“Subject To” – A Little Known Funding Method that Self-Directed IRA Investors Are UsingPosted on February 28, 2014 by
You and/or your client have found real estate to purchase. The inspections go beautifully and then a giant road block shows up. What’s the road block? Your client wants to purchase it with their Self-Directed IRA and their IRA can’t qualify for a non-recourse loan because it doesn’t have the cash reserves for the 35% down payment the non-recourse lender is requiring.
Self-Directed IRA investors have a technique they call “Subject To” that can solve this funding problem. The “Subject To” loan qualifies as a non-recourse loan and can be used to purchase real estate within a Self-Directed IRA. It should be noted that the “Subject To” method can be used for deals whether the property is being purchased by an individual or by their IRA.
“Subject To” defined
Subject To means “Subject To the existing mortgage on the property.” Put simply, the owner of the property transfers the deed to the property into the buyer’s name (or the name of the buyer’s Self-Directed IRA) and the buyer (or their Self-Directed IRA) is responsible for making the payments on the seller’s existing mortgage.
Whose name is the mortgage in?
The mortgage remains in the name of the seller. The “Subject To” agreement is between the seller and the buyer. There are no closing fees and the loan remains in the name of the seller while the title is transferred to the buyer.
Why would any seller agree to this?
There are many reasons why a seller would agree to this. The general theme is that they want to close quickly and this allows them to close in as little as a day. The reasons they might want to close quickly vary and can include divorce, job transfer, military transfer, debt relief (perhaps they already purchased their new home and need relief from the debt of two mortgages), etcetera.
What’s in it for the buyer?
This is a win-win for the buyer. First, the real estate is immediately deeded to them. Second, the loan is not in their name…so they don’t have to worry about credit checks, closing fees, or 20% to 30% down payments. Third, the buyer is immediately in ownership of the property so they can advertise it for rent and/or advertise it for sale.
Perform due diligence…
It is very important to perform the proper due diligence on the real estate you are purchasing. Remember, you and/or your Self-Directed IRA are taking ownership of this real estate and you need to make sure that all the proper tests are completed and that a title search is performed.
Consult with professionals…
A critical component in making this a successful deal is to consult with your professionals to make sure that the appropriate agreement is written up with terms that protect your interests and with terms that allow you to do what you are planning to with the real estate (i.e. rent it, sell it, etc.).
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