The Pitfalls of Wholesaling Subject to Deals
Wholesaling ‘subject to’ deals can be a great creative way to leverage more real estate without ever having to take out a new bank loan, but what are the pitfalls waiting for new real estate investors and are there any better alternatives?
For those new to wholesaling subject to deals, this means buying or at least taking control of a property subject to the current financing in place. This saves on the hassle of applying for a new mortgage loan or the expense and time drain that can bring. Obviously this offers incredible leverage, the ability to do more deals at once, and faster momentum and if the terms of the current mortgage are good can help boost cash flow.
So what could possibly be bad about wholesaling subject to deals?
5 factors to consider:
1. Expense to Reinstate
Considering how delinquent many homeowners are today, just because a seller is motivated and willing to walk away without a penny doesn’t mean they will or the deal will last unless the loan is reinstated. This can often require thousands of dollars. This can sometimes be negotiated down or a loan modification could be arranged but first ask if it is the best use of funds before signing that check.
2. All Owners in On Board
It is especially important for real estate investors to make sure that all owners or those with potential claims to ownership are on board with this type of deal. If a spouse or sibling is left off they could cause a stink later.
3. Due on Sale Clause
Of course these types of transfers do technically trip the ‘due on sale’ clause in most mortgage loans. This means that when the bank finds out they can call the entire loan due immediately. Obviously it might not happen and could take years for the bank to foreclose even if they wanted to but it should be kept in mind, especially if any money if being put into the deal.
4. Other Liens
Remember that mortgages and other potential owners aren’t the extent of possible ‘clouds’ on title. Make sure you are aware of all other liens including mechanic, code enforcement and association liens before signing on the line.
5. Off the Hook?
Remember that while you may not be technically on the hook for paying the mortgage in the bank’s eyes that doesn’t mean you are entirely off the hook if things go wrong either. If you or another end buyer start missing payments and allow the property to slip back into foreclosure you can bet you’ll hear about it from those whose credit it is affecting and you had better make sure your books are in order and can’t be accused of any type of fraud.
3 Alternatives to Wholesaling Subject to Deals
Consider these three options when looking at subject to deals:
- Taking control of the property with a lease option
- Buying the property as a short sale
- Buying the mortgage note at a discount
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