Things to lookout for in a Subject 2 Deal?

Question

Hey BP Family,

I am an investor in the Augusta, GA area with 1 property currently. I'm looking to purchase another property and have come across a Subject 2 opportunity to take over the remaining loan balance from a Wholesaler and in return pay him a fee of $6k.  That said, this will be my first time doing a Subject 2 Deal and have done some research on it and have a pretty good understanding of what it entails but just wanted to know if anyone had some experience with it that could tell me somethings to look out for that I might be overlooking. There is already a current tenant in the rental doing month to month rent which covers the $500/month home loan + additional $250.  In addition I have seen the balance sheet for the loan and know how much is left for the balance. The closing will be done by an attorney and we are planning to close within the week. I spoke to the Wholesaler I am acquiring the deal from and told him the contract must include:

1. Me being added to the deed of the property

2. Having a clause where the mortgage owner is unable to use property on his taxes for write-offs

3. My payments are going directly to mortgage loan holder

4. I will purchase home loan insurance and add the current owner as an additional insured under my insurance

5. My address will be the forwarding address for escrow statements.

Aside from all this, is there anything i'm overlooking?

Mike Stohler · Answer

You need to completely switch the deed into your LLC using a title company.  You are not added to it.  Do not do a land contract.  Do an actual Subject 2 where it is completely switched to your LLC.

I write a letter to their mortgage company and state that the payments will be made via an LLC due to it being a rental.  I do this to give them a heads up to a name change in the payor.

Insurance companies require that the mortgage holder owns the insurance.  I have them keep the insurance but I again, write a letter to their insurance company stating that an LLC will be issuing the check.

They still get all tax benefits of the mortgage.

There are many other things we do but the most important is having the proper paperwork in order to protect your interest.

If you have any questions, let me know.  I own an 8 figure portfolio including commercial and residential.

Hermon Williams · Answer

Definitely make sure the deed is completely in your name and not that you are just added to it. Also a lease option may be something you want to consider too.

Marc Winter · Answer

A couple of thoughts:

1-- Add you to deed?  If you are taking the property sub-to, you want the deed out of the seller's name completely, not 'shared' with you.  You might consider having the title transferred by the seller into a viable trust, naming a trustee of your choosing.  With the property held in trust, you can take over a beneficiary role (and even trustee is you wish--no due on sale trigger.

2.  It's the person that actually pays the mortgage that can take the tax write-off.

3.  Correct

4.  Why name the seller as additional insured?  Check w your attorney.  And notify the bank of the new insurance policy--THEY will be listed on the binder.

5.  Correct

6.  MOST IMPORTANT:  Have your attorney prepare proper disclaimers and informed consent documents to be signed by the seller and notarized.  The seller MUST understand and agree to what you are doing, and their continuing liability on the existing mortgage.  You must make 100% sure your attorney knows this stuff and can perform as required.

Judy Parker · Answer

The Belligerent Tenant contacted me yesterday. He asked me for another copy of the Renewal Letter (he "lost" the original). Says he will sign the renewal, pay the higher rent and will stay for another year. AND, he was actually NICE about it! I assume he was unable to find a comparable one-bedroom apartment at such a good price.

Landlord = 1

Tenant = 0

Victor Umeh · Answer

@Bill Walston how does "buying the beneficial interest" work?

Bill Walston · Answer

@Victor Umeh, I think you should definitely have the current mortgagor listed on the insurance policy UNLESS the current policy doesn't include him/her.  Since the property is already in a trust the policy may be in the name of the trustee - as it should be.  Since the property is already in a trust, have you considered simply buying the beneficial interest?  That's the beauty of using trusts for real estate transactions.

Marc Winter · Answer

@Alex Mikhals

Subject to-- prefer lease/optiion.  I'm not a fan of land contract unless there is hefty cash down.

Alex Mikhals · Answer

@Marc Winter do u take subject 2 and then lease option , or do u usually take subject 2 and sell on land contract

Victor Umeh · Answer

@Kenneth Mooney yes after the repairs.  I'm not sure on the years for the loan.  Haven't seen the full statement but I plan to pay off early.  Would probably dedicate the whole rental payment ($900/month) to paying the mortgage just to get it paid off.  I work fulltime as well so could use this as a tax write-off to offset my corporate income and flips I'm doing elsewhere in Augusta.

Kenneth Mooney · Answer

@Victor Umeh I’m assuming the ARV is $100k after those repairs? How many years is the loan for?

Things to lookout for in a Subject 2 Deal?

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