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The Window Is Closing On Subject To Real Estate Investing (Jason Hartman) - YouTube
Channel: Epic Real Estate Investing
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Being a real estate investor
doesn't always require you
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to go to a bank, get
pre-qualified and call an agent.
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Sometimes that conventional path,
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flat out doesn't work for
the property or the investor.
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And under these scenarios,
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which are more common
than you might think,
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people get stopped, thinking
that they have a credit problem
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or a money problem, when in reality,
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they merely have an idea problem.
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Enter creative outside-the-box
ideas of financing
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and one of the more popular
and profitable creative ideas
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is known as Subject-To.
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I and countless of other
creative real estate investors
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have built small and big
cash flowing portfolios
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using this strategy.
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It's a powerful tool in
your investing toolbox,
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but unless we change
the way we go about it,
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the Subject-To strategy is
dead and I'll tell you why.
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Lets go!
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Hi, my name is Matt Theriault,
CEO of Epic Real Estate
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where we show people how
to invest in real estate
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so they can escape the
daily grind and retire early
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and it's through creative real
estate investing strategies
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where this escape can
significantly be sped up.
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And one of the strategies to do more deals
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and accelerate your escape
is known as Subject-To.
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It's when you purchase a property
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subject to the existing mortgage
that is already in place.
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With a subject-to deal,
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you are not formally assuming the loan,
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instead, you're taking
ownership of the property
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and the responsibility
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of making sure the
mortgage is paid on time,
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typically, until you refinance
or resell the property.
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In a nutshell, your name is on title
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as the new owner and you make the payments
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on the existing financing
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but the seller's name stays on the loan
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and is ultimately the one
responsible for the loan.
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This strategy has been used for years
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as an effective method of investing
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for both newbies and
experienced investors alike.
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But its days, they're numbered
and I'll tell you why.
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And I'll begin by playing
you a quick snippet
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of a conversation I recently
had with a good friend of mine,
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Jason Hartman, host of The
Creating Wealth Podcast.
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It's the longest running
real estate investing podcast
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on iTunes, really smart guy.
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Here, listen to his
housing market prediction
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and then I'll explain how
this is going to impact
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and probably downright kill
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Subject-To investing as we know it.
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And then I'll share with you
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what you can do to keep it alive
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in your creative investing toolbox.
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You know, I was listening
to a podcast the other day,
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driving through the
Canyon over here in Vegas
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and the Rebel Capitalist Show,
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surprise, surprise, you were the guest
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and you were talking about,
well my two favorite subjects
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of the day right now
are debt and inflation
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and how to use those two things
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to build your wealth for the future.
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But you closed out that episode,
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that interview with a
prediction that you're making
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once we get out of this
madness that we're in
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of a housing market and the economy.
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And I just wanted to
invite you onto the show
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and I found it really compelling,
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so I wanted to help you memorialize it.
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- Yeah.
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- And when that comes to fruition,
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you can go and tell everybody
that you told him so.
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- And if it doesn't come true,
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this will be thrown back in my face.
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- Yeah, we'll just hit the delete button
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and everything will be fine.
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- That's right, that's right.
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Well thanks, Matt.
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Yeah, I have a big prediction you know,
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a lot of people are talking about
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the everything bubble and you know,
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predicting our crash and
all this kind of stuff.
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This stuff is complicated,
like everything in life.
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There are many nuances to it
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and I'm not talking about
nuances to the whether or not,
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you know, what might go right
or wrong in the prediction,
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I'm talking about the prediction
itself is nuanced, right?
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And we could have a slowdown,
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And we could have a slowdown,
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we've got forbearance issues,
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we've got eviction moratoriums,
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we've got very low
interest rates which will,
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well, not will, very likely,
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which have to ultimately
become higher interest rates.
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We have had tens of millions of people
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who are either refinancing their houses
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or buying new houses and either way,
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they're getting the lowest mortgage rates
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in the history of the world.
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Overall, we have some of
the lowest interest rates
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in 5,000 years.
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Yes.
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There are people who have kept records
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back to Egyptian times
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of what the interest rates are, right?
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So rates are insanely low and I believe
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rather than the usual talk we hear,
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where people say, "Well, when rates go up,
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we're going to have a housing crash."
