Steps in a Subject To

Buying & Selling Real Estate
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Steps in a Subject To

Mark J.
Jersey City, NJ · Member since 2017 · 135 posts · 31 votes

I did a direct marketing campaign awhile back and one of the responses I received was from a seller wanting to get rid of the mortgage/debt.  She doesn't live in the property and it's been sitting vacant for the last year or so.  She tried to sell it but couldn't- think maybe due to a combination of bad agent and price/condition.

It probably needs about 10K to make it nice.  She owes 90K.  I'm thinking it could rent for $1100-$1200/month, which if I don't have to put the 20K down payment would make a lot of sense.

I'd like to approach the seller with a "subject to" offer, taking over the mortgage, fixing it up and renting it out.  Possibly selling it in a couple of years.

How would I go about it?  Do I need to get an agent to write an official offer and do the legal paperwork?  From what I've read I would/should get an inspection to make sure there aren't any major issues.

Would I hire a title agency firm to handle the transaction like a regular purchase (this is PA)?

Does this make sense as a financial deal or am I overlooking something(s)?

Thanks in advance for any input.

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Account Closed
Specialist · OverTheRainbow · Member since 2020 · 607 posts · 909 votes
6y
Originally posted by @Mark J.:

I did a direct marketing campaign awhile back and one of the responses I received was from a seller wanting to get rid of the mortgage/debt.  She doesn't live in the property and it's been sitting vacant for the last year or so.  She tried to sell it but couldn't- think maybe due to a combination of bad agent and price/condition.

It probably needs about 10K to make it nice.  She owes 90K.  I'm thinking it could rent for $1100-$1200/month, which if I don't have to put the 20K down payment would make a lot of sense.

I'd like to approach the seller with a "subject to" offer, taking over the mortgage, fixing it up and renting it out.  Possibly selling it in a couple of years.

How would I go about it?  Do I need to get an agent to write an official offer and do the legal paperwork?  From what I've read I would/should get an inspection to make sure there aren't any major issues.

Would I hire a title agency firm to handle the transaction like a regular purchase (this is PA)?

Does this make sense as a financial deal or am I overlooking something(s)?

Thanks in advance for any input.

Your offer: Tell her that you will take over the payments so she no longer has to make those payments, you tell her that the loan will remain in her name until you get the place fixed up and refinanced or sold. Tell her it will cost about $10,000 to do the fixing, which you will provide. You get ahold of a purchase and sale agreement, even one from Staples can work. You have a financing addendum stating that you are going to take over the loan for the amount owing on the date of possession. You call an escrow company (or attorney) depending on your state, have them open escrow and order a title report. You can have an inspection done but hey, you're getting a house for practically free, what're you complaining about? Then the escrow company or the attorney will draw up the paperwork and record the deed. Then you contact your favorite insurance company, and have both of your names put onto the insurance. 

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  • John K.
    Wholesaler/Investor · Dallas, TX · Member since 2018 · 260 posts · 222 votes
    6y

    Congratulations on your potential deal.

    You won't need a realtor in this deal. The truth of the matter is, many of them would have no clue how to negotiate it or write it up. Definitely do no lean on a realtor for anything legal, regarding sub 2. You want an attorney that is knowledgable on the laws of your state. They will draft the necessary paperwork and ensure it complies with state laws.

    As far as negotiating it. You need to be knowledgable on the process and what takes place. Chances are the seller is not going to have a clue. If you can't speak intelligently on the subject, bring someone that can or you will lose the seller. You need to be able to gain the trust with the seller quickly, as these transactions can seem overwhelming to a person with little to no knowledge. 

    You need to understand the frontside mortgage, before you know if you have a deal or not. What are the in place terms? Is she late, if so what is the cost to make it whole again? I would get a full understanding of the terms, before I worried about inspections and such. It's not as if you can negotiate her mortgage down. 

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  • Account Closed
    Specialist · OverTheRainbow · Member since 2020 · 607 posts · 909 votes
    6y
    Originally posted by @Mark J.:

    I did a direct marketing campaign awhile back and one of the responses I received was from a seller wanting to get rid of the mortgage/debt.  She doesn't live in the property and it's been sitting vacant for the last year or so.  She tried to sell it but couldn't- think maybe due to a combination of bad agent and price/condition.

    It probably needs about 10K to make it nice.  She owes 90K.  I'm thinking it could rent for $1100-$1200/month, which if I don't have to put the 20K down payment would make a lot of sense.

    I'd like to approach the seller with a "subject to" offer, taking over the mortgage, fixing it up and renting it out.  Possibly selling it in a couple of years.

