What's the typical deal analysis for Subject To deals

Residential Real Estate Broker · Richmond, VA · Member since 2012 · 63 posts · 3 votes

When doing a subject to deal, what does investor look for in terms of equity spread, or as long as the rental income to monthly payment spread is big enough?

I have a subject to deal in the making, but the wholesaler is trying to sell it at close market price, at best 6k equity on a 150k home. Good thing is the home has a very low fixed rate 30 year mortgage, and about $400 spread between rent income and monthly payment. Decent neighborhood.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@Sophia Wang does 400 cash flow account for all costs including maintenance vacancy PM lease fee's and are tax's and insurance impounded and accounted for in the mortgage?

I have bought a substantial amount of sub too's and I never played the cash flow game they needed to have at least 25 to 30% equity I could care less if they cash flowed.. I have seen to many go down with thinking they were going to make cash flow only to have those blow up in their face and the cost to sell is greater than the equity... and then default and the original seller is very upset. etc etc.

Now if its 400 a month after accounting for everything and you have a good 6 month to a year of payments in reserve plus another 10k in cash.. then its a pretty safe bet.. Always have to think about the what if.... tenant goes nuts and our stuck paying the payments while you try to evict... this is where many go south.. Bad deal for the seller generally or Risky might be a better term.

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Marvin McTaw
Rental Property Investor · Atlanta, GA · Member since 2014 · 807 posts · 274 votes
10y
Hey @Sophia Wang its really a personal question on what your exit strategy is. If you're looking for cash flow properties, then you will look at the cash flow. If you're looking to basically flip the properties, equity will matter for you. For me personally, as long as it's cash flowing a minimum amount, is in decent shape (i.e. won't have to invest money or time in it) and I can mitigate certain risks, I'll do the deal. That being said, I'm in the midst of closing a deal where I'm buying it subject to, with minimal cash flow. I plan to list and sell it because I'm getting a good amount of equity with the purchase and will be able to sell retail (even though I'm taking on some interest rate risk because it's a variable rate mortgage).
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Sophia Wang
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Residential Real Estate Broker · Richmond, VA · Member since 2012 · 63 posts · 3 votes
10y
Originally posted by @Marvin McTaw:

Hey @Sophia Wang its really a personal question on what your exit strategy is. If you're looking for cash flow properties, then you will look at the cash flow. If you're looking to basically flip the properties, equity will matter for you. For me personally, as long as it's cash flowing a minimum amount, is in decent shape (i.e. won't have to invest money or time in it) and I can mitigate certain risks, I'll do the deal. That being said, I'm in the midst of closing a deal where I'm buying it subject to, with minimal cash flow. I plan to list and sell it because I'm getting a good amount of equity with the purchase and will be able to sell retail (even though I'm taking on some interest rate risk because it's a variable rate mortgage).
Thanks Marvin! What you said makes sense. I am having rather great cash flow on this deal, about $400 a month, which is in part due to a 3.875% fixed interest rate. But equity spread isn't that great.
When you do a subject to deal, do you usually take it under land trust and transfer beneficiary interest to you or your company? What is the typical closing cost for such a deal?
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Marvin McTaw
Rental Property Investor · Atlanta, GA · Member since 2014 · 807 posts · 274 votes
10y
Originally posted by @Sophia Wang:

Originally posted by @Marvin McTaw:
Hey @Sophia Wang its really a personal question on what your exit strategy is. If you're looking for cash flow properties, then you will look at the cash flow. If you're looking to basically flip the properties, equity will matter for you. For me personally, as long as it's cash flowing a minimum amount, is in decent shape (i.e. won't have to invest money or time in it) and I can mitigate certain risks, I'll do the deal. That being said, I'm in the midst of closing a deal where I'm buying it subject to, with minimal cash flow. I plan to list and sell it because I'm getting a good amount of equity with the purchase and will be able to sell retail (even though I'm taking on some interest rate risk because it's a variable rate mortgage).
Thanks Marvin! What you said makes sense. I am having rather great cash flow on this deal, about $400 a month, which is in part due to a 3.875% fixed interest rate. But equity spread isn't that great.
When you do a subject to deal, do you usually take it under land trust and transfer beneficiary interest to you or your company? What is the typical closing cost for such a deal?
No, I don't do it under Land Trust based on the advice from my attorney (although there are tons of others who would disagree with this I'm sure). I do it all in the LLC.
Why are you concerned with the equity? I personally wouldn't worry so much about the equity if you're getting cash flow off of it. The equity will generally take care of itself in time due to mortgage amortization and (generally speaking) inflation.
If you're really concerned about equity from a cushion standpoint, one option you have would be to sacrifice some of your cash flow and make bigger payments. You'd pay the mortgage off sooner but might run the risk of potentially raising red flags. I'd just say sit back, relax, be patient and enjoy your roughly $4,800 a year in cash flow.
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Stuart Birdsong
Investor · Fort Collins, CO · Member since 2015 · 304 posts · 112 votes
10y
@Sophia Wang, What do you have to bring to the table to acquire the property? This might be a good staring point. If the wholesaler is asking 5k cash and your cash flow is 400/month, you COC is pretty darn good. Not to mention this loan does not register in your financials, so if you go to get lending on another property..... However if he is asking for 50k and now you have 50k tied up for minimal cash flow that might deter your interest. Just a thought!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Sophia Wang does 400 cash flow account for all costs including maintenance vacancy PM lease fee's and are tax's and insurance impounded and accounted for in the mortgage?
I have bought a substantial amount of sub too's and I never played the cash flow game they needed to have at least 25 to 30% equity I could care less if they cash flowed.. I have seen to many go down with thinking they were going to make cash flow only to have those blow up in their face and the cost to sell is greater than the equity... and then default and the original seller is very upset. etc etc.
Now if its 400 a month after accounting for everything and you have a good 6 month to a year of payments in reserve plus another 10k in cash.. then its a pretty safe bet.. Always have to think about the what if.... tenant goes nuts and our stuck paying the payments while you try to evict... this is where many go south.. Bad deal for the seller generally or Risky might be a better term.
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Sophia Wang
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Residential Real Estate Broker · Richmond, VA · Member since 2012 · 63 posts · 3 votes
10y
Originally posted by @Jay Hinrichs:

