Leveraging “Subject To” & Discounting Debt for Maximum Profit – Best

Objective: To teach real estate investors how to structure profitable deals by acquiring properties “Subject To” the existing mortgage and then strategically discounting (or eliminating) junior liens and other debts to create instant equity and cash flow.

Module 1: The Core Strategy – A Powerful Combination

Key Concept: Don’t just look at a property’s surface-level numbers. Master the art of layering strategies to turn a “no-deal” into a “great deal.”

• “Subject To” (Subject-To): You purchase the property and take over the payments without formally assuming the loan with the bank. The existing loan remains in the seller’s name, but you are responsible for it.
• Discounting Debt (Short Sale): Negotiating with a lien holder (e.g., a second mortgage company, a roofer with a mechanic’s lien) to accept less than the full amount owed to release their claim on the property.

Why Combine Them?
Often, a property with a high-interest second mortgage or multiple liens appears to have negative cash flow or too little equity. By purchasing “Subject To” the favorable first mortgage and simultaneously negotiating to short pay the unfavorable junior debts, you can:

1. Preserve good, low-interest financing.
2. Dramatically reduce the total debt against the property.
3. Create instant, substantial equity.
4. Turn a negative cash flow into a positive one.

Module 2: Deal Analysis – Seeing the Opportunity

Exercise: Analyze the Initial Deal

• After-Repair Value (ARV): $280,000
• Existing Debt:
  • 1st Mortgage: $210,000 @ 6.75% ($1,500/month PITI)
  • 2nd Mortgage: $45,000 @ 12.9% ($650/month PI)
• Costs to Rehab & Reinstate:
  • Repairs: $4,000
  • Reinstatement (Back Payments): $5,000 (1st) + $2,200 (2nd) = $7,200
  • Closing Costs: ~$2,000

Initial (Flawed) Analysis:
If you simply took over both loans “Subject To,” your monthly payment would be ~$2,150. With a market rent of $1,700, you’d have a significant negative cash flow. This is why an untrained investor would walk away.

The REISkills Reframe:
The problem isn’t the property; it’s the structure of the deal. The high-cost second mortgage is the poison pill. The solution is to remove it through negotiation.

Module 3: The Negotiation Playbook – Discounting the Debt

Step 1: Seller Motivation & Contingency

• Discover the “Why”: The seller has a gambling problem and wants a fresh start. She is motivated to walk away with no cash, just freedom.
• Crucial Contingency in the Contract: Your agreement to purchase is contingent on you successfully negotiating a discounted payoff on the second mortgage. This protects you if you can’t get the debt reduced.

Step 2: The Lender Negotiation (Script & Psychology)
This is where you create profit. The goal is to get the second mortgage holder to accept a deep discount.

• Tone: Empathetic, collaborative, but firm on your limits.
• Key Phrases & Techniques:
  • Frame the Reality: “The seller has a gambling problem and may file for bankruptcy. The house needs repairs. Foreclosure will be costly and time-consuming for you.”
  • The “Walk Away” Vibe: “I’m not sure we can find a fit here, and I’m okay with that.” This shows you are not desperate.
  • The Range Technique: When they say “$10,000,” you respond with, “Really, the lowest you could take is $8,000 to $10,000?” This anchors the negotiation lower.
  • The “Incredulity” Face: Use your tone to sound shocked and disappointed at their high counter-offer. This works even on the phone.

Result in our Case Study: Second mortgage of $45,000 settled for $9,000. Profit Created: $36,000.

Module 4: Funding the Deal – Six Solutions to the Cash Problem

The deal now requires ~$20,000 cash ($4k repair + $5k 1st mtg + $2k costs + $9k 2nd mtg payoff). If you don’t have the cash, you can still execute.

Six Funding Strategies:

1. Seller Finance It Yourself: Sell the property to a buyer with owner financing. Collect a $28,000 down payment (10% of ARV) to cover your costs, and create long-term cash flow.
2. Credit Card Advance: Use short-term, high-cost funding, then quickly sell the property to a retail buyer for a full-price, cash-out refinance.
3. Use Your Own Cash: If you have it, this offers the highest return on investment.
4. Private Lender: Borrow the $20,000 from an individual, offering a fair interest rate secured by the property.
5. Partner with an Investor: You find the deal and manage it; they provide the cash. Split the profits.
6. Wholesale the Deal: Assign the contract to another investor for a quick, guaranteed fee (e.g., $10,000).

The Bottom Line: A good deal attracts money. Your job is to find and structure the deal.

Module 5: Advanced Applications – Discounting Other Liens

The principle doesn’t stop with second mortgages. You can discount any lien or unsecured debt the seller assigns to you.

Types of Discountable Debt:

• Mechanics’ Liens
• Tax Liens
• Judgments (from lawsuits, divorces)
• Medical Bills
• Credit Card Debt

The Two Key Questions for Any Lien Holder:

1. How Uncertain is Collection? Is their lien in first position or last? Will it be wiped out in foreclosure? The more at risk the debt, the deeper the discount.
2. How Badly Do They Need Cash Now? A small roofer or an ex-spouse is often far more motivated to get a guaranteed cash payment now than to chase a full payment later.

Case Study: The Roofer’s Lien

• Lien Amount: $18,000
• Negotiation Time: 20 minutes
• Settlement Amount: $3,000
• Your Profit: $15,000

This is pure profit added to your equity the moment you clear the title.

Module 6: Action Plan & Mindset

1. Shift Your Focus: Stop looking only for pristine properties with massive equity. Start looking for motivated sellers with messy financial situations.
2. Run the Numbers: Analyze deals with the potential to discount junior debt. Calculate the new profit picture after you’ve negotiated the liens away.
3. Master the Scripts: Practice the negotiation phrases. Your ability to communicate with lien holders is your profit engine.
4. Build Your Funding List: Cultivate relationships with private lenders and cash partners before you need them.

Final Thought:

The more little liens and private debts a seller owes, the more profit potential exists for a savvy investor who knows how to combine “Subject To” financing with the power of discounting debt.

NEXT STEPS:

Continue to the next chapter to learn powerful techniques for cultivating sources of funding for your deals.