Buying a property subject to an existing mortgage can seem a bit complicated and risky if you’ve never dealt with buying one. However, with risk often comes reward as these properties can be prime candidates for cash flowing rentals or lease option opportunities. For those of you who have never closed on a property subject to an existing mortgage, I’ll explain here about my story on closing my first one ever.

My first subject-to deal came about one day when I was riding around with my friend Malachi. Malachi told me his partner and him had a property for sale with an existing mortgage. He told me that the seller wanted to walk away with $2,000 and that him and his partner wanted $4,500 for their assignment fee. I said ok, what’s the address? I looked up the house and proceeded to stop by and do a walkthrough. It didn’t need much besides an AC unit, some new carpet and paint in a couple rooms. This house is a 4 bedroom, 1.5 Bath, 1470 Sq Ft. concrete block home In Jacksonville FL.

After looking over the property, I went home and contacted Malachi for some more information. When evaluating a subject to mortgage deal, the mortgage needs just as much analysis as the property does. I typically ask for 5 components:

-Monthly Payment

-Interest Rate

-Years Left on Loan

-Mortgage Balance

-Cost To Reinstate Mortgage

These 5 mortgage components combined with the condition and ARV of the subject property can tell you if the deal is good or not. Monthly payment is what the homeowner pays to cover PITI. (Principal, interest, taxes, and insurance.) The interest rate is what the lender charges to issue the loan. Years left on loan are how many years remain on the loan until it is paid off. This is important to know because when paying a mortgage, the amount that is reduced from the principal balance each month grows as the mortgage is paid each year. Therefore, it's nice to get a property where 10-20 years have already been paid on the loan.

When purchasing a property subject to mortgage, the homeowner is typically in distress and behind on payments. In order to keep the property from being foreclosed on, the mortgage must be made current and no longer delinquent. In this particular case, the homeowner was behind several months, totaling $3,345. This could have been better, but also could have been much worse. The monthly payment happened to be $666. The property can rent for $1200-1300 so I knew that I could produce great cashflow if I were to rent it out.

The mortgage balance was $104,000 with the interest rate at 4.875% and with 27 years left on the loan. These numbers weren't great, leaving around $10,000-15,000 in equity as the property ARV was around $135,000. However, with the cash flow being as good as it was with the property only needing around 8k in repairs (AC, bedroom flooring, bedroom paint), I decided to move forward and purchase the property. Here is how much it cost me:

-Mortgage Reinstatement: $3,345

-Closing Costs: $2300

-Wholesale Fee: $4500

-Cash To Seller: $2,000

Total Acquisition Cost: $12,145

Total Renovation Cost: $8,000

Now here is the projected rent rate, cashflow and ROI:

Total Cost: $20,145

Projected Rent: $1250 A Month

Projected Cash Flow: $584 A Month

Projected Yearly Rental Income: $7,008

Cash Paid: $20,145

Gross Cash on Cash Return: 34.78%

As you can see, this property should yield a 35% return per year. This means the 20k I invested in the property should be paid back to me within 3 years. However, it's important to also factor in vacancies and future repairs to the property, as these also effect ROI.

One final tip about buying subject to mortgage. Banks have a clause in their loan agreements known as a "due on sale clause." This clause means that the lender has the right to call the remainder of the mortgage due when the property is sold/changed owners. Therefore, when taking title, it's best to take title in a trust. This way, the bank will not know that the property was sold as the owner will be hidden through the trust. When taking title as an individual or an LLC, the bank may notice this and call the loan due, something that can kill your deal and cause you to lose money if you don't have a means to sell the property or refinance.