Subject To - How an Actual Deal Worked - Including the Numbers

[Account Closed]

Subject To - How an Actual Deal Worked - Including the Numbers

Here is how I did it: I was contacted by an investor who hadn’t done any deals successfully. She was a little afraid to make the jump on her own. She invested $50k for me to put a deal together and I took over from there. She asked me to explain it to her so I decided since I had it written up, I would post it here for anyone to learn from. I found the property. (I find lots of properties using a technique that I’ve used many times over the years.) I bought “Subject To” (No Bank involved) I found a house in Mesa AZ suitable to the transaction. I still have to complete the other deals I've run across when she or someone else wants to do the next one. I'll try to post those too.

Zillow says this house is 5 beds 2 baths 1,526 sqft but actually has 3 beds (possible 4 beds) with fireplace, pool and RV Gate in Mesa AZ. The Seller was wanting as much for the house as possible of course. I offered $160,000 and he countered with $180,000. We settled on that $180,000. Not cash nor financing but on MY Terms. This property was off market and no real estate agents involved. That is an old sign in the picture from a previous sale, not this sale. Anyway . . . 

There are some rough patches in the property that would have to be fixed up in order to qualify for FHA financing. The roof needs some work, a wall was removed to enlarge the kitchen but wasn't completed. The amount owing is about $145,000. Zillow has it valued at $212,524 and listed as 5 bedrooms.

So, the basics are that I offered $15k in cash to the Seller towards their equity with the remaining equity to be held as a second. I take over existing payments.

Now, why would the seller agree to that? Well, he understood that using a real estate agent would require that he fix up the house to at least FHA requirements and he wasn't prepared to do that. It would also mean that he would have to pay 6% or about $12,000 to a realtor to list it in the MLS. It would also mean that he would be uncertain when the sale would happen. Selling to me he had a guaranteed sale.

So, the numbers look like this: (round numbers)

$180,000 I bought for “Subject To” (I took over the underlying mortgage)

$15,000 I gave him cash so he could move on

The rest of his equity to be held as a note. (A second mortgage to him)

$145,000 the amount I took over on the loan

$995 My payment per month PITI (I pay every month to the underlying mortgage)

I was able to find what I call a Tenant Buyer and Sell on a Lease Option. He is responsible for all maintenance and repairs. I didn’t do any repairs. This is not a Fix & Flip.

	1) One way to look at the Equity Profit:
	$50,000	Amount she placed in Investment Fund
	$15,000	Given to Seller for moving
	$35,000	Remains in Investment Fund
		To be used for reserves, carrying costs, marketing, closing, etc

	Here is how I Bought
Bought	$180,000	Amount Bought for
Paid Out	$15,000	Gave to Seller for moving
Still Owe 2nd	$20,000	(Seller carries a Second mortgage to us)
Still Owe 1st	$145,000	Our amount owing on the property Taking it Subject To
		So, we still owe $145,000 on the original mortgage
		and $20,000 to the Seller on a carry back 2nd
Owe Total	$165,000	for a total of $165,000 still owing

	Here is how I Sold
Sold	$235,000	"Sold" (Lease Optioned) Amount to a Tenant Buyer
Collected In	$20,000	Option/Down payment from Tenant Buyer
Owner Carry	$215,000	Lease Option to Tenant Buyer

	So far on the Investment Fund
Paid Out	$15,000	So, we have paid out $15,000
Collected In	$20,000	And Received in $20,000
	$35,000	Remains in investment Fund
		The $20,000 goes into the Fund
Fund	$55,000	Makes $55,000 still in Fund
Profit	$5,000	Equity Profit, so far
	10.0%	Equity ROI , so far

	Remaining Equity
We're Owed	$215,000	Amount Tenant Buyer Still Owes Me
We Owe	$165,000	Our Total Payoff (1st $145K + 2nd $20k)
Profit	$50,000	Amount Gross Equity
	100.0%	Equity ROI , remaining

	In Addition - We make monthly Cash Flow Profit
	$1,650	Tenant Buyer Monthly Payment
	$995	Our Monthly Payment
	$655	Monthly Cash Flow
	$7,860	Yearly Cash Flow
	15.7%	Yearly Cash Flow ROI

It's a reasonable deal. Needless to say she is quite happy.

[Dean Letfus]

"Folks from Australia and New Zealand can do this as well"

Just for the sale of clarity you can't do this in NZ or Australia. You would be prosecuted if the bank found out. In addition you can't put a second mortgage on a property these days banks wont allow it AND the goods and services tax issues would make the deal impossible anyway even if it were legal.

The only way you could do it is to have a straight option so the title stays in current owners name and then flip it and close contemporaneously.