Mortgage Assignments Explained (Sub-to assignments)

Without getting into to long a crazy detailed post, I will try and sum up exactly what Phil Grove's mortgage assignments are. I have gone through his course and I am actively wholesaling houses right now on mortgage assignments and lease option assignments.

A mortgage assignment is nothing more than putting a house under contract subject-to and then assigning that contract to an end buyer. Some of you may have even done this with a motivated seller who had equity and wholesaled it out to an investor.

The mortgage assignment strategy is more geared towards buyer's who cannot get a loan. We all know there are a ton of them out there right now, because lease options have never been so hot. The seller's in these situations, are motivated sellers who are unable to sell their property in this market, because they owe what the property is worth (or close to it).

As Phil suggests, it's selling unsellable houses to unloanable buyers. I have seen a couple posts with users commenting that they wouldn't want to assign a house to a buyer with a lousy credit score or who can't get approved for a loan. You have to understand that a lot of people were hit with foreclosures and are recovering now, and still would like to buy a home within their means. They can't get a bank loan the traditional way with a foreclosure on their credit, but they can still afford the payments and will possibly have a large down payment.

You may also have heard about the due on sale clause. This is the biggest issue with this strategy, but it really doesn't differ much from the hostile takeover strategy discussed at last year's Edge Event. Banks will not enforce a due on sale clause unless they have reason to. As long as payments are being made, banks do not care right now who is on the title of the house with the mess of foreclosures they have going on. All the bank wants is that payment sent in on time every month. I have never heard of a bank enforcing the due on sale clause as long as the payments were being made.

With that being said, this whole strategy revolves around a ton of disclosure paperwork that Phil includes in his course. You have to fully disclose all the risks and advantages to both the buyer and seller when trying to do a mortgage assignment (same as you would do on a short sale). They have to understand the possibilities that could occur. Like if the buyer stops making payments, the bank could exercise the due on sale clause and/or foreclose on the house. The Seller can still get the house back on a deed-in-lieu from the buyer, and continue to make the payments and start over again, but that's only if the buyer accepts a deed-in-lieu.

In my opinion, this strategy should be implemented on sellers who are older and don't plan to buy another home, or sellers who are ready to just walk away and let the house go to foreclosure anyway. If a buyer were to stop making payments in either of these scenarios, it wouldn't impact the seller anymore than a foreclosure would have.

When does the mortgage assignment not work:

1) If the seller is too far behind on payments. If they are more than 3 months behind on payments (every area is different), than you are better off trying to short sale the house. If you do not know how to do a short sale, then outsource to a local short sale expert in your area, or PM me and I may be able to partner with you on the deal and do the negotiating for you.

2) If the seller wants to buy another house in the not so distant future, I don't recommend a mortgage assignment. Phil says in his course that the seller can still buy another home if they meet the current lending requirements even after doing a mortgage assignment on their house. He explains that the seller will just have to tell their new lender that they sold their last house sub-to and that someone else is now making the payments on their other mortgage (when doing a mortgage assignment the mortgage stays in the seller's name but the title goes into the buyer's name). The buyer could then confirm they are making the payments with the sellers new lender and everything will be OK. I don't know if I completely agree with that, and therefor thoroughly explain to the seller that they may or may not be able to get a mortgage as long as their current mortgage remains in their name. Every situation is different.

3) If their interest rate and payments are too high, no one is going to want to take over that mortgage. This again would be better suited for a short sale. You want to make sure that their mortgage payment and amount owed doesn't exceed to far over the current values. It's ok if they go over a little, because in the end it's the payments that matter the most, not the total owed (unless the total owed is really far over current market value).

4) If your local areas transfer tax is high, then forget it! I live in the Philadelphia area, and I do some deals inside the city of Philadelphia. Philadelphia's transfer tax is 4% total between the buyer and seller, which will just totally eat up all your profits in a mortgage assignment deal. Phil Grove uses this strategy in his hometown of Austin, TX. Needless to say, there is no transfer tax in the state of Texas! If you live in Texas or any other state with no/low transfer tax, I highly encourage the use of mortgage assignments.

