Need Advise on Subject-To Deal Structure (or any other ideas)

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Need Advise on Subject-To Deal Structure (or any other ideas)

Sean WilliamsBusiness Member
Real Estate Agent · Louisville, KY · Member since 2014 · 124 posts · 56 votes

I have seller with the following situation:

$240,000 single family house

$165,000 balance due on mortgage ($159k balance + $6k in past due pmts)

$950/month (PITI) is the current mortgage payment @ 3.875%

$1,400/month Market Rent

If the seller listed the property, they would walk away with roughly $60k after commissions. However, they are willing to sell fast at $220k and take payments on their equity. Any ideas for the best deal structure?


My thoughts were:
-Purchase at $220,000 with subject-to financing
-Pay the $6k to get mortgage current, then take over the existing mortgage/payments
-Give seller 2nd lien position and pay them $500/month (100% go to principle balance on 2nd lien)

This essentially becomes a break-even (or small loss) situation on monthly cash flow, but I own the property with $0 money down and get the benefits of depreciation. If interest rates goes down, I can either refinance to get seller whole or sell for a small profit.

Any other deal structure ideas?

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Ontwon Smith
Member since 2023 · 3 posts · 3 votes
2y
It's workable; by not paying the seller $500/mo. Preferably, 2nd note payable upon resale. **(You have to hit the "pain" points-FORECLOSURE IS COMING! He can end up with Nothing! **Stress the debt relief he's getting by you making the monthly pmt. **Stress your *"Credit Improvement Plan" by making up the arrearage and continuing the payment stream. That makes the SELLER LOOK GOOD to the bank!). Offer 5yr balloon to seller but 3 yr balloon to your buyer, By the way, if you wrap, the arrearage would come out of the new buyer's deposit. You bump the sales price 10% since you're offering owner financing and get a 10% down payment. (if not more). You can also set up a lease-purchase with your end buyer for 12-24 months. Don't forget to try to discount that 2nd when it close to paying seller off. In fact, add "Right of first refusal" in the mortgage language.. You'll be Fine with this one!
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  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    3y

    you're not including all expenses - if you take it over sub-to and pay the seller $500 a month you'll be significantly negative and not break-even

    0Reply
  • Caleb Christopher
    Title Representative · Denver, CO · Member since 2020 · 126 posts · 66 votes
    2y

    @Sean Williams did you get this figured out?? It looks like you're on target with the bullet points you provided here.

    I do this type of deal all the time, feel free to connect with me to discuss more (preferably tag me back in a reply here so I can provide value to everyone with public replies).

    You can catch up the arrears, make monthly payments, and either LTR, STR, or wrap-sale it to yet another end buyer for a markup!

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Sean Williams

    If you have to pay reinstatement that’s not no money down.

    This doesn’t look like a deal to me.

    7e investments53 Reviews
    WebsiteView Page
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  • Caleb Christopher
    Title Representative · Denver, CO · Member since 2020 · 126 posts · 66 votes
    2y

    @Chris Seveney he acknowledges the low/no cash flow, but he's after a low-entry acquisition with debt paydown and equity-building. It's a longer play where the cash-on-cash return is crap, but the true return is there. Through depreciation, other income taxes are offset, through debt paydown and appreciation, he's going to gain $thousands per year in equity.

    Subjectively, it may appear not to be a deal, but if the buyer understands these factors and wants the property, an entry fee under $10K sounds like a deal. "Buy real estate and wait" is the big-picture game. He'll be happy he did this deal 2 years from now, and would be kicking himself for dodging it because it didn't cash flow immediately.

    0Reply
  • Ontwon Smith
    Member since 2023 · 3 posts · 3 votes
    2y
    It's workable; by not paying the seller $500/mo. Preferably, 2nd note payable upon resale. **(You have to hit the "pain" points-FORECLOSURE IS COMING! He can end up with Nothing! **Stress the debt relief he's getting by you making the monthly pmt. **Stress your *"Credit Improvement Plan" by making up the arrearage and continuing the payment stream. That makes the SELLER LOOK GOOD to the bank!). Offer 5yr balloon to seller but 3 yr balloon to your buyer, By the way, if you wrap, the arrearage would come out of the new buyer's deposit. You bump the sales price 10% since you're offering owner financing and get a 10% down payment. (if not more). You can also set up a lease-purchase with your end buyer for 12-24 months. Don't forget to try to discount that 2nd when it close to paying seller off. In fact, add "Right of first refusal" in the mortgage language.. You'll be Fine with this one!
    3Reply
  • Sandra McEwanPro Member
    Rental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
    2y
    Quote from @Caleb Christopher:

    @Chris Seveney he acknowledges the low/no cash flow, but he's after a low-entry acquisition with debt paydown and equity-building. It's a longer play where the cash-on-cash return is crap, but the true return is there. Through depreciation, other income taxes are offset, through debt paydown and appreciation, he's going to gain $thousands per year in equity.

