Should I Buy Grandma's House with Subject-To Financing??

Question

Hello Everyone!

I got so much feedback from my last post...HERE, and now have the opportunity to purchase my grandmother's well-maintained 2-family house in Chicago with the equity from 4-family brownstone in Brooklyn. My grandma is willing to sell her 2-flat to me as-is for $180k, she has a $130,000 mortgage on it currently at a 4.6% interest rate. The current value of the home is $220,000. It needs some work, mostly cosmetic, and I have the option to convert the basement into a 3rd unit. Ideally, I would like to get use seller/subject-to financing to assume her current mortgage payments at the 4.6% interest rate, use a HELOC from my Brooklyn property to pay her $20k down and rehab the property. I would then rent out the units, get the property appraised, and take out another HELOC to keep investing...ultimately an even more creative version of the BRRRR method. My goal is to take advantage of seller financing, spending little money upfront, and keeping her current interest rate. Is this scenario possible and if so, how do I avoid the due-on-sale clause? ...as I can see the bank calling the loan due since interest rates are so much higher now.  I know this is a unique scenario so please let me know if I'm nuts for attempting!

Eudith Vacio · Answer

Hey @Keisha F. - BOSS moves. I would definitely acquire the property and your plan sounds really good. The only thing I would keep in mind, is that its very difficult to get a HELOC on investment properties, there really isn't a bank doing those right now so just keep that in mind.

Crystal Smith · Answer

The first thing you need to do is ask your grandmother for a copy of her mortgage note and all associated papers so you can review the due on sale clause.

Another idea to avoid the due-on-sale clause is to purchase the property using a lease with option to purchase contract.  Your option fee will be the $20K downpayment to the seller.  You can then set your monthly payment to match what the seller is currently paying at 4.6% interest rate and maybe give the seller a little more cash flow above that.   Then renovate the property and rent out the units.  This is commonly called a sandwich lease.  You will not be able to use a HELOC to pull cash out of the property since you will not own the property. You will have to exercise the option to purchase and if the value of the property is high enough then use a HELOC to pull cash out after you own the property.

Some notes about this strategy- Even though she's a family member your lease payments should not go directly to her.  The payments should go to a 3rd party servicer who will pay the mortgage first and then pay your grandmother.  It protects you and the seller (unless of course, you do not follow through on making your payments)

Keisha F. · Answer

Thanks @Jonathan Klemm for clearing that up! I would be interested in hearing about the banks that you know of. Let's connect!

Jonathan Klemm · Answer

O I understand @Keisha F....Yes, technically the 203k loan would not work if this is an investment property, however, I do believe you could still do a refinance into a construction loan.

So like you said after you go on title and have acquired the property you would go to a bank that does construction investment loans to do the refi.  I have a few local banks here in Chicago that may be interested!

Keisha F. · Answer

Thanks so much @Jonathan Klemm ! I hadn't thought about a 203k refinance loan...is this for the purchase and repairs or do you mean just for the repairs after I'm deeded the property? This would be an investment property so I wouldn't qualify for a FHA 203k loan. Can you explain the steps further because I am interested in getting money back for my next purchase.

Jonathan Klemm · Answer

Hi there @Keisha F. - You are FAR from nuts...this sounds like an awesome plan!  And a no-brainer to acquire an awesome Chicago property.

Another option, instead of the HELOC might be to do a 203k refinance loan...then you wouldn't have to come out of pocket any money.  I understand utilizing the low-interest rate but this way you could even potentially get money back for your next investment.

No matter- what the numbers won't lie so just figure out which strategy makes the most sense to get you to your end vision quickest with a comfortable amount of risk.

Happy to talk rehab numbers if that would help.

Keisha F. · Answer

@Mohammed Rahman Ok great, glad to hear that you believe it to be a good strategy. I did learn about the trust option but didn’t know I could take over the mortgage after transferring to a trust. I’ll definitely contact an attorney before starting. Thanks so much!

Mohammed Rahman · Answer

Hi @Keisha F. - nice strategy! The due-on-sale clause is a hit or a miss, however you could possibly avoid it if your grandmother transfers the property to a trust first before you take over the mortgage.

This comes with its own set of difficulties, so I recommend finding a good real estate attorney in Chicago to help.

Keisha F. · Answer

@Randy Rodenhouse Thanks, Randy! Will consider assuming the mortgage. I have to look through the mortgage docs to see what it says but that does sound like a great option.

Keisha F. · Answer

@Crystal Smith Thank you, Crystal for the input. I will definitely take a look at the mortgage papers to see what I’m dealing with. I didn’t know about the lease option…will for sure look into this and yes, I’m treating this as a business deal even though we’re family. I want us all to be protected!!

Should I Buy Grandma's House with Subject-To Financing??

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