Volume 2, Number 4
Meeting Date: Sat 4/5/14
Topic: ‘Subject To’ Investing — A Passive Income Strategy
Presenter: Brian Fouts, Merrill Investments Group, LLC, Issaquah WA
Location: Shoreline Conference Center
Welcome to THE ‘AL’ REPORT. My name’s AL — Here’s my report.
A new record of 37 people attended including 12 new people! GONG!
* 4pm Seattle Investors Club mingling, and vital business networking
* 4:40pm Joe began with ‘Needs and Wants’. Each person shares what they ‘need or want’ with the idea that a solution matches a need. Items included needing an investor friendly lawyer, contractor, private funds, a project manager, more deals to rehab, buyers for wholesale deals. Some ‘matches’ were the law firm of Pucket and Redford, sources of private funds were mentioned, there were several contractors in the room.
AL explained the brass gong on the table. In the words of Than Merrill, CEO and founder of FortuneBuilders, “…we believe in ‘celebrating all wins’…” So I got for us a ‘Celebrate All Wins!’ gong. We encourage anyone sharing a ‘WIN’, any WIN, to ring the gong to celebrate! One person was close to completing the real estate license course. Another person closed on an arduous but lesson packed rehab sale…and made some money. Many other ‘WINS’ were shared and the gong rang to each of them. Come share a WIN in your life or business and ring the gong! Be sure to view and post WINS at www.fbwins.com.
* 5pm Presention: Mr. Brian Fouts. Investing in Subject To (the existing mortgage) Contracts — another tool to help monetize all leads.
Brian brought a 7 page handout with much more detail about this topic. This report is a summary.
‘Subject To’ scenarios are more common in areas such as Florida, Atlanta, etc. The typical situation that lends itself to this ‘subject to’ is a house worth less than the mortgage. About one in five are in this situation. Another scenario is where the mortgage is about 100% of the house value. Here a would be seller would have to pay many thousands in closing costs to sell their house, and many cannot do so. They could be a candidate for ‘subject to’.
Sellers in these situations often have limited choices, short sale, foreclosure, walk away from the property, or… selling ‘subject to’.
The nationwide median home price is about 150K. Seattle’s median price is about $250K making the house value higher than the mortgage might be. This is why Seattle does not have as many ‘subject to’ deals.
An advantage to this strategy is owning ‘paper’, notes, rather than owning property. This is one of several investing strategies along with rehabbing, wholesaling, lease options, etc.
In a ‘subject to’ arrangement, the seller keeps the mortgage in his name. The seller signs a new contract with a buyer, making the buyer responsible to make the payments. If the seller is in arrears, the buyer also brings the mortgage current. The seller vacates the house, the buyer rehabs it if needed, and finds a new buyer. Then the seller is no longer responsible to make payments to the mortgage, their credit is saved, the buyer makes a profit by either selling the house or rents it at a positive cash flow, and the seller doesn’t have to bring money to the table to sell their house. There are variations but this is the main scenario.
The banks’ “due on sale clause” could be invoked, but it rarely has been. The reason why relates to the bank costs of from 40K to 80K per foreclosure. It isn’t to their advantage to foreclose or to call in the loan. Banks often sell blocks of defaulted loans to hedge funds able to buy them all at once.
One possible advantage that came from the Dodd-Frank bill is that if the ‘subject to’ loan performs for 12 months after a buyer takes it over, the seller can get a new loan, and the lender cannot use the performing loan when calculating their Dept to Income ratio.
The buyer/investor must fully understand the documents used in a subject to deal. Rather than spending a year or more studying this often complex topic, we can defer to ‘our partner’, Brian Fouts, and say to the seller something like…’Mr Seller, we have a program for your situation. I can ask my partner to contact you if you’d like to learn more about it.’ Brian will take it from there.
Exit strategies include rent/lease to own, assignment, selling traditionally, owner financing.
Approximately 80% of potential buyers cannot afford a home loan. This means that there are huge numbers of buyers for ‘subject to’ homes using seller financing. Seller pricing is about 7% to 8% markup, 3% above prime rate.
RMLO means Residential Mortgage Lien Originator. These people help the end buyer to purchase ‘subject to’ homes by qualifying the buyer per Dodd-Frank Act.
Brian also brought a handout titled Performance Assets Fund, LLC. He is available to discuss this investment opportunity as well.
For more detailed treatment of this often confusing topic, contact Brian Fouts:
Brian Fouts, Merrill Investments Group, LLC
- Your Seattle Investing Group is growing! Meetings began over a year ago by local FortuneBuilders Mastery students, AND we gladly include other like-minded folks interested in learning/doing what we do. These are not sales meetings — nobody tries to get you to join anything…except maybe their buyers list. (Put me on yours!) These are networking and learning events where we share, ask questions, team up, make deals happen, etc. Invite others and come join us!
- Meetings are the first Saturday of the month, 4pm to 6pm, unless otherwise announced. Watch for Joe’s emails. Other news is posted on our exclusive Seattle Investors Club Facebook page. Ask Joe for the link.
- Do you have ideas for a meeting topic or format? Please contact Julie or Joe. Perhaps you know an expert to invite. Perhaps you ARE an expert! We solicit suggestions.
Many thanks to Joe and Julie for their diligence.
And thanks to everyone. We look forward to knowing and working with you!
Disclaimer: Though every effort is made to report accurately, the inadvertent error may occur. Feel free to let me know if you see any goofs. Thank you. AF [email protected]