University of Real Estate Letter Vol 9 No 4

Buying Property "subject to" the debt is one of the best techniques for safely building wealth. But there has always been a lot of confusion sur-rounding this technique. Part of the problem revolves around a basic un-derstanding of the legal and liability issues involved with this approach. Yet, having this method of buying at your fingertips can open up a whole new world of opportunity for you. Knowing when and where to use this strategy will add yet another way for you to purchase property while add-ing profitability to your business. Instead of going to the bank to borrow, you'll be going to make deposits.

Dear Friend and Subscriber,

Let's face it. There are literally thousands of ways to buy Real Estate.

The problem is, knowing a thousand ways to buy does you absolutely no good if you don't know when to apply each of the different ways. In fact, I would dare say, some of the most successful Inves-tors I know only apply a handful of techniques to buy Real Estate. Some only use one or two.

Learning how to buy property "subject to" is, in my opinion, one of the fundamental ways anyone can use to purchase real estate. Anyone, that is, who will take the time to educate themselves on the power and proper use of this technique.

Using this method can open many doors for you. It can overcome bad credit. It can overcome fi-nancing problems. It can overcome liability issues. It can allow you to purchase nicer homes with fa-vorable financing. It can allow you the opportunity to solve more problems. It can allow you a way of saying "Yes" when others are forced to say "No".

Quite frankly, there is a lot of misinformation and misunderstanding surrounding this valuable method of purchasing Real Estate. It's time to clear the air.

It's A Matter Of Liability

Let's start by going back to the basics. When a Buyer purchases a home the conventional way they borrow the money to buy the property from a Mortgage Lender. At the closing, they not only purchase property, but they also borrow the money to satisfy the Sellers price.

In other words, there are two closings in one. One closing is the Mortgage Loan closing. The second closing is the Real Estate closing.

The Mortgage Loan closing consists of the Borrower giving a Promissory Note and a Mort-gage/Deed of Trust to the Lender in return for the funds necessary to purchase the property. The Prom-issory Note is evidence of the Debt and is signed by the Borrower. The Mortgage/Deed of Trust is the security agreement and is also signed by the Borrower. The Mortgage/Deed of Trust secures "the promise" to pay with the property.

The Promissory Note is a legally binding agreement for repayment of the debt. Signing this agree-ment creates a legal obligation. It creates a legal liability. But, what does that mean.

Basically, what this mean is, in the event of default, the Lender can look to the property pledged as security in the Mortgage/Deed of Trust for repayment of this debt via foreclosure. But that's not all. The Lender has other options available. It could abandon the Mortgage/Deed of Trust (security agree-ment) and go after the Borrower personally. In effect, this puts all of the Borrowers assets at risk. Or, the Lender could foreclose on the property and if they were unable to obtain the full amount owed at the sale, they could go after the Borrower for any deficiency.

Does this ever happen?

Yes, it does! But the more important question you should always ask yourself is... Could it happen? You see, it makes absolutely no difference if it has ever happened if you have given them the option to make it happen. Lenders may not have gone after anybody personally in the history of the world, but if you give them this option then they can always use it at their discretion.

To boil it all down, when you sign a Promissory Note you have created a Legal Liability. This Legal Liability can put all of your other assets at risk!

So... every time you sign personally on a Promissory Note with a Lender to purchase another piece of property, you are in effect, risking everything else you own to acquire the new property. That is an important enough sentence to go back and read again.

That's the process.

That's the way 99.9% of Americans purchase their homes. It's the norm. The default.

It's called Personal Liability. It is a Legal Obligation. It can be enforced against not only the prop-erty being purchased, but against everything else you own.

Release of Liability

Once upon a time there were these things called "Assumable Mortgages". In fact, they still exist. FHA had its own version of the "Assumable Mortgage". One of these was called a "Non-Qualifying Assumption".

