 00:17:17.454
Okay.

00:17:17.454 --> 00:17:17.875
What are they?

00:17:18.204 --> 00:17:20.424
Number one, proper education.

00:17:20.575 --> 00:17:21.204
Seriously?

00:17:21.384 --> 00:17:21.474
Mm-hmm.

00:17:21.474 --> 00:17:28.075
You need to deeply understand the mechanics, the paperwork, the legal nuances, the risks, the potential pitfalls.

00:17:28.404 --> 00:17:30.835
Don't just watch a couple YouTube videos and think you're an expert.

00:17:30.984 --> 00:17:36.535
Learn from reliable sources, people with actual long-term experience who teach the complexities.

00:17:36.674 --> 00:17:40.484
Not just the hype, so know what you're doing fundamentally, fundamentally.

00:17:40.545 --> 00:17:44.744
Number two, make sure you have enough equity in the deal from day one.

00:17:45.164 --> 00:17:47.144
This is arguably your biggest safety buffer.

00:17:47.234 --> 00:17:47.954
Why equity?

00:17:48.615 --> 00:17:50.234
Because if problems hit the fan.

00:17:50.545 --> 00:17:55.015
Like that due on sale clause gets triggered, or you need to sell fast because of a seller issue.

00:17:55.164 --> 00:17:57.384
Having significant equity gives you options.

00:17:57.474 --> 00:18:07.105
You might be able to refinance the property with a new loan in your name to pay off the old one, or you could sell the property quickly on the market, pay off the underlying debt, and still walk away.

00:18:07.224 --> 00:18:07.644
Okay?

00:18:07.795 --> 00:18:08.875
Maybe even with a profit.

00:18:09.295 --> 00:18:15.535
Remember Carrie's story from the source equity allowed her to just pay off the loan when things got complicated with the seller.

00:18:15.625 --> 00:18:17.244
Yeah, equity equals options.

00:18:17.424 --> 00:18:17.904
Got it.

00:18:18.085 --> 00:18:19.404
Equity buys you breathing room.

00:18:19.404 --> 00:18:20.005
What's number three?

00:18:20.154 --> 00:18:24.474
Number three, have cash or access to cash reserves.

00:18:25.045 --> 00:18:27.505
You need the ability to get funds quickly if needed.

00:18:28.035 --> 00:18:31.365
This could be for catching up payments if the seller was behind when you take over.

00:18:31.394 --> 00:18:38.565
It could be for those unexpected major repairs, or worst case, having funds available if that due on sale clause is causing you to pay off the loan.

00:18:38.565 --> 00:18:41.414
Fast cash provides the ability to solve problems.

00:18:41.565 --> 00:18:44.775
Okay, so education, equity, and cash.

00:18:45.194 --> 00:18:46.484
The three pillars of defense.

00:18:46.605 --> 00:18:48.464
What about the actual process?

00:18:48.464 --> 00:18:51.555
What due diligence is specific to subject to Right.

00:18:51.555 --> 00:18:54.105
So beyond the usual stuff you do for any property.

00:18:54.595 --> 00:19:06.535
You know, checking the physical condition, estimating repair costs, figuring out the after repair value, a RV, running the numbers on potential rent, and calculating your full PITI payment principle interest taxes, insurance, exactly.

00:19:06.865 --> 00:19:12.025
Beyond all that, there are critical steps unique to subject to first, and this is non-negotiable.

00:19:12.535 --> 00:19:14.575
You have to thoroughly underwrite the loan itself.

00:19:14.634 --> 00:19:15.565
What does that involve?

00:19:15.565 --> 00:19:17.934
More than just asking the seller what the payment is.

00:19:18.630 --> 00:19:19.319
Way more.

00:19:19.829 --> 00:19:24.420
You cannot just take their word for it or look at a single recent statement or a screenshot.

00:19:24.720 --> 00:19:33.690
You need to get full, detailed official mortgage statements directly from the lender if possible, or have the seller get them for you request official payoff statements too.

00:19:34.109 --> 00:19:40.230
You're looking closely for any signs of past loan modifications, and here's where a massive hidden risk often lies.

00:19:40.795 --> 00:19:45.115
You need to specifically look for something called HUD partial claims.

00:19:45.775 --> 00:19:46.164
Whoa.

00:19:46.164 --> 00:19:46.674
Hold on.

00:19:46.674 --> 00:19:50.335
HUD partial claims, what on earth is that and why is it a hidden risk?