    How would I go about it?  Do I need to get an agent to write an official offer and do the legal paperwork?  From what I've read I would/should get an inspection to make sure there aren't any major issues.

    Would I hire a title agency firm to handle the transaction like a regular purchase (this is PA)?

    Does this make sense as a financial deal or am I overlooking something(s)?

    Thanks in advance for any input.

    Your offer: Tell her that you will take over the payments so she no longer has to make those payments, you tell her that the loan will remain in her name until you get the place fixed up and refinanced or sold. Tell her it will cost about $10,000 to do the fixing, which you will provide. You get ahold of a purchase and sale agreement, even one from Staples can work. You have a financing addendum stating that you are going to take over the loan for the amount owing on the date of possession. You call an escrow company (or attorney) depending on your state, have them open escrow and order a title report. You can have an inspection done but hey, you're getting a house for practically free, what're you complaining about? Then the escrow company or the attorney will draw up the paperwork and record the deed. Then you contact your favorite insurance company, and have both of your names put onto the insurance. 

    2Reply
  • Mark J.
    OP
    Jersey City, NJ · Member since 2017 · 135 posts · 31 votes
    6y

    @John K. Thanks for the info, much appreciated and all makes sense.  I left a message with the seller today to give me a call, so we'll see. 

    Good call on the mortgage and terms.  I'm a little skeptical, so will definitely dig into that.

    Will follow up if I end up speaking with the owner again....

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  • Mark J.
    OP
    Jersey City, NJ · Member since 2017 · 135 posts · 31 votes
    6y

    @Account Closed thanks for the step by step playbook, seems fairly straightforward and makes sense. I left a message today asking for her to give me a call, so we'll see.  Some time has elapsed so not sure. Unfortunately I didn't know of this strategy when I originally spoke with her. Seems like it could be a win win.

     Either way hoping to use this strategy going forward.  Will give an update if I hear back.

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  • Mark J.
    OP
    Jersey City, NJ · Member since 2017 · 135 posts · 31 votes
    6y

    Just a quick update...I was able to get a hold of the seller again.  It came up that she's behind on payments, but didn't seem to know by how much.  She said she has to call the bank and get the amount that's past due as well as the interest rate.  I think she wants to talk to the bank about doing a subject to, which I'm guessing they're going to advise against?

    Anyhow if I hear back will give a follow up.

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  • Glenn Lee
    Member since 2020 · 9 posts · 2 votes
    6y

    From my understanding, you want to try and avoid the banks getting involved.  When I was first shown how a subject to works, I was told the banks don't care who is sending them a check.  But I have subsequently heard of some banks calling in the loan if the home owner isn't the one making the payments so I guess it varies.  I'm interested to hear how this plays out.

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  • Mark J.
    OP
    Jersey City, NJ · Member since 2017 · 135 posts · 31 votes
    6y

    @Glenn Lee I've read banks in general don't like this process, and could call the loan, but may depend on the bank?

    I tried to explain to the seller that the bank wouldn't be involved in the process and may say it can't be done/isn't allowed.  I sensed she was becoming skeptical, so didn't want to push it too much.  Unfortunately she didn't know the back payments owed, interest rate, etc. so she has to call the bank.  

    We'll see...

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  • Glenn Lee
    Member since 2020 · 9 posts · 2 votes
    6y

    I'm just getting started in RE investing ...I just started researching all this about 4 or 5 weeks ago, but one thing I plan on using is 'borrowed credibility" and it might help you in the future with talking to someone in this situation. Find a partner who has done hundreds of these deals and can help walk you through it.  Then when the homeowner is hesitant, you can say "my partner and I have done hundreds of these deals and we can help you each step of the way".  They don't need to know the partner has hundreds and you have zero.

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  • Mark J.
    OP
    Jersey City, NJ · Member since 2017 · 135 posts · 31 votes
    6y

    Update..

    @Glenn Lee sounds like a strategy that could work, if you can partner with the right person.

    Soo...the owner spoke with the bank and seems she has 2 loans on the property and the main one has already started to go into foreclosure and I would need to pay the foreclosure fees.  Doing a quick internet search it looks like foreclosure fees can be quite a lot.

    She said they are mailing her how much the fees are and said she'll let me know, but she didn't sound too hopeful.  

    I thought about calling the bank to see if they would sell it, but the deal doesn't make much sense if I need to be 20% down, given what I'd also have to put in for repairs.

    Going to follow up in a week or so to see if she has more info.  Really hard time hearing her/understanding (bad phone reception, loud tv) what she's saying, which doesn't help.

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