Subject to

[Darian Stewart]

Hello BP community,another newbie here! I have a question for my potentially first deal. It would be a subject to deal. I was visiting at a coworkers house and he asked me, what sounded like to me a jokingly manner, if I would want to start paying his mortgage. We joked about it and went on about the day. Then I got to thinking, he mentioned to me that he was recently divorced, I don't know how long ago, and that it is too much house for one man. I even told him what househacking is but he was not interested. It is a nice 2 story 4 bed 2 bath with a 2 car garage in a nice neighborhood in a small town of about 5,000 people. There is a stable job market from several different big companies in town so it would be a nice rental down the line. But I would want it to be my own home for a year, at the most two. My questions are this. 1. Can i get a home equity loan? 2. How do I go about asking a bank for a home equity loan on a deal like this because I would use it to start buying more deals like this but keep enough for reserve capital. Of course the numbers always have to be plugged in, but I was just curious if I could a equity loan and I don't want to trigger a due on sale clause or waste any of my time before I get to deep into it. So thanks. Any answer is appriciated!

[Brandy Deunk]

I agree with Jeremy; this isn't how Sub2 deals are generally executed.

Typically the remaining balance of the mortgage (i.e., the portion of the loan that the seller still owes) is considered part of the buyer’s purchase price. Thus, if the buyer has agreed to pay a total of $200k for the home and the loan is $100k, the seller acknowledges that the cash-out will be $100k to them once the final transfer is executed.

Execution of the above deal can take a few forms:

CASH: Most of the deals I see are straight cash - i.e., the buyer takes over the payments for the existing mortgage (which in this environment will likely be 1-3 percentage points lower than you can get for an investment loan) and pays the seller $100,000 in cash to the seller (the difference between the purchase price and the loan balance). 

SELLER CARRIED FINANCING: The buyer doesn't have enough cash to cover the payment to the seller, so the seller finances the difference. In the case above, the seller now has two loan payments: one to the original mortgage company that continues to hold the mortgage in the name of the seller, and one directly to the seller. 

WRAP-AROUND: In this case, a seller offers a buyer an owner-financed loan which includes or “wraps around” the seller’s current mortgage, often at a higher interest rate. Using the numbers from above, the seller offers an owner-financed loan to the buyer for $200k, and the buyer makes a single monthly payment to the seller, from which the seller continues to pay their mortgage. The benefit to the seller is that they can charge a higher interest rate than what their current mortgage charges, and they aren't worried about late mortgage payments dinging their credit.

For all of these deals, having enforceable contract language is essential. 

For example, cash deals often have sellers who want robust language protecting the seller if the buyer is late or stops paying the mortgage. This can take the form of strong "default" terms which, notwithstanding any payments or improvements on the part of the buyer, give the property back to the seller free and clear if the buyer doesn't correct a contractual default in a fairly short period (such as 14 to 21 days after receipt of a notice of default).