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 from 3% to 6.5%. The monthly mortgage payments don't make sense to buyers with interest rates at these levels. So there are less buyers, and sellers are having a harder time selling. 

One interesting point is that 3 years ago people asked me "why would anyone sell when they have such a low payment"? Why wouldn't they just keep the house to keep that low interest rate locked in? The answer is because people sell when they need to sell. People sell because they want to move. People sell because they can't afford the mortgage payments because they lost their job. People sell for many different reasons.

So this couple wanted to sell their house and  move back to the North East. 

If I offer them $5,000 cash and I take over their $200,000 loan, my cost on the house is $205,000. If it is worth $250,000 that would be $45,000 of equity that I would be getting.

If I rent out the house, I would make $600 a month in cash flow. That is $7,200 per year on a $5,000 investment. That's not a bad rate of return. If I paint the interior and brighten up the house, I may be able to even get a little more for rent and my cash flow could be $700 or $800 per month. 

If they had multiple offers above asking price they would not be thinking about accepting my offer. But the problem for them, is that they have no offers other than the 225k offer and even that is not certain because the buyer may not qualify for a mortgage. 

So they are seriously considering my offer. You can see that the market has changed. Buyers are now skittish and very reluctant to buy. In fact, there are now more sellers than buyers so the market has turned into a buyers market. Buyers are reluctant to buy for a number of reasons. The first reason is because they see that prices have come down, and conventional wisdom is that prices will continue to come down. I don't disagree with this logic (for now) as inventory is increasing it makes sense that prices would come down. If interest rates stay where they are, it is understandable that there will be fewer buyers. The second reason that buyers are hesitant to buy is because prices have increased by more than 50% in the last few years. Buyers have sticker shock at how high prices are relative to where they were just a few years ago.

Finally, the number one reason why buyers are reluctant to buy is because when they go to their mortgage broker and price out a loan, they are effectively needing to pay 50% more to buy a house with a mortgage that is double the interest rate of what it was before. To put that into perspective a $200,000 mortgage at 6.5% is $1,264 per month in interest versus $843 per month in interest. That is 50% more per month in interest. Considering that property taxes and insurance have gone up dramatically too you can see how this creates an affordability issue. Even if the buyer is willing to pay, will the mortgage company approve the borrower? Will their debt to income ratio be in line? What if the buyer has just okay credit and their mortgage rate is 7.5%? Now their payment with taxes and insurance is over $2,000 and they are thinking they would rather just rent.    

The net result is that the buyer looks at that mortgage payment with taxes and insurance and concludes that they are better off renting. Sellers are slowly starting to realize that their house may not be worth what Zillow says it is worth. Or to put it more accurately, buyers are no longer willing to pay that amount. That is why prices are declining. That is why you see so many price cuts on the MLS. There are now more sellers than buyers and it's becoming more and more difficult to sell. I anticipate that this will be the case for the rest of this year and going into next year too. As prices come down, I anticipate more foreclosures too. Many of these foreclosures will end up as bank owned properties. 

So in this environment, where sellers may have a very low interest rate mortgage, and are wanting to sell but are not able to, you may be able to buy their house for substantially less than what they paid by simply buying the house and assuming their mortgage. Buying houses subject to is a very valuable strategy in today's market. If I can get the seller to agree to sell me their house with just $5,000 down then I could buy a $250,000 asset with just $5,000 down. This strategy allows me to buy multiple properties with very little money down. If the seller is really motivated, they may even accept an offer where I give them no money down at all and just take over the mortgage payments. In that scenario I would be buying with no money down.

If you are looking to buy rental properties, and you are looking to buy with no money down (or very little money down) then buying houses subject to is a very powerful strategy for you to learn and ad