Downfalls of Subject-To deals?

Question

I love the theory behind a subject to deal, however i'm curious how some of you guys handle the potential drawbacks of the deal.

I'm not very worried about the due on sale clause, it seems that this happens so rarely that statistically it can almost be ignored.  Worst case scenario you can still either give the house back, sell it, try to refinance it, or find hard money as a stopgap.

Insurance:   Since the insurance has the original owners name on file, wouldn't any check that results from a claim be sent to them instead of you?  Even if you list yourself as an additional insurer, doesn't that just mean that both people would need to sign the check?  Do you cancel their old insurance policy and just start a new one with your name on it?  If so then wouldn't the original owner get a refund check from the insurance company for any unused amount, and then you be required to post a years worth of insurance payments immediately similar to your prepaids at closing?  And if so, how does the bank react when the original name is no longer on the insurance policy?

Bank statements:  While you might be the one paying the debt every month, the bank will still be sending the original owner the statements.  If that is the case how do I know that the bank actually received my payment and is properly crediting the correct account?  Also without statements how do you go about properly claiming items such as interest deduction / property taxes etc when its time to file taxes?

Selling:  Eventually it stands to reason that at some point you will decide to sell this property.  When that happens and the original loan is paid off, won't the bank send a check to the original owner for any amount that still remains in the escrow account?

Sub-2 sounds so amazing, but it seems to get very messy very quickly unless I'm missing something.

Jay Hinrichs · Answer

thats important being in the foreclosure business i can tell you the sales are littered with those that sold sub too and the buyer was a crook who just ripped rents and stopped paying until the house was sold.  thats my heart burn.

along with folks that get into this thinking its a no money down get rich.. those tend to not intentionally get into trouble they are just under capitalized and so they get into a deal with little money out of pocket thinking a 100 dollar a month delta is great.. first time renter does not pay and they have to evict or renter does major damage they no longer have the funds and the seller ends up in some bad position.

then you have sellers that do this and want to buy another home and since the original mortgage is still on their fico they have a hard time explaining it or meeting DTI.  For your example on the other thread and what i basically did was buy rehab RETIRE the loan I did not rent them.. and so i knew that i would be negative cash flow until the project was full cycle.. that i get.

Brady Grohne · Answer

Bob, did you ever get a relevant answer to any of your very specific, thoughtfully crafted questions in the original post? I too am curious about the implications regarding insurance, statements, and seller credits at closing.

With regard to the bank statements portion, designating and third party servicer to whom you send your monthly payment, who then actually pays the underlying mortgage and provides an accounting could help alleviate those concerns.

Account Closed · Answer

@Bob "Subject To" works very well. It is all I do except for the occasional "quick flip". You are on the right track if you have sufficient financing. As @Jay says it's more a matter of integrity and having the funds in case everything goes wrong.

Here is a Subject To I did in Mesa as an example

How I buy houses for pennies on the dollar

https://www.biggerpockets.com/forums/311/topics/67...

Michael Thompson · Answer

@Bob Daniels - In my opinion one of the best subject to buyers is Grant Kemp out of Texas.  Explains it the best and has a course as well. However, he gives most of his knowledge away for free on Propelio TV via YouTube.  I haven’t seen anyone package it the way he does and constantly promotes integrity through the whole deal.

Jay Hinrichs · Answer

Bob I think Mike might have a course you can buy to walk you through all of this.. if your serious about it I am pretty sure he knows exactly how to do these since he teaches it..  I did all of mine ( more than a 100 ) in the 90s and early 2000s  mine though were all foreclosure rescues last second.. and I only did it if there was at least 30% to 50% equity day one.. I was not looking to build a stable of rentals I just wanted to get control like you probably do.. fix and sell and make my money and move on.

Jay Hinrichs · Answer

most important is your ability  to cut a check if worse comes to worse  everything else can be managed.

Bob Daniels · Answer

@Jay Hinrichs While I appreciate your extreme concern for the seller, I am in a solid financial position and could write a check if needed.  However just because I can come up with that money, doesn't mean that I want to if there is a better way to do things.

Regardless of my particular financial situation, from a purely educational point of view, how do people go about eliminating some of these aforementioned problems?

Jay Hinrichs · Answer

Bob I get the concept I have done hundreds of them..  but we were very well capitalize and anyone of the needed to be paid off we could stroke a check to retire the debt.. I have bailed out numerous undercapitalized investors that have gotten way over their ski tips drinking the sub too coolaid.. it does not go right and I can tell yo the seller is going to sue you.. and or file a complaint at the AG.  So you need to really know what your doing in the case of a water landing.. IE tenant or subsequent buyer defaults causes huge damage and your now faced with negative cash flow for a year and 20k to fix the place. if you can handle that its ok

what happens though is you have unsophisticated sellers and in a lot of instances the home is lost to the bank and the sellers credit is trashed.. plus many times they want to buy something else and with this mortgage still in their name they cant.

its just a very risky dangerous thing for a seller.  I get the buyers motives and benefits.  I think its best used like we did quick flips. retire the debt.

Bob Daniels · Answer

@Jay Hinrichs  I have a few rentals already leveraged at a modest ~60% LTV, and my W2 is with the military and due to living frugaly I am able to save ~3k/month from the military income alone and have more than enough cash reserves so I am not worried in the least about being overstretched and unable to pay the loan.

Even if you are able to buy a property at a discount, a 25% downpayment is still relatively expensive so the ability to avoid that problem would be nice.  It also eliminates the need for appraisals, and the annoyance of detailing every minor financial transaction while you apply for a new loan as well as loan origination costs etc and since you don't have to deal with the bank  you can close a lot faster.

Jay Hinrichs · Answer

the major down fall is under capitalized buyers getting into the deals and really screwing the sellers. that's the major down side.  its seller risk not so much buyer risk.

Seller has transferred ownership but still on the hook for the mortgage so what can go wrong with that scenario ??

well a ton.

get a bad actor they just rip rent and never pay on the mortgage Seen that happen a ton.

best intentions but no real money  and tenant stops paying and trashs house and now buyer has no ability to carry the property seller gets back a messed up home and is out thousands.

and I could go on and on..

its not about you the buyer the risk is the seller..

Downfalls of Subject-To deals?

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