Purchasing "subject to" in Texas

[Annchen Knodt]

Hi BP,

My father @Tom Knodt and I potentially have a motivated seller in Brenham, Texas (near College Station, between Houston and Austin) who we think would be a good candidate for a "subject to" purchase for a buy and hold rental.  (At first we looked into assuming the loan but have learned that these days it's not usually an option.) We have been trying to learn exactly how this would work, but there are still a few specifics we are unsure of so I wanted to post our plan here and see if anyone has any feedback.

Step 1: Talk to our attorney, we have a list of questions for him

1. Make sure he doesn’t advise against it in general
2. Should we have the seller put the house into a land trust before we buy it to avoid due-on-sale clause? 
3. Confirm that we can use the usual offer-to-purchase contract, but with “subject to" existing financing specified
4. Can we use the attorney / escrow as an intermediary for the payments, to protect the seller?
5. Do we also need to talk to a title company to make sure they will do it?
6. Do we need to talk to the bank at all? I don’t think so

Step 2: Fully inform seller of how it works, have them sign OTP contract if agree

Step 3: Do an inspection and get rehab estimates (we already have some estimates, need to finalize so will probably include a contingency for this in OTP)

Step 4: Finalize amount and purchase property     

1. We will offer the seller a down payment in addition to taking over mortgage payments
2. We will now just be paying the bank directly, instead of the seller paying the bank, correct? (the mortgage is with Chase bank)
3. In lieu of a down payment, we are considering offering the seller monthly payments over 5 years, for a greater total amount. I think this would be considered a wrap?  Would we cut one check to the bank, and one to the seller then?

Step 5: Rehab and rent out 

Step 6: Cash out refi after stabilized, pay off loan & hopefully pull some cash out

1. How long do we have to wait for that?  Based on this thread I'm thinking it might be 12-24 months?

Any advice or feedback is greatly appreciated, thanks!

[David Patchett]

@Annchen Knodt

Earlier this year, I completed the sale of a rental in Houston using a wrap-mortgage. In Texas, I learned a Title company can handle such a transaction. However, I hired an attorney to ensure my interests were covered (as the Seller). The attorney had me use the Texas 1-4 Family Residential Contract. Here's a link to forms authorized by Texas Real Estate Commission to familiarize yourself. Your attorney will have appropriate forms as well.

https://www.trec.texas.gov/forms-and-contracts

After doing additional research, I identified terms and provisions important to me to further mitigate my risk than whats in usual docs like Deed of Trust, etc. This list went to my attorney to ensure they were either not needed or added into final docs. My attorney dealt with the Title company attorneys in finalizing all appropriate documents. 

For me, a proven and skilled real estate attorney plus a professional and proven Title company for this specific type of transaction was a must. In Texas, these kind of transactions are not as common as NC. So find the right professionals to assist you in Closing the deal out.

Secondly, be wary about when and how much you will be able to receive your investment funds back in a cash-out re-fi. I have an investment in North Carolina that I purchased and rehabbed, all cash. Initial conversations with BP'ers and some lenders shared that, in general, the lending community will only cash-out to finance 70% or so of the original purchase price within first year of ownership. More research is necessary.

And third, Brenham is far from NC. Are there better options available closer that can be managed easier? Just wondering out loud. I have family nearby so I'm in Brenham once or twice a year. A great town that is growing. 

Best of success to you!