Subject to questions

[Eric NA]

I have a few questions regarding subject to.

1. Once I have the deed, is the interest paid on the loan deductible for my LLC or is it deductible for the individual who still carries the loan in their name?

2. When does the seller get paid? This probably varies, but lets say you take over the payments and then decide to rent the property out. If the owner had some equity in the house and they wanted some cash out of it, it seems like it would be tough to tell them, "you'll get cash eventually, but i'm just going to rent it out right now" Lease option could provide a little up front cash but if they have 50K in equity and they are willing to give up 25K to get out of the situation, they are still going to want 25K. What would you do here?

3. What ACTUALLY happens in the process. I know they give you the deed, but do they literally hand you a piece of paper and sign it and say it's you're and viola it's done, or do you take it to a title company and have them complete the process?

4. Do you pay the mortgage company directly or do you pay the person who is financing the property and then they pay the mortgage company?

5. What if the house needs a little work, paint, yard work, etc and it's going to cost 2K, how would you handle that? do you just eat the money out of pocket and make up for it with positive cash flow, or do you get the owner to split cost with you? I'm sure there's many option here.

6. Does doing a subject 2 basically boil down to A) Finding someone motivated to get out from under their mortagage B) convincing them to trust you enough to give you the deed to their home. C) Getting a good price. Is that basically the jist or do you need another key?

7. Lets say one day the person who takes over the deed can no longer make the payment. Then what happens? I assume the home owner could go into default for not making the payment anymore and could have to file for bankruptecy, but what happens to the person who has the deed?

8. So lets say someone agrees and they are happy to let you take the deed and keep the mortgage in their name. Wouldn't that make it darn near impossible for them to get ANOTHER mortgage if they are moving to another state or buying another home? Especially now they are goign to check and see what you make vs what you are wanting to buy so it seems like them keeping the mortgage in their name makes it impossible to get another mortage.

Thank you for your time in advance.

[Jon Holdman]

The standard advice to consult with a lawyer and a CPA applies. Here's my understanding of the situation.

Originally posted by Eric W:

I have a few questions regarding subject to.

1. Once I have the deed, is the interest paid on the loan deductible for my LLC or is it deductible for the individual who still carries the loan in their name?

The buyer deducts the interest. Once the transaction is done, they own the property.

2. When does the seller get paid? This probably varies, but lets say you take over the payments and then decide to rent the property out. If the owner had some equity in the house and they wanted some cash out of it, it seems like it would be tough to tell them, "you'll get cash eventually, but i'm just going to rent it out right now" Lease option could provide a little up front cash but if they have 50K in equity and they are willing to give up 25K to get out of the situation, they are still going to want 25K. What would you do here?

Whatever you negotiate. Realistically in your example, the seller would want the $25K up front. The transaction is that you pay them $25K and take over the note. I suppose you might find someone who's willing to do this deal and wait indefinitely to get their $25K. Most likely, they would insist on some time period, say a few years, to get paid. You would need to sell or refi within that time in order to pay them off.

I'd guess most deals like this won't have nearly that much equity.

3. What ACTUALLY happens in the process. I know they give you the deed, but do they literally hand you a piece of paper and sign it and say it's you're and viola it's done, or do you take it to a title company and have them complete the process?

Use a title company. You could do it yourself, but doing it with a title company and getting title insurance is safer unless you're very familiar with all the ins and outs. You may have to search around to find a title company that will do this sort of transaction.

4. Do you pay the mortgage company directly or do you pay the person who is financing the property and then they pay the mortgage company?

You pay the mortgage company directly. As part of the transaction, you want to get a limited power of attorney from the seller that allows you do deal with any future issues with the property. Then you would prefer to never have contact with the seller again. You want to make the payments to ensure they're made. If the seller want's some assurance they're being made, you could offer to send along the statements showing the payments. As a last resort, there are escrow services who will handle the payments.

5. What if the house needs a little work, paint, yard work, etc and it's going to cost 2K, how would you handle that? do you just eat the money out of pocket and make up for it with positive cash flow, or do you get the owner to split cost with you? I'm sure there's many option here.

Again, whatever you negotiate. Usually that sort of thing is factored into the price. Once this deal is done, it your property. The only thing that's unusual is the financing. Other than that, its just like any other transaction. Once the deal is done, the seller is out of the picture. You're the owner, so yes, the owner would pay for any ongoing maintenance.

6. Does doing a subject 2 basically boil down to A) Finding someone motivated to get out from under their mortagage B) convincing them to trust you enough to give you the deed to their home. C) Getting a good price. Is that basically the jist or do you need another key?

Pretty much. "A good price" would be the existing mortgage balance. If they have a bunch of equity, they should just sell the place via the normal process.

7. Lets say one day the person who takes over the deed can no longer make the payment. Then what happens? I assume the home owner could go into default for not making the payment anymore and could have to file for bankruptecy, but what happens to the person who has the deed?

Again, you're using the wrong terms. If the new owner (buyer) stops making payments, the lender will foreclose. If you do nothing, they will eventually take possession of the house. The old owner (seller) is the one who takes the credit hit and has the foreclosure on their record. Needless to say, they will be unhappy, and will likely sue the buyer. The buyer would, at best, have to defend them self in court, and wouldn't have much of a defense.

8. So lets say someone agrees and they are happy to let you take the deed and keep the mortgage in their name. Wouldn't that make it darn near impossible for them to get ANOTHER mortgage if they are moving to another state or buying another home? Especially now they are goign to check and see what you make vs what you are wanting to buy so it seems like them keeping the mortgage in their name makes it impossible to get another mortage.

Yes, probably makes that very difficult. Not impossible, if they can convince the new lender they have in fact sold the house and the new buyer is making all their payments on time. They might be able to do that after a year or more of the new buyer making payments. Even then, some lenders are going to say no.

Realistically, a seller who's wanting to sell their house and buy another is not your best prospect for a deal like this. You want someone who's motivated, and doesn't have plan to turn around and get a new loan.