@Sophia Wang does 400 cash flow account for all costs including maintenance vacancy PM lease fee's and are tax's and insurance impounded and accounted for in the mortgage?
I have bought a substantial amount of sub too's and I never played the cash flow game they needed to have at least 25 to 30% equity I could care less if they cash flowed.. I have seen to many go down with thinking they were going to make cash flow only to have those blow up in their face and the cost to sell is greater than the equity... and then default and the original seller is very upset. etc etc.
Now if its 400 a month after accounting for everything and you have a good 6 month to a year of payments in reserve plus another 10k in cash.. then its a pretty safe bet.. Always have to think about the what if.... tenant goes nuts and our stuck paying the payments while you try to evict... this is where many go south.. Bad deal for the seller generally or Risky might be a better term.
Thanks Jay! the $400 spread counted in the tax and insurance, but didn't count in the maintenance, vacancy and PM lease fees and such. I guess the deal is a bit too thin then!
But I don't see why someone with 25-30% equity will need to sell the property subject to. They can easily get cash for more than that, right?
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Sophia Wang
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Residential Real Estate Broker · Richmond, VA · Member since 2012 · 63 posts · 3 votes
10y
Originally posted by @Stuart Birdsong:

@Sophia Wang, What do you have to bring to the table to acquire the property? This might be a good staring point. If the wholesaler is asking 5k cash and your cash flow is 400/month, you COC is pretty darn good. Not to mention this loan does not register in your financials, so if you go to get lending on another property..... However if he is asking for 50k and now you have 50k tied up for minimal cash flow that might deter your interest. Just a thought!
Wholesaler is asking slightly more than 5k for the deal, so the COC return is not bad. But since the equity is pretty thin, I am more concerned what if bank calls the note, and I will have to sell the deal or get more expensive financing. Then the small equity will make the deal go south.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Sophia Wang its usually some emotional event were they get stubborn and are in arrears and your saving them from losing it.
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Sophia Wang
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Residential Real Estate Broker · Richmond, VA · Member since 2012 · 63 posts · 3 votes
10y
I have heard that transfer property into LLC will more likely to trigger the Due on Sale clause. What's your attorney's argument on that point?
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Matt Moger
Rental Property Investor · Bermuda Run, NC · Member since 2014 · 44 posts · 33 votes
10y
@Sophia Wang,
Another thought to consider is, how many more years are left on the loan? If the margins are slim, I'm assuming that it is a fairly new loan, but you never know. Obviously, the further down the amortization schedule they are, the more principal pay down for you. It could make the $400 per month cashflow seem sweeter.
Side note from earlier comments. The transfer of the insurance is usually the trigger to the lending institution that there's been a transfer in title. We like to place every property we purchase in a land trust & we usually name it something to do with the property. i.e. 123 Main St. Trust. It just sends less red flags, in our opinion.
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Marvin McTaw
Rental Property Investor · Atlanta, GA · Member since 2014 · 807 posts · 274 votes
10y
Originally posted by @Sophia Wang:

I have heard that transfer property into LLC will more likely to trigger the Due on Sale clause. What's your attorney's argument on that point?
Let me first say that I am not passing along any of my attorney's advice. These are solely my opinions based on my experience. In terms of transferring the property to an LLC, that's really more county level stuff. The big trigger just like @Matt Moger said is the insurance change. To address this, I have been adding my name to the existing insurance policies with the seller.
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