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Check out our monthly Ask the Expert Q&A Sessions to grow your knowledge and understanding. Here’s a sample of real client questions and our special guests’ answers.
What are some possible risks I should look out for when considering taking a property 'subject to?” I would imagine you'd be working with some really motivated sellers, but is there a good way of working out an agreement with them? I was wondering if maybe getting a loan servicing company involved might help make everyone involved feel better about things. Thoughts?
Thank you for your question regarding buying "Subject to." I have bought lots of properties subject to the existing note. So, here's what you should watch for: (and by no means is this an exhaustive list, but here are some main points) Make sure the seller understands that the mortgage is remaining in their name until you sell the property. The "Due on Sale Clause" will be triggered.
However, in all of my experience, the lender does not want to call the note due. The lender simply wants to continue to receive their monthly payments on a timely basis. It's important for you to get an "Authorization to Release" signed by the seller so that you, your attorney, and any of your team members can speak to the seller's lender at any time in the future. Make sure you get all correspondence switched to your mailing address so that you receive all monthly bills and any notices. Very important you also get in writing a current payoff instruction letter from the lender good for 30 days so that you know exactly the payoff instruction amount. It will also show if there are any past due payments or attorney fees that the seller didn’t disclose.
How are you dealing with Dodd- Frank, for primary residences?
There are exceptions for one a year to sell and carry back owner financing or three a year if certain criteria is met. But this is only for seller financing, not financing an owner-occupant buying from someone else. I am trying to avoid these until the law is eased somewhat. If I needed to do something now, I would hire a mortgage loan originator (MLO).
How do pre-foreclosures work? How can I buy them?
A pre-foreclosure is a property where the borrower is behind on their payments and the lender has the right to auction the property to the highest bidder after due process is done correctly by the lender. The lender will then set an auction date which may be months or years in the future. You can contact the owner by letter, phone, or in person and offer to buy the house before the auction date. Be sure to get a "title search" done to see if any other liens or mortgages are against the property or owner as you would be responsible. Have this done before you enter into any contract to buy the property and always buy "title insurance". Also you must get true comps of the market value and an "estimate of repairs".
If you know what you are doing, it is a good way to buy a property at below market value.
What is the easiest and quickest way to perform due diligence on property that I cannot personally look at? Specifically:
type of neighborhood
value of property
condition of property
is property in a desirable school district?
Great question! I would recommend that you conduct the exact same due diligence regiment for an out of state property that you would conduct if the property was in your hometown. So, to determine the value of the property, you would simply hire an appraiser (or get a local broker price opinion to show you closed comparable sales).
To determine the condition of the property, you would hire a professional home inspector. Same thing you would do if you were buying a rental property on your own block, or a primary residence to live in. Remember, even if you could walk through and look at a property in your neighborhood, unless you are a professional home inspector, you would not be able to identify all the potential problems with the property that would be identified on a home inspection report.
So, even if you can see and touch and feel the property, I would encourage you to have the same due diligence regiment, using 3rd party professionals to evaluate these things for you, whether the property is in-state or out of state. And if it is out of state, that is often better as you won't be tempted to skip any of those steps by just looking at the property yourself.
Also, in terms of looking up school districts and that sort of thing, it is all online these days, so basic internet searches allow you to see school rankings pretty easily. One other online service I would recommend to you that tons of our clients use is RentRange.com. That service is able to tell you, down to the address level of the property you are looking at, what the fair market rent should be, what the local vacancy rate is, and which way the local trends are going in that particular location, with a remarkably high degree of accuracy.