Here's how they work. When a Seller wants to sell his house, all he has to do is find a buyer and they can take over his loan payments without qualifying. There's an old joke that says the only thing they need to do to qualify is fog up a mirror. In other words, they need a pulse, that's it!

The Buyer would sign papers with the Lender saying they "assume and agreed to pay" the balance of the loan. Remember those words... "assume and agreed to pay" because that's how you can inad-vertently take on personal liability without much thought.

A funny thing happens here. The new Buyer has just "assumed and agreed to pay" this obligation thus putting him in the chain of liability. Yet, the Seller never receives a release of liability. And guess what? Nobody ever informs the Seller of this fact.

As a result, not only is the new buyer held responsible for repayment of the debt, but the Seller re-tains contingent liability as well. But they would never do that, would they?

Buying "Subject To"

The opposite of "assuming and agreeing to pay" is "subject to". You've all seen this language be-fore if you have ever purchase property. Generally, down towards the bottom of your deed there is lan-guage to the effect that you are taking title to the property "subject to" any outstanding liens of record, oil and gas rights, Ad Valorem taxes, covenants, restrictions or other matters of record.

What this means is... there are matters of public record affecting this property such as Ad Valorem Taxes. But, nobody can come after you personally for these. The remedy for non-payment or other breach of these items is solely the property.

You want to put yourself in the exact same position when you are taking over someone else's pay-ments. You don't want to "assume and agree to pay" (creating personal liability) but you want to take title "subject to" the existing debts. Remember, this does not release the Seller or Original Borrower from liability. For that to happen, not only would you have to qualify to assume the debt, but they would also have to request a release of liability. In today's world, it would be much easier and probably more beneficial to originate a new loan.

Let's Talk Deeds For A Second

It's important to note the default deed in use today for the transfer of Real Estate where existing fi-nancing is involved is the Warranty Deed AKA the Assumption Warranty Deed. Yet another tricky place you can assume liability.

You could do everything else right, but if you accept a Warranty Deed with the "assume and agree to pay" language, you have just taken on legal liability. You may not have obligated yourself to the Mortgage holder, but you have certainly obligated yourself to the Seller. This is another excellent rea-son to control all of the paperwork in a transaction. You can either do it yourself, or direct a closing agent to do it the way you want it done. But, get it done right!

A Quit Claim Deed by its very nature works well here. Why? Because there are no warranties what-soever with a QCD. You get whatever quality of title the Seller has. The Sellers aren't even warranting they own anything. So... when you accept a QCD, you are taking title "subject to" any and all out-standing liens and encumbrances. There are those words "subject to" again. Use them!

Of course the first place to address this issue is in your Purchase Contract. Make sure you agree to take title "subject to" any existing encumbrances. You could also agree to accept a Quit Claim Deed as the document of transference. If this is the case, make sure you get clear title as is evidenced by an Opinion of Title on which Title Insurance can be written. Then, buy the Title Insurance.

Selling The Concept

The first question I'm always asked is... Who would do this? Who would sell you their property and not make you assume the liability? Answer: Not everyone! But there are those who will.

Ever had a call from someone who just lost their job or is in the throws of divorce? Transferred? Or purchased another house and was tired of making payments on two houses? Or how about someone who just owed more on their house than you were willing to pay... but the loan made sense? Ever thought about how a Home Owner can obtain the best possible financing in Real Estate (with the ex-ception of those of us who fully expect to sign up a few zero interest deals over the course of the year)?

There's room in everyone's portfolio for highly leveraged Single Family Homes if they are newer, nicer homes with favorable financing where the Tenants can afford the debt. Many of these can be ob-tained with little, if any, money down. Consider them a FREE house. But, they have to make sense.

There are two schools of thought about how to sell this concept to a Home Owner. They are 1) ex-plain everything, or 2) explain nothing. I believe in full disclosure, but sometimes we can actually scare someone right out of doing business with us. As a result, I prefer to harp on the benefits to them of sell-ing and not go into great detail about the liability issue. No doubt this has room for abuse. But you have to remember, while you are not taking on any legal liability, you do have a moral responsibility to make the payments. Don't do these deals if you plan on just collecting rents and never making pay-ments. That's a short sighted scam that will have you picking cotton at Parchman Farm.