00:19:50.365 --> 00:19:52.404
Yeah, this is super important and catches people out.

00:19:52.615 --> 00:19:54.805
HUD is the Department of Housing at Urban Development.

00:19:55.255 --> 00:20:03.714
Partial claims were often part of government programs designed to help struggling homeowners modify their loans, especially after the 2008 crash like the HAM P program.

00:20:04.410 --> 00:20:12.240
Think of a partial claim as basically a silent second mortgage, often interest free placed on the property by the lender on behalf of hud.

00:20:12.480 --> 00:20:14.069
A silent second mortgage.

00:20:14.369 --> 00:20:14.849
Exactly.

00:20:14.849 --> 00:20:14.940
Hmm.

00:20:15.150 --> 00:20:17.160
They typically have no monthly payments.

00:20:17.369 --> 00:20:19.019
You don't get regular statements for them.

00:20:19.019 --> 00:20:28.529
They just sit there and they usually only become due and payable in full when the first mortgage gets paid off or matures, or sometimes if the property is sold or refinanced.

00:20:28.559 --> 00:20:29.730
Okay, so why is it hidden?

00:20:30.299 --> 00:20:33.480
Because sellers often completely forget they exist.

00:20:33.934 --> 00:20:38.194
Or they didn't understand what it was back when they signed the modification paperwork years ago.

00:20:38.434 --> 00:20:41.105
Since there are no payments, it's outta sight out of mind.

00:20:41.855 --> 00:20:53.795
These things often only reliably show up on a full official payoff statement requested directly from the lender or, and this is critical by you proactively pulling the TIVA report and checking public records yourself.

00:20:53.795 --> 00:20:56.914
So I need to check public records no matter what the seller says.

00:20:56.974 --> 00:20:57.724
Absolutely.

00:20:58.144 --> 00:21:00.125
The source gave a really vivid example.

00:21:00.474 --> 00:21:14.964
A seller genuinely thought he had just one mortgage, but when the buyer checked public records turned out there were three separate HUD second liens plus an HOA lien recorded against the property that completely blew up the deals, numbers, and viability.

00:21:15.505 --> 00:21:19.224
You must verify the loan status and search for these hidden liens yourself.

00:21:19.779 --> 00:21:21.940
Trust, but verify'em meticulously.

00:21:22.000 --> 00:21:24.339
Okay, that is a huge red flag to look for.

00:21:24.400 --> 00:21:25.690
Underwrite the loan deeply.

00:21:26.049 --> 00:21:27.130
Check public records.

00:21:27.130 --> 00:21:28.480
What else is specific?

00:21:28.599 --> 00:21:30.759
You also really need to underwrite the seller.

00:21:30.970 --> 00:21:32.500
Underwrite the person, how?

00:21:32.650 --> 00:21:38.589
It means getting a really clear picture of their situation, and importantly, their motivation.

00:21:38.589 --> 00:21:40.329
Why are they willing to sell this way?

00:21:40.690 --> 00:21:42.099
What's the real pressure point?

00:21:42.130 --> 00:21:45.099
Is it financial distress, relocation, burnout?

00:21:45.339 --> 00:21:47.740
Do they seem reliable, honest, communicative.

00:21:47.890 --> 00:21:53.980
Remember, your financing is tied to this person, their character, their stability, their life situation.

00:21:54.250 --> 00:21:55.779
It's all part of your risk assessment.

00:21:55.779 --> 00:21:56.890
Now that makes sense.

00:21:56.890 --> 00:21:59.230
You're kind of going into partnership with them in a way.

00:21:59.289 --> 00:22:00.250
In a very real way.

00:22:00.250 --> 00:22:00.730
Yes.

00:22:00.849 --> 00:22:01.119
Yeah.

00:22:01.269 --> 00:22:02.380
And finally, the paperwork.

00:22:02.769 --> 00:22:04.660
It has to be absolutely rock solid.

00:22:04.990 --> 00:22:07.480
Your purchase agreement needs to be comprehensive.

00:22:07.750 --> 00:22:18.400
It needs extensive disclosures that clearly spell out all the risks, especially for the seller, the due on sale risk, the credit implications, the potential impact on their ability to get future loans.

00:22:18.789 --> 00:22:23.440
The source mentioned their standard agreement is like 10 pages and eight of those are just disclosures.

00:22:23.650 --> 00:22:24.910
Eight pages of disclosures.