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Okay, I see what they're saying
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and everybody understands
that concept because
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it will definitely cool the
market down if rates go up.
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But what they are not talking about
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that's critically important
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is the supply side of that equation
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and the motivation for
all those tens of millions
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of people I just mentioned
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to keep their houses
because they have an asset,
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and when I say asset,
I don't mean the house.
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I mean the mortgage being an asset
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of unduplicatable,
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ultra low interest rates.
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And if you ask me, Matt,
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they're going to fight tooth and nail.
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They are going to fight really hard
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to keep that mortgage asset.
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And that is going to
constrict housing supply
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quite dramatically.
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We already have a huge housing shortage
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but I think it could get worse.
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If someone's got a 2.5% interest rate
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and then the rate at the time is 5%
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which would still be a
historically low rate, right,
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for a 30-year fixed rate mortgage.
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If the rate at the time is 5%,
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that's not 2.5% higher.
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It's a 100% higher, it's double.
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So people, I think, will
be very much incentivized
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to hang on to the properties they've got
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and either one, improve
them to stay in them.
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So they might add a
room, they might repaint,
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they might redo the yard,
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they'll do something to
make the house nicer.
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I don't know what they'll do
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but I think they're
going to be incentivized
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to keep the house
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or they might turn it
into a rental property
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rather than selling it.
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So it's going to be impossible
to duplicate that low mortgage
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because you cannot move the
mortgage when you change houses,
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the mortgage is immovable.
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That's going to be the incentive
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and that's going to further
constrict housing supply
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beyond the shortage that we already have.
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- One thing to note
from Jason's prediction
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is how the current housing supply crisis
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might not improve any time soon
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which would support a
strong seller's market
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for a long time to come.
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That alone could hinder the effectiveness
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of Subject-To investing, but
certainly wouldn't kill it.
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There's something bigger
in Jason's prediction
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that likely would though.
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To really grasp it, you
must understand the history
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of the Subject-To deal
because this isn't a new form
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of real estate financing.
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You see, in the 50's and into the 60's,
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buying property Subject-To
was a common practice.
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Homeowners would sell
their property this way
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to a buyer that had insufficient credit.
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It happened all the time,
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but over time, banks
evolved and made it easier
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to buy houses with personal
credit and because of this,
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the Subject-To transaction
became less popular.
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And then in the mid-70's as
interest rates started to rise,
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the Subject-To transaction
took an even bigger hit
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when banks began inserting
a due on sale clause
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into their loans.
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A due on sale clause,
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also known as an acceleration clause
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is a provision in a mortgage document
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which gives the lender the
right to demand payment
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of the remaining balance of the loan
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when the property is sold.
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It is a contractual right, not a law,
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contrary to popular belief.
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Nor is it a bank's obligation
to call the loan due
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but merely their option to.
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Here's why banks started to put
this into their loan documents.
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Homebuyers were taking over existing loans
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rather than borrowing new money from banks
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because the interest rates
on the existing loans
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were lower and eventually much lower.
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Thus, the banks weren't
lending new money out
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at the higher rates
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and rates that reached
as high as 18% in 1982.
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Now they argue that the
reason for the restriction
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was to be able to police who
was living in the property,
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the collateral for their loan.
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Weak argument though and here's why.
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You see this was a very small window
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of just two or three years
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where banks were enforcing
this due on sale clause,
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making it problematic
for Subject-To deals.
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But banks started to pull back
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on their due-on-sale enforcement
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when interest rates
began to plummet in 1984.
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It wasn't really about monitoring
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who was living in the property at all,
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it was all about the money.
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To this day, banks are still unlikely
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to enforce the due-on-sale provision
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because interest rates have been
trending downward ever since.
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And it makes sense that they
don't enforce it right now.
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I mean, they'd lose money if
they made it a common practice.
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Now with regard to Jason's prediction
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with interest rates being at a place
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where they can't go much lower
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and despite what the Fed is saying about
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keeping the rates low,
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they have been on an
uptick since early January.
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Now we may see them slide
up and down along the way,
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but to support our
over-leveraged monetary system,
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the Fed will have to increase rates
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at some time and over time
to keep inflation in check.
