Refinancing a Subject 2 purchase??

Question

Another post on here got me thinking. This may or may not be a rare situation to come across, but for the sake of my question, here is an example:

Suppose you come across a home owner who has a first and second mortgage. Say the original first lien was in the amount of 200k, and they have paid it down to 100k. They now have a second lien in the amount of 75k. They have no equity because the property value has dropped. They are having trouble making payments, have bad credit because of it, and cannot refinance because of their credit and lack of equity.

If you were able to step in and do a short sale on the second lien (10% of value), and purchase the property subject to the first lien, could you refinance? Purchasing subject to, you would be making the payments based off of the amortization of the original 200k loan amount. Refinancing the 100k loan over another 30 years would obviously greatly reduce the payment. I imagine that there would be seasoning issues and that this wouldn't be possible, but maybe some of you could shed some light on it for me.

Thanks in advance for the help.

Jonathan Rexford · Answer

Refinancing would be based on your qualifications or your buyers qualifications. Personally I would not refi unless it was necessary. What is the value of the property? If it is nice then it might be a good keeper. If you are currently getting good amortization then why kill the pay down. I would probably just wrap the note and make the spread. Use your buyers downpayment money to short the 2nd and the rest is gravy. Just an idea

Nick J. · Answer

James, for you and anyone else who ever might ask the same question, I created a blog post about it. 101 Sub2 Exit Strategies

Nick J. · Answer

Steve, thanks for thinking of me :) Jonathan has a great point. In your situation I would do this: Go ahead and short the 2nd and like Jonathan said, use a Lease/Option tenants down payment to pay in full or help with the funds needed to pay off the second. Keep the 1st Sub'd and DON'T refinance. To refinance, you're going to have to qualify like any other loan but really, that isn't why you Sub a house so it would really be called a short sale if you were going to short the 2nd and finance with a new loan paying off the first right? Instead, keep the 1st as a Sub and make sure you have in your Sub2 addendum that the seller is NOT allowed to take out a HELOC, Instead, YOU take out a HELOC as a 2nd considering HELOC's are much easier to qualify for and it's like a checking account that you could use in the future like, buy a few more houses Sub2 or even more importantly, if you take some money out of the HELOC and store it away safely in case the 1st calls due, you can use what you put away safely as a down payment for a conventional loan paying off the 1st/HELOC. Anyways, that's getting a little too complex but really, this is where having a really great mortgage broker will help you in what some of the great options you have. Summary, just my opinion and I'm sure the other Sub2 homeboys like Jonathan will say is: Short the 2nd but don't refinance the 1st and execute an exit strategy whether its sell as a wrap like Jonathan said, L/O or sell retail and collect a REALLY BIG CHECK :)

Nick J. · Answer

What you're saying is shorting the 2nd and then getting a new loan for a lower amount to pay of the second right? Whats the difference between that and a Short Sale? You may not be shorting the 1st but you're still executing the same strategy. You have a point about getting the new(er) payments at a lower % and lower $ amount but also remember if that the existing mortgage has any seasoning already, then at least the amount going to pay down the principle is a lot higher than it would be if you were to get a new loan. Chances are you're going to need to cough up some dough on the re-fi anyways and unless you have some dough for that and the dough needed to fund the shorted 2nd, you're better off doing it our way :)

Steve Babiak · Answer

James, I believe that what you proposed is very plausible. After all, the typical exit strategy on a Sub2 purchase is to do a lease option, with the tenant buyer eventually getting a mortgage to pay off the existing loan. Your proposal just leaves out a tenant buyer from that typical scenario. I'll bet Motiv8td (aka Nick Johnson) will be chiming in to help you further.

Will Barnard · Answer

Great job Nick as always.

James Harkness · Answer

Nick, thank you so much for taking the time to write that blog post for me. Very helpful.

Nick J. · Answer

Oh, the possibilities are endless!! I'm off to see my daughter play the Viola in at her schools concert. When I get back, if no one else stepped in with an amazing response. I'll hook it up for ya :mrgreen:

James Harkness · Answer

Thank you Nick. I know you are right. I guess that I was hoping that you wouldn't have to use the "purchase price" of 100k when determining the loan amount when it may be worth 175k if you purchased with the original financing in place. Maybe sit in the property for 3 months with the old financing and then refinance based off of the 175k appraisal rather than the 100k purchase price. However, I know that the appraisal will come in low after you buy it for 100k. I've been in the mortgage business for 3 years, and know that this probably would never work, but have never really worked with investors using creative financing, so I didn't know for sure. On a different note, what exit strategy do you recommend when purchasing subject 2? What has the best returns, and what have you had the most success with?

James Harkness · Answer

Thanks Nick. Enjoy the concert. I look forward to your reply.