00:22:25.089 --> 00:22:28.539
Yeah, covering everything, because that paperwork is what you stand on.

00:22:28.539 --> 00:22:32.019
If things go sideways later, it protects everyone by ensuring clarity.

00:22:32.224 --> 00:22:32.585
Okay.

00:22:33.305 --> 00:22:35.105
And you mentioned leading the conversation.

00:22:35.194 --> 00:22:35.464
Yes.

00:22:35.464 --> 00:22:36.605
Conversation, leadership.

00:22:36.634 --> 00:22:36.755
Yeah.

00:22:37.055 --> 00:22:43.025
Since you're likely the one bringing this more complex, creative solution to the table, you need to act like the professional.

00:22:43.144 --> 00:22:51.724
You need to patiently, clearly walk the seller through the process, explain the documents, make sure they genuinely understand what they're agreeing to, and the potential consequences.

00:22:51.964 --> 00:22:54.815
Don't just shove papers at them and expect them to figure it out.

00:22:55.085 --> 00:22:56.434
You guide them through it.

00:22:56.724 --> 00:22:58.315
That's a lot of critical detail.

00:22:58.404 --> 00:22:59.275
Very thorough.

00:22:59.815 --> 00:23:01.164
Let's try to bring this all together.

00:23:01.164 --> 00:23:03.805
Now with that real world example from the source material.

00:23:03.805 --> 00:23:06.025
Can you walk us through that duplex case study?

00:23:06.174 --> 00:23:06.565
Sure.

00:23:06.924 --> 00:23:10.375
This was a duplex, uh, in the suburbs near New Orleans.

00:23:11.035 --> 00:23:18.055
The seller was an investor who'd bought maybe 10 rentals pretty quickly using the BRRR ME method.

00:23:18.265 --> 00:23:21.714
Buy, rehab, rent, refinance, aggressive growth.

00:23:21.805 --> 00:23:24.325
Very, but he basically run outta cash reserves.

00:23:24.880 --> 00:23:26.049
This one duplex.

00:23:26.259 --> 00:23:29.230
It had been sitting, vacant, listed the traditional way for like eight months.

00:23:29.259 --> 00:23:31.930
It had issues, moisture, problem, literal home, the floor.

00:23:31.960 --> 00:23:40.119
He needed out creatively and he actually approached the expert in the source material'cause he trusted her, knew she'd actually make the payments if she took it over.

00:23:40.339 --> 00:23:41.900
Okay, so trust was a factor there.

00:23:41.900 --> 00:23:43.430
What were the deal specifics?

00:23:43.490 --> 00:23:54.470
So she bought it in September, 2022, subject to, she brought only 2,951 Lars to the closing table that covered her closing costs plus a small fee under three grand and Wow.

00:23:54.529 --> 00:23:57.529
Yeah, and she took over his existing investor loan.

00:23:57.575 --> 00:24:01.444
It was A-D-S-C-R loan common for rentals that he'd gotten back in 2019.

00:24:01.894 --> 00:24:04.295
The balance was about$83,600.

00:24:04.295 --> 00:24:11.944
The rate was a nice 5.25%, and the payment was$750 a month, and she bought it totally as is holding the floor, abandoned couch.

00:24:11.974 --> 00:24:12.515
Everything I.

00:24:12.775 --> 00:24:19.525
Okay, so she got into a fixer upper with existing financing for very little cash out of pocket, leveraging that lower rate from 2019.

00:24:19.585 --> 00:24:21.625
That's exactly the opportunity we talked about.

00:24:21.775 --> 00:24:22.404
Exactly.

00:24:22.464 --> 00:24:22.674
Yeah.

00:24:22.704 --> 00:24:25.734
Now, her initial plan wasn't actually to do the heavy rehab herself.

00:24:26.005 --> 00:24:30.234
She described herself as, uh, ambitiously lazy when it comes to swinging a hammer.

00:24:30.234 --> 00:24:30.315
Huh?

00:24:31.095 --> 00:24:31.875
I can relate.

00:24:31.964 --> 00:24:32.295
Right.

00:24:32.595 --> 00:24:40.815
So very quickly, within weeks, she turned around and put the property under a master lease agreement with an option to buy, selling it to a couple of self-employed contractors.

00:24:40.815 --> 00:24:42.105
She'd met at a local meetup.

00:24:42.765 --> 00:24:45.884
These guys were handy, but couldn't get a traditional bank loan themselves.