Where this works great is when you get the call from someone who is literally begging you to buy their house. Just take over the payments and you can have it. Highly leveraged. They have little or no equity they could realize even on a full retail sale. They just want the thorn out of their foot.

Now, you have a way of buying the nicer, newer homes... financing in place. Just another way to say "yes' when others are saying "no"! - SB

NOTHING DOWN

NOTHING LEFT

Buying a house with nothing down isn't difficult at all. Es-pecially when you are buying "subject to" the existing fi-nancing. In fact, you will of-ten run into people who will just give you their house. That's right. Take over the payments and it's yours. Who wouldn't do that? Well, I might not. And you might not either. Why? Simply put, how the deal performs is much more important than whether you had to put any money up to purchase the property. Will the Tenants be able to support the payments? Or, do you have a Buyer waiting eagerly in the wings? Or, will you have to feed this puppy over time? Some of these can grow into alligators if you're not careful. It really all comes down to the num-bers. If it has a favorable loan in place, it just might make sense. But, it doesn't make sense just because it's noth-ing down. And it surely wouldn't make sense if it was nothing down and you as-sumed the liability on the ex-isting financing (highly lev-eraged). This could be a very bad move. It could negatively impact your financial health... and I do mean fast. You still have to ask yourself how you are going to make money, whether you are buy-ing for nothing down, paying "All Cash" or any combina-tion in between. You just can't get away from the fact that a property has to make economic sense, or you just shouldn't own it. So don't be mesmerized by the Nothing Down opportunities out there. They could lead to you hav-ing Nothing Left. Run the numbers and make sure the deal makes economic sense.

HOW TO PROFIT

FROM "SUBJECT TO" TRANSACTIONS

There are several ways you can profit from these types of highly leveraged transactions. In fact, they don't really have to be highly leveraged at all. Occasionally, you'll run into someone who just wants to move on and doesn't want to fool with harvesting their full equity. These deals can sometimes be had for the price of walking money. If you have a few bucks stashed away for repairs and are will-ing to invest those hard earned dollars, then you can acquire some great keepers with rapidly amortizing loans in place. For example, you might be able to pick up a house where the owner has been paying on a 30 year loan for 10-15 years. A $50,000 30 year loan would have am-ortized down to $44,300 in 10 years @8.5% or $39,000 after 15 years. Not a whole lot of amortization in the first half of that loan. This might have been a house the Own-ers got into for a small down payment. Considering re-pairs, sales costs and market time, the Sellers might look on this as a pretty good deal to take a couple thousand dollars and be on there way. No muss! No fuss! You as the Buyer pick up a house that you will probably have to put a few bucks into... but you also get the benefit of a rapidly amortizing loan. Per-sonally, I like these types of transactions. Each year, I feel better and better about this kind of purchase because more and more of each pay-ment is going to principal and less and less to interest. What else can we do with these properties we buy "subject to"? The obvious choice would be to keep them and rent them out, letting our ten-ants pay for them. With the low interest rates of the last several years, this can work very well for you. You could also sell these types of prop-erties on Lease Options. There are many people who have pretty good incomes but just can't qualify for a Home Loan. Who might these peo-ple be? Well, how about me! Most of us who are self-employed would have a hard, if not impossible time quali-fying for mortgage financing. We just don't fit the mold. I heard Pete Fortunato say the local Chamber of Commerce is a good place to find these types of people. Not a bad idea. You might be able to actually sell these types of properties for high retail if financing is in place. You could take your equity in cash or part cash and part pa-per. In fact, couldn't you ac-tually wrap the underlying financing and pick up a half point of so for your efforts? I think so. Bottom line here is it just depends on what your goals and objectives are. Per-sonally, I think there is a lot of opportunity here for the "Buy and Hold" strategy. Af-ter all, where else can you get the long term financing at fa-vorable rates and zero points.

