I frequently talk with investors about a strategy called buying property Sub2. This is short for buying property “subject to the existing financing�. This simply means that you get title to the property deeded to you and take over the payments on the existing loan. So you legally own the property but you don’t have to get your own loan. You just start making payments on the seller’s existing loan.
At some point in my discussions about this strategy I hear the comment or question “No one would just give someone else their home� or “Why would someone just give someone else their property for nothing�?
There are numerous answers to these questions with the most forthright one being that the owners have no other option. The bank is bearing down on them, they’ve been unable to sell or refinance the property and they are going to lose it in a foreclosure proceeding. Selling the property Sub2 will at least prevent the foreclosure and gets someone else paying the mortgage.
As investors, we need to be careful when taking over a property and its payment. We want to make sure it is a good deal, the payment we are taking on is manageable and we have a profitable exit strategy.
The note below taken from The Economist magazine validates the fact that many sellers are willing to simply walk-away from their homes.
Some Home Owners Just Walk Away
As prices drop, more home owners who bought at the top of the market are mailing their keys to the lender and walking away. In some circles, it’s called “jingle mail.�
For a fee, Web sites like YouWalkAway.com will advise home owners on the process. Because the legal costs are high, it is unlikely that a mortgage firm will chase those who walk away, although the law allows it.
In past downturns, few people have walked away from their homes, but the situation is different this time, some say. Many of the borrowers had high initial loan-to-value ratios. As home prices have dropped, these buyers are deep in the hole and don’t want to pay for properties with negative equity.
“It may not be a big thing yet, and hopefully it won’t be,” says David Berson, chief economist for mortgage insurer PMI Mortgage Group Inc., of Walnut Creek, Calif. But if it turns out to be a significant trend, he says, it means that “delinquencies and defaults could be higher than the industry is estimating.”
Source: The Economist (03/01/08)
Posted by Carter Brown
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