00:24:45.974 --> 00:24:46.275
Okay.

00:24:46.275 --> 00:24:48.345
So she found buyers who could do the work.

00:24:48.345 --> 00:24:49.605
How was that structured?

00:24:49.875 --> 00:24:58.964
The deal was set up so the contractors would do the necessary repairs, fix the hole, deal with the moisture, update things, and that work would essentially earn them equity, sweat equity.

00:24:59.920 --> 00:25:06.250
They agreed to pay her$950 a month in rent, so she had cashflow right away,$200 over her payment.

00:25:06.309 --> 00:25:11.650
Yep,$200 positive cashflow,$950 rent minus her$750 sub depay.

00:25:11.950 --> 00:25:16.630
And they also had the option to buy the property from her down the road for$120,000.

00:25:16.630 --> 00:25:17.259
Plus.

00:25:17.319 --> 00:25:27.759
She collected a$5,000 non-refundable option fee from them right upfront, so that 5K upfront immediately covered her initial 2,951 closing costs and put cash in her pocket.

00:25:28.065 --> 00:25:28.605
Exactly.

00:25:28.605 --> 00:25:33.494
Nice structure initially, but here's where that human element risk popped up again.

00:25:34.095 --> 00:25:39.105
The contractors, they ended up defaulting on their agreement after about 24 months of making payments.

00:25:39.795 --> 00:25:40.154
Ah, okay.

00:25:40.394 --> 00:25:43.964
So the people she leased it to stopped paying her.

00:25:44.384 --> 00:25:45.105
What happened then?

00:25:45.105 --> 00:25:46.454
Did she lose the property?

00:25:46.694 --> 00:25:52.005
No, because she had structured the master lease option correctly based on the terms of their agreement.

00:25:52.035 --> 00:25:55.275
When they defaulted, she had the right to take the property back.

00:25:55.765 --> 00:25:58.015
Which she did around the end of 2023.

00:25:58.194 --> 00:25:59.755
Okay, so she got the property back.

00:25:59.755 --> 00:26:00.954
What condition was it in?

00:26:01.255 --> 00:26:12.055
Well, the good news was the contractors had actually fixed the foundation issue, which was a big ticket item, so that was a plus, but it still needed a lot of cosmetic work, flooring, paint, updating the kitchens and baths.

00:26:12.055 --> 00:26:14.694
It wasn't rent ready, so she had to put money in astral.

00:26:14.724 --> 00:26:19.525
She did the rehab, ended up costing her about$25,000 out of pocket to get it market ready.

00:26:19.884 --> 00:26:23.934
After finishing that work, she listed it on the MLS in March, 2024.

00:26:24.279 --> 00:26:27.190
Priced it pretty aggressively at$185,000.

00:26:27.250 --> 00:26:27.970
Did it sell?

00:26:28.329 --> 00:26:32.589
Got a full price offer within like 24 to 48 hours closed quickly.

00:26:32.799 --> 00:26:33.309
Wow.

00:26:33.339 --> 00:26:34.690
Okay, so let's talk numbers.

00:26:34.960 --> 00:26:41.470
What was the actual profit after everything getting in for 30 K, putting in 20 5K, dealing with the default?

00:26:41.619 --> 00:26:50.440
Right, so the final closing statement, the HUD showed a gross figure around$87,973, but that's not the real profit as we know.

00:26:50.875 --> 00:26:56.035
When you calculate it properly, her actual net profit was somewhere in the 65,000 to$68,000 range.

00:26:56.095 --> 00:26:57.234
How do you get to that number?

00:26:57.265 --> 00:26:58.944
You start with the gross proceeds from the sale.

00:26:59.214 --> 00:27:01.914
You subtract the$25,000 she spent on the rehab.

00:27:02.275 --> 00:27:08.424
You add back the$5,000 option fee she got initially, plus the roughly$4,800 in cash flow.

00:27:08.950 --> 00:27:12.789
200 month for 24 months she received from the contractors before they defaulted.

00:27:13.269 --> 00:27:20.500
Then you also have to account for her holding costs, utilities while it was vacant and the subject of payment she had to make during the rehab and vacancy period.

00:27:20.650 --> 00:27:29.109
Put it all together and, yeah, landed between 60 5K and 68 cash, 65,000 plus profit on a deal she got into for less than 3000 cash.

00:27:29.109 --> 00:27:30.190
That needed a ton of work.