SILVER MEMBERSHIP EXPLAINED!

If you are a sub-scriber to this news-letter and didn't just pick it up off somebody else's desk or worse yet steal it out of their mailbox, then you are a Silver Member of the Britton Inner Circle. No longer are you just a subscriber. No, no! You are entitled to many more benefits, such as the Tele-Classes listed later in this letter. This isn't something you have to pay extra for; it's another valuable benefit of being a subscriber. In fact, there is an-other way of looking at this. You bought a Silver Membership and the Newsletter is just one of the bene-fits you receive with your membership. Now you might be asking yourself a question like... so what? Well, here's what. In the future, I want to also offer a Gold Membership for those who want to become more serious about their investment ca-reers. Obviously, there would be more services and support to go along with this level of membership, as well as, a higher price tag. It wouldn't be for eve-rybody, but a lot of you have asked for more services and support and this is a way I see fulfilling those desires. By the way, I'm currently beta testing this concept with those who attended my Real Estate Alchemy Semi-nar in March. Hope-fully, by mid-year, I'll have the rough edges knocked off this concept and be able to provide those of you who demand it, a valuable product which will produce a myriad of benefits to you. Taking this con-cept to the ultimate extreme, I would hope to have a Platinum Membership available in approximately a year. This membership level would be akin to Napoleon Hill's Master Mind concept. It would be by invi-tation only and would only contain a dozen members from all across the country. I envision this group meeting 3-4 times a year in various loca-tions for a 2 day Mastermind meeting. So, you are a Silver Member now. In the future, you will be able to upgrade to a Gold Membership if you choose to take your business to the next level. Ulti-mately, a Platinum Membership will be offered to those Gold Members who are actu-ally putting into practice the philoso-phy and concepts I teach. These members will not only be se-rious students who have achieved their own level of success, but they must also be willing to develop and test new ideas, as well as, share the results with their peers. This is an ex-citing concept to me and I believe, some-thing that could re-sult in millions and millions of dollars worth of profits in a very short time.

Important

Announcement

The Tele-classes I prom-ised you as an added benefit of your Silver Membership in the Britton Inner Circle have begun. Our first class was held last night. Attendance was light but we covered some very valuable ground. Those who attended got extra time because of the small initial class size. I anticipate it will take most people a while to adjust their schedules before at-tendance picks up. So, those of you who are savvy enough to stay on top of this schedule will benefit greatly. My sug-gestion would be to write the dates and times down in your Daytimer or what-ever system you use to keep track of appoint-ments and such. My plans are to develop a list of classes to address your needs. The "Getting Started Right" class will repeat more than any other because I think the fundamentals are so im-portant to success in this business (or any other venture for that matter.) Vince Lombardi built a dynasty on the very same principle as did John Wooten at U.C.L.A. Simply getting back to the fun-damentals. Stressing the fundamentals. There isn't one among us who wouldn't benefit from this! Anyway... the classes are rolling. Take advantage of them. You can't beat the cost or the dress code. Class size is limited. Call in 5 minutes early to as-sure yourself a seat. I'll be adding more topics as we go. Let me know what you would find valuable. Also adding an open call in day to answer your questions as well. Feel free to fax in any question you would like to have answered. Fax number: 601-977-0988

TELE-CLASS SCHEDULE

(First Come, First Served - Clothing Optional)

Date: May 7, 2002

Time: 7:00 PM CDT

Title: "Everything You Ever Wanted To Know About Simul-taneous Closings but Didn't Know Who To Ask!"

Call: 702-851-3330

Enter Code: 050702

Date: May 21, 2002

Time: 7:00 PM CDT

Title: "Getting Started Right

In Real Estate Investing!"

