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Buying Houses Subject To the Existing Mortgage

Buying Houses Subject To the Existing Mortgage

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 On today's podcast episode, I talk about buying houses subject to the existing mortgage. This investment strategy is also known as "assuming the mortgage" or buying "subject to". As prices have pulled back around 15% from the peak, many sellers are realizing that they will not be able to get their Zillow estimate if they sell their house. There are a lot of people who purchased houses 3 years ago when interest rates were as low as 2.5% or 3% (on a 30 year fixed rate mortgage). Today the rate is 6.5% which is more than double what the rate was just 3 years ago. This has created an opportunity with many motivated seller leads where sellers are calling us and trying to sell their house. As an example, let's look at one of the leads that called my office recently. This was a young couple who had purchased their house for $225,000 a few years ago. They had put down $25,000 and their original loan balance was $200,000. Their interest rate was 3%. The interest component on their 30 year mortgage was a monthly payment of $843. With taxes and insurance the payment was $1,443. This seller was trying to sell their house and had it listed on the MLS for $250,000. This is what Zillow said the house was worth. However the house had been listed for over 90 days and other than a few low ball offers from wholesalers, there was only one real legitimate offer for $225,000. You may be wondering how I got in touch with this seller. I reached this seller by mailing a postcard campaign to a list that was NOT motivated and was just a broad mailing to all of the 3 bedroom, 2 bathroom home owners in this specific city. Not all sellers that are motivated to sell are on a motivated seller list. There are many sellers who may be paying their mortgage payments on time, who are not in foreclosure and who appear to have no distress at all. But some of these sellers really want to sell their house. Their motivation to sell as soon as possible makes them a motivated seller. In this scenario, this young couple had moved to Florida from the Northeast during the pandemic when they could work from home. Now a few years later, they want to sell their house and move back home to the North East which is where they are from. Zillow says their house is worth $250,000. That is the amount that they listed their house for, but all they have received is a bunch of low ball offers at around $200,000. They also received one potential offer of $225,000 but their realtor was concerned the buyer would not qualify for a mortgage. I asked them why they don't lower the asking price on the MLS and they said that they were sick and tired of showing the property every weekend and just wanted it sold. They were reviewing that one offer that came in for $225,000 but they realized that after paying the commission and closing costs, they would not be making any money from the sale and would be walking away and simply paying off the loan. They were looking at a scenario of maybe netting only $5,000. Even worse, they did not think the buyer would qualify and they could not afford to pay for any repairs that would be required after the inspection. They had discussed this scenario and were trying to figure out how to get a better offer or a little more. That is where my postcard came in. And that is what prompted them to call me. Their mortgage payment was $1,443. If I were to be taking over their mortgage payment that is what I would be paying per month to the bank. Market rents in this area are around $2,000 per month. It's in a desirable area where there are many potential renters so it would be easy to find a tenant for $2,000. The house may even rent for $2,100 or $2,200 with some new paint and a cosmetic clean up. So the first question I asked them is "why don't you rent the house out"? This is a key question to ask because it puts the seller on a footing where they start wondering why you are not interested in their house. Why would you advise them to keep it instead of buying it yourself? This is a great question to ask a seller. Their answer was that they did not want to be landlords. I told them that there was no way I would be willing to pay $225,000 cash for this house. The only way I would possibly consider buying their house would be if I were taking over their mortgage payments. This is called buying a house "subject to the mortgage" or "assuming the mortgage". This is known in legal terms as a "quiet assumption" because you are not telling the bank that you are taking over the mortgage. My offer was $5k cash and I would take over their mortgage payments. This scenario is very common because anyone who purchased 3 years ago when interest rates were really low, is looking at a price decline of 15% from what they paid for their house. So they are finding that their house is not as easy to sell for what they originally wanted to get for it. The reason for this is because while prices have pulled back, interest rates have more than doubled ...
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