Guest article by Augie Byllott:
I am often asked the best way to acquire investment properties. My answer is usually, “It depends…” Those of you who know me, know I have a sense of humor, but this answer is not intended to be either evasive or funny. My favorite acquisition technique is with owner financing, but that usually requires a free and clear property. How many of those free and clear properties come along with a motivated seller attached? Certainly there aren’t as many as I’d like. Then there’s buying with cash…I’d rather save that resource for the killer deals that have to be closed quickly in exchange for a massive profit.
For houses with an existing mortgage, my favorite way is to purchase the property using the T.O.P.S. method (Taking Over Payments System) also known as “buying subject to” the existing mortgage. The general problem with the term “subject to” is that most people just don’t understand it. T.O.P.S.is so simple a child can understand it!
It’s a great way to buy pretty houses without spending a pretty penny. Simply put, I step into the seller’s position and begin making their payments at an agreed upon date. The ownership of the property is transferred to me or my entity and the mortgage remains in the seller’s name until I, or more typically my tenant/buyer, pays it off when they obtain new financing and purchase the home.
Why is this a good deal for the seller, you ask? The first thing you have to remember is that successful investors only deal with motivated sellers! This is a good deal for the seller because I can close within a matter of days, as there’s no lengthy loan qualification and approval process. Additionally, I can typically pay them a higher price because I don’t have any financing costs.
Why is this a good deal for the bank? In many cases, the seller is either in default or soon will be. Banks make money by taking in deposits at one rate and lending them out at a higher rate; simply, they earn a spread on their depositor’s money.
When a loan, which is an asset, becomes delinquent, the lender’s income stream is interrupted. When their assets become non-performing, the lender is required by the Fed to increase their reserves. These reserves reduce the amount of capital available for new loans. So, does the bank prefer payments or would they rather foreclose and take the house back? The easy answer: with foreclosure costs running at about $40,000 per house; banks want payments, not houses!
Finally, why is it good for the investor? First, we have no funding cost. Second, since the loan is not in our name it doesn’t appear on our credit report. Third, our creditworthiness doesn’t come into play because we are not qualifying for a new loan. But the best reason is that “subject to” transactions offer you the broadest array of exit strategies!
Additionally, even if you have a super credit score, most lenders will limit you to a maximum of 4 loans (if you can get them) and you’ll be required to make a substantial down payment (25 – 30%). If the loans aren’t in your name and you don’t have to qualify for them, just how many of these will you be limited to? That’s right, no limit! I met an investor from Ohio who has over 200 properties; not a single mortgage was in his own name. That’s quite a retirement portfolio he’s built.
My preference is to be a “transaction engineer” rather than restrict my business to any one strategy, technique or area of investing. I love finding profitable opportunities in all types of transactions from pre-foreclosures to renovation projects or owner financing, to split funding. But a core element of my acquisitions strategy is using “T.O.P.S.” transactions and it should be a critical part of yours.
By the way, did you know that you can do T.O.P.S. transactions for buying real estate with your self-directed IRA?
Augie Byllott helps people buy and sell homes and investment properties in all price ranges without using lots of cash or credit. He is a full time real estate investor, speaker and coach with Personal Action Coaching & Training. He is also a founding member of Common Wealth Trust Services, LLC a land trust service provider.