Call: 702-851-3330

Enter Code: 052102

Date: June 4, 2002

Time: 7:00 PM CDT

Title: "Rehabbing Homes for Retail - Maximum Profits, Minimum Time"

Call: 702-851-3330

Enter Code: 060402

BOOK RECOMMENDATION

I've been going back and re-reading some of the classic self help books lately. One of the two leading books in this field is Maxwell Maltz's in-credible book Psycho-Cybernetics. From a market-ing perspective, I think this book could have a better title, but alas it has stood the test of time. Maltz was actually a plastic surgeon who made some remarkable discoveries concerning how our self-image dramatically influ-ences everything we do. I hand wrote the date 3/30/81 in my original copy of this book, but I can remember us-ing Maltz's methods to im-prove my free throw shooting when I was playing basket-ball in high school. Recently, Dan Kennedy edited and up-dated this book, improving it greatly and making it even more applicable today. Even if you have a copy of the original like I do, I would en-courage you to pick up a copy of The New Psycho-Cybernetics by Maltz and Kennedy. This isn't a Real Estate book, but it's just too important to pass up. I don't care whether you are inter-ested in making more money, losing weight, cutting strokes off of your golf game or just becoming better looking, this book can help you. In fact, the information in this book may just be the "missing link" for a lot of people. Get a copy of the new updated version and read it right away. Those who do will outpace those who don't. It's as simple as that!

(By now I'm sure you are aware of the fact that I'm an Amazon.com freak. I buy most all of my books there. And why not? I can order online right now and have the book in a matter of days and usually at a lower cost than I can buy lo-cally, including shipping. If nothing else, it's good time management. SB)

The Back Page

Due-On-Sale Issues!

I'm sure by now you are asking yourself about the issues surrounding the "Due-On-Sale" clause found in most mortgages today.

We've discussed this before, but it's worth visit-ing again. There are a lot of different ways to deal with this issue.

If you are planning on utilizing the "subject to" approach to buying Real Estate, then you need to come to grips with this issue. You have to decide up front what your attitude and approach is to handling the problems surrounding taking over payments on loans that contain "Due-On Sale" clauses.

First thing you should know is... there isn't any due-on-sale jail. They don't lock you up for violat-ing this clause in a mortgage. The only remedy af-forded the Lender when property is transferred with the presence of this type of clause in the Mortgage is to accelerate the debt. In other words, they have the option of calling the loan due and demanding their money in full (acceleration). Foreclosure would be the ultimate remedy if the loan was not paid off when demanded.

So... now you know the risk!

What this means is you would either have to scrape up the money to pay-off the loan... or... call their bluff and let it go to foreclosure.

I can almost imagine what your reaction is to the last option. FORECLOSURE? Hey, it's not all bad. You could actually attend the sale and bid on your own property. If somebody wanted it more than you did, let them have it. After all, any overage will be coming back to you as title holder. But, let's talk odds here for a minute. Let's think rationally for a change.

Interest rates today are lower than they have been in many, many years. There is a good chance any loan you take over will have a somewhat higher rate than is available today. At the very least, the rate will be comparable. The question then be-comes... what's the advantage to the Mortgage Holder in accelerating the debt?

Plus... if you make your payments on or before they are due... the loan is a good performing asset. Why screw it up? What's the benefit? In light of the recent dot.com and stock market debacle, the Mort-gage Lenders have bigger fish to fry. They have their own problems.

Now that's not to say the Loan Servicing Agent won't give you a hard time - because they will. My attitude is I don't care if they get upset. Have an ul-cer. I really don't give a rip. Call it a bad attitude or call it whatever you like. They don't really have any leverage on me. So take a hike. Don't tell me what you are going to do... do it... or sit down and shut up! It's actually a lot of fun.

The truth is... I always pay my payments. I keep the insurance current. Pay the taxes. Keep the prop-erty up. No harm, no foul. Sure, there are many ways to disguise the transfer and confuse the ownership. But in the final analysis it's my attitude that makes it work. I'm a good risk. I just don't want to play their game. But it is a decision you need to make for yourself. How will you handle it?