Sub To or Wrap Opportunity w/ an existing FHA mortgage?

Question

Hi All!  I have a potential opportunity that I'd like to run past the brilliant minds of BP....I'm a sub to/wrap virgin, so be gentle.

Seller is a friend and purchased this townhome direct from landlord in May of 2022 for $206,000(200,000+6k in closing costs). The current loan balance is 199,XXX. He has a 5.5% rate, which is assumable, but FHA guidelines would require owner occ.

He just took a job out of state and is needing to sell the property, but has very little equity and when fees are factored in he would likely end up needing to bring cash to closing. I feel like this is the perfect time for a win/win creative finance deal. Open to suggestion and also curious to hear of anyone doing creative finance deals when there's an FHA mortgage in place.

Here's my thoughts:

- Offer him $1,000 to accept the agreement, which is about a $2,000-$3,000 swing from what he would make[lose] if he were to go to market. The property does need carpet, paint, and some simple updates.

- Create LLC in the name of the address of the property. I've heard this may reduce the off chance that the loan is called due.

- Deed transfers to new LLC.

- Current owner continues making monthly payments, we pay him after he shows he paid the mortgage on time. Curious if anyone is paying the mortgage directly themselves and if that could or would create any issues not coming from the original borrower?

- 5 year balloon. He's a young fella and while he won't be ready to buy anything in the immediate future, he will want to be out of this deal at some point so he can free up his credit, etc... I'm considering the wrap option so that this time frame could be extended and he could be free to go get a new car, house, etc... without this mortgage effecting his ability to finance. Thoughts on this?

Comps are $210,000, but subject needs probably 5-10k in updates. If we really made this property shine, we might be able to get just north of $210,000.

Current PITI: $1401.87

HOA Fee: $236.00

Total Mo: $1,637.87

Estimated Rent: $1,800-$1,900

Mo Cash Flow: $162.13 or $1,945.56/yr

CoC Return of 194%. If I factor in additional $5,000 in upgrades it still hits a 30%+ CoC return....

It certainly is not a grand slam, but for the extremely low barrier of entry, it seems like a solid base hit. The end game would likely be to improve it and rent it out for a few years, possibly mid-term it to increase cash flow, and then sell before the 5 year balloon. I am also a real estate agent in the area and constantly have people looking for this sort of thing, so it would be likely I'd be able to sell it to my own client in the future.

What am I missing or should I be thinking about here?

Thanks for your time!

TZ

Trent Zimmer · Answer

To update everyone, we bought it for cash today. Closing in two weeks and seller is thrilled.

Trent Zimmer · Answer

Amazing!  Thank you for these perspectives.

Caroline Gerardo · Answer

If you transfer the deed to LLC and the servicer or lender calls the loan due in full, the friend's credit is damaged by foreclosure for four years.

Also the hazard insurance must remain in his name as owner occupant. When the LLC takes title you both might not have coverage. Changing the insurance to LLC alerts lender/servicer. LLC can't get owner policy.

The 5.5 rate is desirable to an owner occupant IF is assumable. Find the owner buyer for friend without changing the deed to LLC. If you can quickly find buyer to legally assume it frees him up.

The balloon puts stress on friend. Balloons are generally not allowed for owner occupied which is covered under Dodd Frank. You act a lender in your description. Run this by your broker. Not much juice in this orange to be worth the risk.

Alisha Marie Brown · Answer

any updates?? STRONGLY considering getting into a subto deal

Trent Zimmer · Answer

Glad you found the thread useful. There are so many little intricacies and its always nice to get others thoughts and perspectives.

Melissa Leak · Answer

Wow! I learned so much in this discussion! You both know your stuff. I'll be tuned in and hope to bring this much value as I learn the lingo in Real Estate.

Trent Zimmer · Answer

Appreciate all of the above!

Trent Zimmer · Answer

I am working with the servicer right now to confirm it can be assumed. If it can, it will increase the chances of him getting a bit more for the property.

FHA guidelines require owner occ, so I would not be able to assume this. This was never my plan to assume it. I simply wanted to find out if this were possible so I can market it this way, if we get to that point.

I do have to disagree with you about putting him in a bind or not honoring my fiduciary to him and here is why:

1. We can list the home and he will likely need to bring $3,000-$5,000 to closing, possibly more.

2. I can give him $1,000 which is a sizable swing compared to option 1. He takes on no real risk. The risk is to me, which is that the loan gets called due and I need to refinance or sell it at a loss. Either way, he is made whole.

I've made it really clear to him that I am 100% good with whichever direction he wants to go, but listing it on the market will likely cost him money.

Maybe I am missing something here, but how is him netting more money and closing sooner NOT a win for him?

Caroline Gerardo · Answer

The note says the loan is assumable?

If it is it is only owner occupied and never in a LLC.

So put your friend in a bind for tiny profit? As a licensee you are not honoring your fiduciary duty.

List it for him and get a buyer.

Andrew Kiel · Answer

If you're going to do a "subject to" deal, do a subject to deal.  Don't do a balloon and don't do the funny business with the deeds.  First, find a title agent/company willing to wrap an FHA loan - it's possible but difficult.  If you can't find a title company, you'll have to self-close the property without title insurance (which can be a bit scary).  If you're going to do this type of deal, just make sure you're comfortable with the possibility the loan may get called and you could have to refinance.  If this is an issue, don't do the deal.  I've done many FHA subject-to type transactions and they are fantastic, if you and the seller are willing to accept the risks.  There is no work around to the due on sale for an FHA loan.  More importantly, in my opinion, get the deed now.  I've seen far worse things when instruments like option agreements are used.

Sub To or Wrap Opportunity w/ an existing FHA mortgage?

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