Buying Deeds: A Guide for Real Estate Investors
Buying deeds is a strategy that involves purchasing the legal rights to a property from the owner, without taking over the mortgage or the title. This can be a lucrative way to invest in real estate, as you can collect rent from the tenants, sell the property at a profit, or negotiate with the lender to reduce the debt.
However, buying deeds also comes with some risks and challenges. You need to do your due diligence before buying a deed, as you may inherit liens, taxes, or other liabilities attached to the property. You also need to have a clear exit strategy, as you may face foreclosure if the owner defaults on the mortgage or the lender refuses to cooperate with you.
In this article, we will explain how buying deeds works, what are the benefits and drawbacks of this strategy, and what are some tips and best practices for buying deeds successfully.
How Buying Deeds Works
Buying deeds is also known as buying subject to, buying sub2, or buying the beneficial interest. It is different from buying a property outright or buying a mortgage note. When you buy a deed, you are essentially buying the owner’s equity in the property, which is the difference between the market value and the outstanding debt.
To buy a deed, you need to find a motivated seller who is willing to sell their deed for less than what they owe on the mortgage. This can be someone who is facing financial hardship, divorce, relocation, or foreclosure. You also need to find out how much is owed on the mortgage, what are the terms and conditions of the loan, and what are the current market value and rental income of the property.
Once you have agreed on a price with the seller, you need to sign a purchase agreement and a deed transfer document. The purchase agreement will outline the terms of the sale, such as the purchase price, closing date, and contingencies. The deed transfer document will transfer the ownership of the property from the seller to you. You will also need to pay any closing costs and fees associated with the transaction.
After you have bought the deed, you will have the legal right to possess and control the property. However, you will not have the title or the mortgage in your name. The original owner will remain on the title and on the loan documents. This means that you will not be liable for the mortgage payments or any other obligations related to the property. However, it also means that you will not have any legal recourse if the owner stops paying the mortgage or violates any other terms of the loan.
The Benefits of Buying Deeds
Buying deeds can offer several advantages for real estate investors, such as:
- Low entry cost: You can buy deeds for a fraction of what they are worth on the market, as you are only paying for the seller’s equity. You also do not need to qualify for a loan or pay any down payment or interest.
- High cash flow: You can collect rent from the tenants or lease option buyers who occupy the property. You can also charge them more than what you pay for the mortgage, taxes, insurance, and maintenance.
- Potential appreciation: You can benefit from any increase in the value of the property over time. You can also make improvements to increase its curb appeal and marketability.
- Negotiation leverage: You can use your position as the deed holder to negotiate with the lender to modify or reduce the loan balance. You can also offer them a short sale or a deed in lieu of foreclosure if they agree to waive any deficiency judgment or tax consequences.
- Tax benefits: You can deduct any expenses related to owning and operating
the property from your taxable income. You can also defer any capital gains taxes when you sell
the property by using a 1031 exchange.
The Drawbacks of Buying Deeds
Buying deeds also comes with some disadvantages and risks that you need to be aware of,
- Lack of title protection: You do not have legal ownership of
the property until you pay off
the mortgage or transfer
the title to your name. This means that
you may lose
the property if
the owner files for bankruptcy,