00:27:30.250 --> 00:27:33.700
Yeah, and where her initial exit plan with the contractors completely fell apart.

00:27:33.700 --> 00:27:35.289
That's, that's pretty incredible.

00:27:35.289 --> 00:27:37.750
It really shows the potential if you can navigate the messiness.

00:27:37.974 --> 00:27:41.484
It really does, and the lessons from this one case study are huge.

00:27:41.484 --> 00:27:48.595
I think first it shows you can find serious opportunity and make really good money, even on deals that look messy.

00:27:48.744 --> 00:27:51.865
Need work maybe aren't your ideal, perfect property.

00:27:52.134 --> 00:27:56.089
These can be great supporting actors in your portfolio building significant wealth.

00:27:56.575 --> 00:27:57.144
Good point.

00:27:57.174 --> 00:27:59.305
Not every deal has to be a home run base Hit.

00:27:59.634 --> 00:28:00.265
Exactly.

00:28:00.535 --> 00:28:09.025
Second, it highlights the importance of being a strong deal maker, structuring creative solutions that work for multiple parties, the original seller, the contractors herself.

00:28:09.835 --> 00:28:14.724
Third, it shows how doing good business being trustworthy pays dividends later.

00:28:14.904 --> 00:28:23.605
Remember the original seller, he later offered her private money to fund another deal because she handled this one responsibly, made the payments even when her tenant buyers defaulted.

00:28:23.845 --> 00:28:25.285
That trust is currency.

00:28:25.585 --> 00:28:27.055
That's a great point about reputation.

00:28:27.055 --> 00:28:27.535
Huge.

00:28:27.625 --> 00:28:29.724
And leads to another massive lesson here.

00:28:30.535 --> 00:28:37.855
The danger of simply wholesaling these kinds of creative finance deals, especially subject, subject to wholesaling, subject to how is that risky?

00:28:38.095 --> 00:28:48.775
Think about it, if she had just found the contractors and assigned her purchase contract to them, or done a quick double close, maybe taken a$5,000 or$10,000 wholesale fee and walked away.

00:28:49.690 --> 00:28:52.089
She would've been selling her promise to the original seller.

00:28:52.119 --> 00:28:53.559
Selling her promise.

00:28:53.589 --> 00:28:53.859
Yeah.

00:28:54.160 --> 00:29:03.670
She promised the seller she'd make the payments if she hands that off to someone else, the contractors, and they default, which they did nine times according to the source.

00:29:04.299 --> 00:29:10.000
Who do you think the original seller whose credit is on the line is going to call her the original buyer?

00:29:10.029 --> 00:29:10.599
Exactly.

00:29:10.779 --> 00:29:16.930
Her reputation, which takes a lifetime to build, would be shot by staying in the middle, managing the deal.

00:29:16.930 --> 00:29:23.019
Even through the default, she protected her reputation and ultimately made way more profit than a quick wholesale fee.

00:29:23.710 --> 00:29:28.329
This business, especially creative finance, is fundamentally built on keeping your promises.

00:29:28.420 --> 00:29:28.480
Wow.

00:29:29.154 --> 00:29:32.154
That's a really powerful perspective on wholesaling creative deals.

00:29:32.154 --> 00:29:33.444
It's not just about the QuickBook.

00:29:33.954 --> 00:29:34.525
Not at all.

00:29:34.974 --> 00:29:40.615
And finally, the case study just reinforces how crucial clear communication is, even when things go wrong.

00:29:41.125 --> 00:29:47.815
Apparently the communication with the contractors broke down when they started having trouble, which just made resolving the situation harder.

00:29:47.904 --> 00:29:48.414
Makes sense.

00:29:48.654 --> 00:29:50.184
Okay, so wrapping this up.

00:29:51.095 --> 00:29:54.815
How should people think about subject to overall?

00:29:55.625 --> 00:30:00.035
Well, to bring this deep dive toward a close subject to is clearly a powerful tool.

00:30:00.400 --> 00:30:05.440
It's highly relevant in today's market because of that big gap between current rates and all those low existing rates.

00:30:05.440 --> 00:30:06.309
Mm-hmm.

00:30:06.310 --> 00:30:09.579
But, and it's a big, but it is absolutely not a beginner strategy.

00:30:09.579 --> 00:30:11.410
It's not for every buyer or every seller.