Those are the 3 things I usually stay away from with motivated sellers who may be a mortgage assignment candidate. Oh and for those who are wondering, "How do I get paid on a mortgage assignment?", it's pretty simple. You get a property under contract that makes sense for the seller to do a mortgage assignment, and then find a buyer who has a reasonable down payment for this house and can afford the mortgage payments. Most of the time the seller will not come to closing with any money, so your buyer is going to pay all closing costs. This is where you figure out your profit. Let's say you have a buyer who has $10k to put down, and the total closings costs with transfer tax, title insurance, title fees and everything included is $4k. You would then assign your contract to that buyer for a $6k fee. Your buyer's total down payment has to cover all the closing costs, and whatever is left after that, is the money you can make on the assignment of contract. Also make sure you are working with a title company/attorney who can handle subject-to and assignment of contract transactions.

This is why high transfer tax can kill a deal. Most buyer's down payments will depend on the mortgage amount, and the mortgage amount will usually determine what the seller owes. For example, let's say the seller owes $100k and his mortgage payments are $1000/mo. If you ask a buyer to put $5000 down for that deal, you would technically be asking 5% down. It the city of Philadelphia, there would be a $4000 charge just for transfer tax! Then probably another $1500 in title fees and closing costs. Therefor, the buyer would need $5500 just to clear the closing costs, and then there would be nothing left for you. The only way to make any money on that deal is to try and get 8-10% down on that loan amount, to make $3-5k. As you can see, the higher your transfer tax and/or closing costs are, the harder it is to make a profit.

THE SOLUTION TO MORTGAGE ASSIGNMENTS: Lease Option Assignments!

When I approach a homeowner that is motivated to sell and has no equity and also doesn't qualify for a short sale, then I give them 2 options. They can either do a mortgage assignment or lease option assignment. I love doing lease option assignments over mortgage assignments, because the seller still remains on title and there is a lot less things that can go wrong. If you put a buyer in the property on a lease option instead of a mortgage assignment, the seller can simply evict the tenant buyer. There is no due on sale clause or foreclosure to worry about. BUT, the seller has to understand that with a lease option assignment they will be responsible for the house. Since they are still on title, they then become a landlord whereas in a Mortgage assignment, they simply become the bank so to speak. I will pitch to the seller that rent to own tenants are much easier to manage and aren't the nightmare you hear about with landlording, but I leave it up to them which option better suites them, if either work at all. It is pretty much figuring out what is the least worst option for their situation.

Another reason I prefer lease option assignments is because the closing does not happen for years later. This means the tenant's down payment of $5000 all goes into my pocket (minus $500 that I give to the seller). There is no closing costs to eat into my profit, and the deal is a lot safer for the seller, because they never give up title to their house.

Well there it is, a breakdown of mortgage assignments and lease option assignments, and how I use them both in my business. Every area is different, but I think I gave everyone a good idea on here when it makes sense to use these strategies. There is definitely more to it and I can keep going on with sandwich lease options and buying properties for yourself sub-to, but I could write a book on all of that.

In fact, I probably will one day. =D

P.S./Disclaimer: This is a very complex strategy, and I can't fully teach everything here nor do I want to rip Phil Grove or any other Gurus efforts off. If you want to execute this strategy, I strongly recommend purchasing one of their courses, or getting with an experienced attorney in your area to help you draw up the contracts and disclosures you will need for your area. Like a short sale, there is a lot to it. If you are just starting out, I highly recommend doing regular wholesale deals with motivated sellers and cash buyers at first, or maybe finding another investor in your area who is already doing these deals and bring your leads to them and partner up!

Perhaps, if anyone is looking to get into mortgage assignments or is currently doing mortgage assignments you can post your areas here. I myself, am working these deals in the following counties:

- Philadelphia, PA (lease options only)
- Delaware County, PA
- Chester County, PA
- Montgomery County, PA
- New Castle County, DE
- Gloucester County, NJ
- Camden County, NJ

** sorry for any spelling or grammar errors =)