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It's really the government's only plan,
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along with increasing our taxes
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to recover from the
monumental stimulus bills
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that we've recently passed.
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Not to mention the Godzilla-sized
infrastructure bill
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on its way from the Biden administration.
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The bottom line, when
rates increase to a point
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where it becomes profitable for banks
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to enforce their due on sale clause again,
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just like they aggressively
did in those few years
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in the early 80's, you can
bet they most certainly will,
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thereby killing the Subject-To transaction
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under most circumstances.
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So what can you do about it?
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Why do you want to
figure out a workaround?
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Yes, you can do something about it
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and here's why you want to.
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When you successfully execute
a Subject-To transaction,
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one, you don't have to qualify for a loan.
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Two, you will have the advantage
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of the owner's lower interest rate.
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Three, you will have the advantage
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of the owner's amortization schedule
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based on their time in the loan.
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Four, you will have instant
ownership in the property.
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You don't want to give up those benefits
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just because the bank's
increasing inclination
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to execute the due on sale clause.
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And besides, the benefits don't
stop with just you either,
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the seller benefits too.
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By one, receiving an instant solution
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to their urgent problem.
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Two, preserving their credit rating
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because you are making their payments,
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and three, eliminating
their closing costs,
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fees and need for repairs.
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Now I use the word 'workaround'
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and I'll let you in on
what it is in a second
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but if this feels like
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we're playing in the gray
area of the law, we're not.
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You can still purchase
a property Subject-To
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on listed and off-market properties
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because there is nothing illegal
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or unethical about buying
a property Subject-To.
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And to assure that you don't create
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any unnecessary challenges for yourself,
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you want to follow these best practices.
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First and foremost,
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use a trusted real estate
attorney throughout the process
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of the deal to protect
you and the homeowner.
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It is still a real estate transaction
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that must follow real estate
laws, both state and federal.
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Second, ensure that all aspects
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of the transaction are in writing,
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especially the seller acknowledging
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that they're fully aware
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of the Subject-To aspect
of the transaction.
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Third, have a backup plan.
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Lenders, they rarely enforce
the due on sale clause
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because they prefer a performing
loan over a foreclosure.
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Now, while the loan being called
due is highly unlikely for now,
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it is still possible and
as the rates increase,
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so does that possibility.
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Fourth, use a 3rd party
note servicing company
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to hold the funds and make the
seller's mortgage payments.
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It's also not a bad idea
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to give the seller limited
access to the account
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in the interest of their comfort
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that the mortgage payments
are being made on time.
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Fifth, you will need to open
up a new insurance policy
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naming you or your company as the insured.
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This limits liability.
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All right, now,
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for the workaround that
you've been waiting for,
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to keep this strategy
alive in your toolbox.
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You see, banks don't
typically look for reasons
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to exercise the due on sale clause
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but if they're notified that
the property has been sold
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without paying off their loan, they could,
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and as mortgage rates
increase, they're likely to.
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The primary way to keep the bank
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from being privy to
your Subject-To purchase
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is by incorporating a land
trust in the transaction.
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And you can watch the video
right here on how to do that.
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And I'll also put the
link to it conveniently
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in the description below for you.
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The land trust will keep most
of you and your sellers secret
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from the bank and
there's one person though
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that will eventually
blow the whistle on you,
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and that's the insurance company.
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You see, the insurance
company will notify the bank
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as they are the loss payee
in the seller's policy
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that there's been a
change to the insurance.
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So the one way to deal with this issue
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is to keep the seller's
insurance in place and current.
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So if your strategy is to
hold long-term for cashflow,
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make sure that you calculate
the double insurance payment
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and refer to number
three of best practices,
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have a backup plan
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in case the bank does
call the mortgage due.
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Now purchasing Subject-To is
still relatively risk-free
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if your plan is to refinance
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or flip the property
within a few months or so.
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Just know that when the rules change,
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specifically when the interest rates rise,
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your strategy to win will
have to change with them.
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So what'd you find most valuable?
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Let me know below.
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And who do you know
that needs to see this?
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When their name comes to mind,
please share it with them.
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Oh, and if you're already subscribed,
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I pulled this video out
special for you to watch next.
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Otherwise, I'll see you next time.
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Thanks for watching. Take care.
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