00:30:11.410 --> 00:30:19.839
It demands serious education, really rigorous due diligence, especially on that loan and the seller, and a very clear-eyed understanding of all the risks we talked about.

00:30:20.019 --> 00:30:22.809
Any specific don'ts people should take away.

00:30:23.079 --> 00:30:26.920
Yeah, definitely don't jump into these deals lightly, just because you hear about low rates.

00:30:26.980 --> 00:30:27.279
Yeah.

00:30:27.309 --> 00:30:28.299
Avoid deals.

00:30:28.660 --> 00:30:35.890
Especially when you're starting that have very low no or even negative equity or deals with tight or negative cash flow.

00:30:36.099 --> 00:30:40.269
Those require deep pockets and serious expertise to handle if things go wrong.

00:30:40.869 --> 00:30:43.059
Don't make subject to your only investing strategy.

00:30:43.059 --> 00:30:47.859
Keep other tools in your belt and please, please don't be blinded just by a sexy low interest rate.

00:30:48.220 --> 00:30:49.240
Look at the whole picture.

00:30:49.240 --> 00:30:52.660
Equity, cash flow, condition, seller situation, those hidden liens.

00:30:52.690 --> 00:30:53.019
Got it.

00:30:53.019 --> 00:30:53.710
Holistic view.

00:30:54.390 --> 00:30:55.079
Absolutely.

00:30:55.440 --> 00:31:02.519
Ultimately, I think success in subject to, and really in all real estate investing goes down to a core philosophy.

00:31:03.059 --> 00:31:04.410
How you do business matters.

00:31:04.799 --> 00:31:21.359
That means treating people ethically and fairly, being totally transparent with sellers about the risks, handling their often difficult situation with care, and it means executing the technical side flawlessly, the detailed paperwork, the deep dive on the loan docs verifying public records yourself.

00:31:21.769 --> 00:31:31.670
Learning from experienced mentors, maybe those gray-haired guys mentioned, who've seen multiple market cycles is invaluable for understanding the long game and avoiding those painful, expensive mistakes.

00:31:31.670 --> 00:31:32.599
Powerful stuff.

00:31:32.630 --> 00:31:36.559
It's clear subject to offers incredible potential, especially right now.

00:31:36.589 --> 00:31:39.565
But it's definitely not a path for the unprepared or the faint of heart.

00:31:40.065 --> 00:31:43.609
It requires work diligence and managing risk carefully.

00:31:43.759 --> 00:31:44.359
Exactly.

00:31:44.509 --> 00:31:45.710
And maybe the final thought for you.

00:31:46.240 --> 00:31:52.690
The listener to ponder is this, often the biggest opportunities in real estate are kind of hidden inside other people's problems.

00:31:53.140 --> 00:31:56.470
Situations that seem too complicated, too messy for most people to touch.

00:31:56.619 --> 00:31:59.079
Finding opportunity and complexity, right?

00:31:59.500 --> 00:32:13.329
But with that hidden value almost always comes hidden risk, whether it's an undisclosed lien lurking in the records, a sudden insurance hike you didn't expect, or just the unpredictable twists and turns of life for the person whose loan is still attached to your property.

00:32:14.079 --> 00:32:15.009
True success.

00:32:15.220 --> 00:32:18.130
Long-term success isn't just about spotting the deal.

00:32:18.279 --> 00:32:31.059
It's about the depth of your diligence, the integrity of the promises you make and keep, and ultimately your capacity to step up and solve the problems that others can't or simply won't face a complex, critical, and timely topic.

00:32:31.059 --> 00:32:35.049
Unpacked, thank you so much for joining us for this deep dive into buying subject to the mortgage.

00:32:35.289 --> 00:32:42.819
Keep exploring, keep learning, and always approach your deals with purpose, with clarity, and with that essential, meticulous due diligence.

00:32:43.884 --> 00:32:46.173
If you love what you heard today, it would mean the world to us.

00:32:46.253 --> 00:32:59.263
If you would take a moment to rate review and share this podcast with someone that you believe would benefit to sharing is the best way for us to grow and to develop a community, to join you on your intentional investing journey.

00:32:59.939 --> 00:33:09.019
In the meantime, come hang out with us on social media at On Purpose Investor, or sign up for our next course, newsletter, or meetup at OnPurposeInvestor.

00:33:09.019 --> 00:33:09.398
com.

00:33:09.749 --> 00:33:14.528
But most importantly, go out, live your life, and do it On Purpose.