    Subjectively, it may appear not to be a deal, but if the buyer understands these factors and wants the property, an entry fee under $10K sounds like a deal. "Buy real estate and wait" is the big-picture game. He'll be happy he did this deal 2 years from now, and would be kicking himself for dodging it because it didn't cash flow immediately.

    Hey @Caleb Christopher, I hate to but in but I have another deal.  I was wondering if you could look over:)
    0Reply
  • Sandra McEwanPro Member
    Rental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
    2y

    I should probably start a new thread here but I thought I would jump in an ask as I am following @Sean Williams question. Thank you as I am learning along the way.   My deal is a triplex with a potential Subject-To or anything else creative I can do.

    VA loan 2.6% 28 years left

    341k left on loan

    Current property value 400k

    mortgage is $2046

    Owner is going overseas in end of December and either needs to sell, do creative deal or get a property manager.  He wants to get into the building space in 2 years instead of buy and hold small multifamily.  In creative deal, Seller agrees, I will keep the 2.6% rate for the life of the loan.  

    Rents together are: 2945k/month for LTR

    Market rents after minor reno: 3400 for LTR

    Can mid-term rent these as well: 4800 for MTR/STR hybrid

    Reno: 5-10k

    Seller wants 60k (his perceived equity) in 2years, nothing down and no monthly payment.

    Seller wants a chunk in 2 years b/c he wants to start a new venture.  5 years doesn't interest him and I am not thrilled with monthly payments b/c there will be much transition.  He doesn't really care for monthly payments anyway for equity.  One unit is vacant and need to put in W/d hook up and get tenant and then potentially furnish for MTR next year.  I understand his equity is actually much less if he were to sell on the market.


    He wants more than 20k in 2 years.  I could get an equity partner at some point.  

    Any help is appreciated! Thank you!!

    @Nicholas L. @Caleb Christopher @Chris Seveney @Ontwon Smith

    @Ontwon Smithundefined

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  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Sandra McEwan

    this is a complicated one and there is a lot here.  reactions - 

    -you said he "doesn't want monthly payments" - well, that's the whole point of sub to; you just pay the existing mortgage, you don't make additional payments to the seller.

    -you would need a plan to get him his 60K in 2 years and if you refinanced you'd lose the existing low rate on the mortgage.

    -i don't know whether this would cash flow as a LTR - would need all the expenses, not just the mortgage - and how solid are the MTR/STR numbers?

    -how many rentals do you own?  i don't think sub to is a new investor strategy.

    0Reply
  • Sandra McEwanPro Member
    Rental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
    2y

    yes, I would have to figure out the 60k but I think he will take less b/c he doesn't really have that much equity.  I would not refinance but would take on a partner perhaps or save the cash flow and use my own money for the rest, refi another property.  

    A few things have to happen: stop paying water and for a dumpster, add w/d hookup in one unit and bring market rents up. 

    expenses: 

    $150 for water, $95 dumpster, $130 lawn, pest control $18

    It does cash flow LTR but very little until those changes.  

    I have 4 MTR/STR hybrid quadplex and a duplex LTR same street.

    1Reply
  • Ontwon Smith
    Member since 2023 · 3 posts · 3 votes
    2y

    Sorry, just saw this. You may have to pass because unfortunately, your company policy doesn't allow purchases above 85% LTV max. You can offer him 10k in 2 years in anticipation of appreciation but don't feel bad if he turns down your over generous offer. Basically, you can really only offer him DEBT RELIEF BY TAKING OVER THE PAYMENTS OR HE CAN MAKE THEM HIMSELF. (He'll have to offer you some equity if you extend to him the GREAT FAVOR of making payments for him).

    0Reply
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