First Time - Should I do a 'subject to' sale?

Question

I'm having some difficulty finding traditional financing for a single-family property. My mother-in-law is selling it to me for what she owes, which is only 32K (ARV is about $130K). Unfortunately, I've been told by 3 lenders now that it's simply not a large enough loan. And all the business loans/credit seem to be stopped currently from those same institutions.

Should I do a subject to sale? The numbers work for cash flow, but the property needs renovation, which I would have to figure out how to pay for myself--pretty certain I can't get a HELOC until after I pay off the subject to loan. I have some money saved up, but I'm a bit short of just buying it cash.

So subject to, or keep shopping around until I find someone who wants to finance it?

Account Closed · Answer

So, lots of questions - why is she selling it so far under value? Does she need money from the sale or is she fine taking payments? Lots of banks have stopped doing HELOCs, do you think you can still get one?  Does your mother-in-law understand the risk she is taking doing a Subject To? Do you? Why not do Seller Financing or a Wrap? Do you have Thanksgiving dinner with her every year and want to keep Thanksgiving fun and comfortable?

What is her goal?

Jason Jaros · Answer

Account Closed Thanks for your thoughts on this. I have read the contract, there isn't a due on sale clause. We tried to contact that original owner a couple times, but haven't heard back yet. I was going to offer financing it through him, to get him what he wants out of the deal (I could do a down payment to give him a large lump sum, etc.) My assumption is that he will be willing to work with us, but unfortunately several weeks of phone calls have left that option a bit flat.

I think mom-in-law will be fine with the financing being in her name. I'll have to contact some banks and see what the seasoning period will be.

Jason Jaros · Answer

Account Closed Her goal is to get out of the property. Someone lives in it right now and doesn't pay enough to cover the mortgage. She just wants out, and wants to help us out along the way. I'm not sure if I can do a HELOC, I think I could get one with the large amount of equity we will have in the property, but a subject to doesn't actually put the property in our names from what I understand (which seems like it would make getting a HELOC difficult?) She would let me make payments I'm sure, but she doesn't have the money to pay off the debt in full--she owner financed the property when she bought it.

Account Closed · Answer

A Subject To puts the property in your name but doesn't put the financing in your name. There is a big difference in your favor. There may be some seasoning required before a bank would lend you money on the property. The big question is whether the owner financed loan has a due on sale clause. The person she bought the house from on owner financing probably wants to get paid off. A Subject To would not pay them off. Are they willing to work with you or will they be trying to get the property back? It matters, in how you approach the situation.

Jason Jaros · Answer

@Owen Dashner I am attempting now to reach out to some credit unions now before I settle on a decision. I researched some hard money loans, but I'm nervous about taking out a loan with a balloon payment right now. I have every intention of re-financing at the end of the process to help get ready for the next one. I should have plenty of appreciation (natural and forced) to leverage.

Owen Dashner · Answer

Have you tried talking to smaller community banks and credit unions that do portfolio loans?  That's your best bet for getting financing on a small balance deal like this.  Smaller banks are much more likely to lend on these kinds of deals.  They may even throw rehab money into it too.  Another option is to get a hard money loan, rehab it, then refi with a bank on long term debt at the higher appraised value after the work is completed.

Rick Pozos · Answer

Do the sub-to which means that it is now in your name. Get the tenants out as quick as you can. Do the rehab out of pocket and with the help of family. THEN get a new tenant who is paying WAY more.

NOW you can refinance the property for more money, maybe 60k?? That would get the loan paid off and get your cash back in your pocket or just sell it retail price and now you have a whole bunch of money in your pocket. Give mom in law some money for her help!

Clint G. · Answer

@Jason Jaros

Sub2 is a great strategy, just get a solid real estate attorney to write everything up.

Since she bought it owner financed, that might pose some challenges from what I understand. A RE attorney can help you there.

Sounds like a solid deal though.

Jason Jaros · Answer

@Colby Hager We (my wife and I) estimate the repairs at 35K (which is probably more than necessary, but we are trying to be super conservative for this first time). There is a bathroom that needs a whole new floor (water damage), a new AC unit is needed, and a kitchen upgrade. Also minor issues like some flooring and painting. I haven't been at this long enough to have contacts with that kind of money, I just found BP a couple months ago. Trying to go as fast as possible!

Colby Hager · Answer

@Jason Jaros

I’m not sure that you’ve provided enough information.

It needs repairs. How much?

Arv 130 and taking over payments with a 32k balance, I’m sure you can bring someone in with some rehab cash for some back end action. Assuming the rehab isn’t over the top.

First Time - Should I do a 'subject to' sale?

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