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Real Estate Investing Myths That Steal Profits From Your Pocket
One of the things that distresses us about our industry is the amount of wrong or incomplete information available to investors. Some myths block what otherwise would be a great deal, while others would have you believe that a bad deal is actually great. For example, we encourage purchasing homes "subject-to" the existing mortgage as an option to finance the purchase of an investment property. This means that title to the property is transferred to the purchaser, but the loan remains in the original borrower's name with payments made by the purchaser. Unfortunately, many myths exist around this method which could rob you of your profits. Let's take this opportunity to dispel 5 of the most common. Myth #1: Buying A House "Subject-To" The Existing Mortgage Is Illegal. Absolutely not true! Most mortgages have a "due-on-sale" clause which states that if the house is sold without paying off the mortgage, the lender has the "right" to call the entire loan due. The key here is that they have a "right" - not an "obligation". In other words, it's their choice. We asked several attorneys in town who represent lenders to see if they had ever heard of a bank call a loan due because of a sale. In every instance they said not as long as the payments were made timely. Why? Because banks are in the money business - not in the real estate business. If they call the loan due, and it goes into foreclosure, they have a poor performing loan on the books (for which they have to increase their reserves), they incur additional costs, and they inherit a property. Or, they can just accept the timely payments from the new owner. Which makes more sense? Myth #2: Buying "Subject-To" Is Complicated And Requires A Ton Of Paperwork. The truth is that all you have to do is write it into the Purchase and Sales Agreement (PSA). We write it in right next to the Purchase Price. Here's an example using our PSA: Total Purchase Price to be paid by Buyer is $80,000.00, payable as follows: "subject-to" existing first mortgage with a balance of approximately $77,500, and monthly PITI payments of $695; remainder of Sellers equity to be paid in cash at closing. That's it. You and the Seller have now agreed that you'll purchase the home subject-to their mortgage. As a precaution, we have the Seller sign a disclaimer that they know that the loan has a due-on-sale clause, and that we make no promise as to when the loan will be paid in full, or how long it will remain in their name. We also prepare a letter from the borrower informing the bank that all future correspondence should be forwarded to us, and we have the right to act for the Seller in every way regarding the loan so they'll disclose loan information to us in the future. It really is that easy. After closing, you just start making the payments. We don't hide our identity. We send in our own checks, and the house insurance is in our name. Myth #3: No Homeowner Will Ever Sell Me Their House And Leave The Loan In Their Name. If you're dealing with a seller who has no problems with his house, this may be true. But when you deal with motivated sellers - ones that either have financial, personal, or house issues - this will not be an issue. Motivated sellers need a way out - quickly! Often, they're already behind in their payments, and facing foreclosure. When you tell them that their worries are over, and you'll catch up their back payments, and make all the subsequent payments on time they'll jump at the opportunity. As a bonus, their credit will even improve. The key to successful negotiating lies in your confidence. Realize that you're providing a viable alternative solution which allows the highest price to be paid, with the quickest closing, and immediate relief for the Seller's situation. Myth #4: Kitchen Table Closings Are Perfect For These Transactions Investors love to say that they "got the deed" at the kitchen table while they presented their offer. The concern is you have no validation of what you purchased. Without a title exam, there's no guarantee the correct owner even signed the deed, nor whether any other loans or liens exist on the property. You also have no title insurance to protect you from any unanticipated title problems. Finally, the actual payoff on the loan must be validated with the lender by requesting a statement of account. Do not use the principal balance payoff shown on the monthly statement because it does not include past due payments, other interest accrued, fees and penalties, and any prepayment penalties. We've seen actual payoffs tens of thousands of dollars greater than the principal payoff. You could argue that what difference does it make if the loan isn't in your name and you gave the Seller no cash. The problem is that you may not discover any of these issues until much later in the transaction - maybe not until you try to sell the property. By then, you will have invested time, energy, and money in the property only to see it all lost, when all of these problems could have been avoided by conducting a standard closing with your attorney or title company. Myth #5: I Can Always Just Walk Away If I Can't Pay The Mortgage This is technically true, but not a great strategy for the successful investor. Legally, you are not responsible for the payments. But you do have your credibility and reputation to consider - which are critical to your long term success. You definitely don't want an angry seller defaming your reputation in the community, or submitting a complaint with the Better Business Bureau. Not to mention that you probably have cash invested in the house, which will all be lost. We recommend treating "subject-to" mortgages just like any other with your name attached - make timely payments. Lou FREE! Real Estate Investing Secrets To Earning $100,000 Your 1st Year! -- 11 Overlooked Real Estate Statregies That Will Turn Your Investing Business upside Down And On The Fast Track TO Success...Guranteed! Plus A Bonus Track With A Secret So Successful It Can Double Your Investing Income Overnight! http://www.InvestorSuccessTactics.com
MORE RESOURCES: Prologis Warns of Slowing Industrial Real-Estate Market The Wall Street Journal Office market collapse: Commercial foreclosures spike 117% in a year Business Insider Former HGTV star from Los Gatos sentenced in $10M real estate fraud case CBS San Francisco Real estate investors, cottage owners could be hit with bigger tax bill following Ottawa's capital gains change Toronto Star 21 Largest Real Estate Companies in the World Yahoo Finance Banks' Commercial Real Estate Risks Are Uneven Federal Reserve Bank of Kansas City Big Tech Is Downsizing Workspace in Another Blow to Office Real Estate The Wall Street Journal Motley Fool: Investors could trust real estate The Spokesman Review Inked: Recent LI real estate deals Long Island Business News TikTok’s Origin Story: Court Files Show Role of GOP Megadonor Jeff Yass The New York Times Blackstone Earnings Rise as Investment Giant Projects Commercial Real Estate Recovery - CoStar Group Real Estate Minute – 04-18-2024 KFDX - Texomashomepage.com Real Estate Transactions: April 19, 2024 The Recorder Real Estate Balance Announces Chair CoStar Group Real Estate Briefs | April 19 | News, Sports, Jobs Cape Coral Breeze Real Estate: Q1 2024 - Coronado Real Estate Market Update Coronado Times Newspaper Southeastern Wisconsin industrial real estate market softens in Q1 BizTimes Milwaukee Inside PROFILEconnect 'A Night at The Museum' Real Estate Impact Conference at the Coral Gables Museum PROFILE Miami Google's Strategic Job Cuts Reflect Ongoing Cost-Cutting Measures, Affecting Real Estate and Finance Departments Yahoo Finance Bronx real estate sales drop across the board, though spring market may be more active: report – Bronx Times Bronx Times S.F. housing market: Still very few homes, selling even faster San Francisco Chronicle 'A Man in Full,' starring Jeff Daniels as an Atlanta real estate mogul, dropping May 2 FOX 5 Atlanta Inside Savannah Homes: $6.475M Historic Monterey Square home Savannah Morning News Will It Be a Pricier Housing Market in Spring 2024? Norada Real Estate Investments Mixing real estate & renewable energy to help build greener world NoCamels - Israeli Innovation News Blackstone Real Estate Earnings up 15% in First Quarter The Real Deal Why you might not need a real-estate agent when buying a home Business Insider The Real Estate Top Performers share tips for buying or selling a house in today's market! WUSA9.com EquityMultiple Bullish on Industrial Real Estate Sector, Brings Opportunity to Individual Investors Newswire AI in real estate discussed during virtual forum Westfair Online WHO?! This Southern Utah Town Is A Real Estate Hot Spot! Cat Country 107.3 and 94.9 Documentary shows roots of segregation were planted in Chicago Tribune 'It was surprising.' Metro Detroit man caught up in real estate scam; here's how to protect yourself My TV20 Detroit Palm Beach home-sale median price up sharply, new Q1 reports show Palm Beach Daily News High Country Real Estate: First Quarter 2024 High Country Press Boise Real Estate Market Steady Amidst California's All-Time Low KIDO Talk Radio Millennials Are Coming for Your Golf Communities The Wall Street Journal Celebrity real estate agent Mauricio Umansky explains when housing prices will come down Fox Business ‘It doesn’t smell right.’ Michigan councilman linked to $69,000 marijuana real estate sale MLive.com Real estate mogul concerned how Americans will deal with squatters: ‘Something really bad is going to happen’ Fox Business Will Hilton Head real estate pricing rules change this summer? Here’s what’s in play Hilton Head Island Packet Tiny California home the size of a hotel room will sell for 'considerably' more than its $1.7M asking price New York Post Real estate: Buyer’s agents’ role in today’s real estate market Main Street Media of Tennessee A new real estate trend? Shopping malls converted into residential units in South Florida NBC 6 South Florida China home prices slumped in March as property crisis drags on Business Insider Fannie Mae, Freddie Mac clarify real estate commission rules National Mortgage News Retirees: Is it time to downsize, even in this real estate market? Effingham Daily News Who's Had a Harder Time Buying a Home: You or Your Parents? The New York Times Homes for Sale in Manhattan and Queens The New York Times Top residential real estate sales for April 1-5 in Sarasota, Siesta Key, Palmer Ranch, Osprey, Nokomis Your Observer |
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