Subject to, plus Taxes and Insurance?

Question

Hello BP,

I just need a little clarification on strategies using subject to. Specifically, how do you handle taxes and insurance?

As I understand it, acquiring a property subject to the existing mortgage entails that the owner is still responsible for the lean, but ownership of the property is transferred to the buyer/investor.  The smart thing for the investor to do is pay an escrow company to ensure the mortgage remains current. As opposed to relying on the seller to pay a mortgage for a property he/she no longer owns.

The gap in knowledge, or portion of the strategy I'm not finding, is how taxes and insurance are handled.

Some lenders collect a monthly payment that includes PITI. The taxes and insurance are deposited into an escrow account and paid annually on behalf of the borrower.

Once title is transferred, should the buyer/investor ask the seller to cancel the escrow account so that the only portioned paid is the principal and interest remaining on his or her mortgage? Would this cause any issue with the lender?

I suppose cancelling would be the correct way to do business since taxes and insurance are the responsibility of the new owner.

Let me know if I'm in the ballpark or if there is something I have missed.

Thank you.

Clarence M Canty · Answer

@Rick Pozos , brother. You got the wrong problem man! El Paso is a super rich market, especially for rental property. Look at the median income, avg cost of a home, and compare the cost of ownership to renting. The taxes here makes buying a home almost insane with all of the rental inventory. I just moved here (El Paso) last month, and I already have two deals in the process to acquire a total of 93 doors. I'm buying multi-family. Send me a message, we can get to the money down here together. This market reminds me of Atlanta in the early 2000's, I rode that wave and learned some valuable lessons, so here we go again... MONEY TIME!!!

Robert Gilstrap · Answer

@Justin Webb Taxes and Insurance are easy for Subject to's once you understand how. Give me a shout and I can explain in a few minutes. I've got about 35 subject to's right now of my own and I'm closing on another in a few days. You can also easily sell one using a wrap but I would never allow the new buyer to make the payments direct. They pay you on the wrap, you pay the mortgage and remember; regardless of whether they pay you or not you are still obligated to make that underlying mortgage payment or your reputation will be trashed. You commit to buying it means you commit to paying for it.  Subject to's to me are the best thing ever invented and I would be retired by now if I had started buying them 10 years earlier.

Rick Pozos · Answer

Taxes too high, property management too high or rents too low is never the issue. Those are part of the landscape that you are buying in. What you have to do is find deals that are at the right price with those parameters. It may be harder to find, but I am sure many people own and continue to buy properties in El Paso.

You need to become an expert in marketing. Learn how others market in your area to find great deals. Is it probate, absentee owners, pre-foreclosure or divorces or maybe something else. But marketing is definitely the key to finding deals.

Become a member in one or several real estate groups in El Paso and see what others are doing.

Justin Webb · Answer

Great information gentlemen! I think I drifted a little off course and read a few over-inflated strategies from some of the Guru's out there publishing books with no substance. That's why I needed to ask the question here to see if it was a valid tactic or something to get us all in trouble.

@Rick Pozos I noticed your an investor from San Antonio. Would you mind sharing a strategy you use to acquire properties in Texas that still cash-flows after P.I.T.I, property management, and capX without having to put 50% down? Property taxes typically push me over the edge so I've had to abandon El Paso. The rental market is $200 cheaper because of proximity with Mexico and the industries located here. Plus, too many houses were built between 2008 & 12 since the city was expecting more soldiers to be stationed at FT Bliss than actually occurred.  I have been conducting the research to invest in San Antonio since it's the next closest metropolitan in Texas. We both know it's still quite a drive. However speaking with the chamber, there is a lot of growth and preparation occurring.

Rick Pozos · Answer

Sub-to is a little tricky. It seems simple, just take over the payments. Well...there are a bunch of ways that you can get into trouble. The first is the insurance. If you change the insurance, actually change the name of the insured, you can have some problems. Also, when the title changes to another name, there may be a search that comes up with a new owner, you. This is what triggers or can trigger the due on sale.

Owner financing to someone else is not a recommended strategy, especially if you are not putting the property in a land trust, which is a whole other discussion. Sub-to works great to get control of the property, rehab it and sell it. Make your money and move on.

There is also the release of information authorization and a limited power of attorney that should be created when you purchase. How about an acknowledgement statement by the seller so that you can be sure that they know 100% what they are doing. Gosh, lots of things that can go wrong when trying to do some owner financing. It would be much easier to sub-to for the acquisition, rehab, then refi with a private lender or sell.

Odie Ayaga · Answer

Hi @Justin Webb. I may have my references off but you benefit from checking out podcast 188 where David discusses some strategies regarding subject to I hadn't heard before such as setting up the transaction so every time a payment is made the original seller would get $1 that would inform them that payments were being made appropriately.

Mike D'Arrigo · Answer

@Justin Webb That's when the lender collects the taxes and insurance with the monthly mortgage and holds it in an escrow account. Often times that is optional.

Justin Webb · Answer

@Mike D'Arrigo Could you explain a little more about the impound account?

Mike D'Arrigo · Answer

That's not entirely accurate. Most of the time lenders give an option of whether you want an impound account or not.

Justin Webb · Answer

@Rick Pozos , very simple but true advice. I should probably link up with a few investors locally. I might be missing something or my math may be too conservative.

@Robert Gilstrap, outstanding! I'll send you a PM. Inherently, there is risk involved with being the middle man, but you are right. If you have the means to pay for the wrap in case a buyer falls behind in their payments it looks to be beneficial. I just can't close the gap on all the small steps that have to occur to make a wrap, or make owner financing work on the back end. Its tough work but looks promising. Look forward to hearing from you. On a side note, I hope all is well there in the city with the big chicken. I'm originally from Rome.

@Greg Lawrence, Hooah! I'll send you a PM.

@Clarence M Canty, @Adrian Silva, thank you both I'll shoot you a PM.I have struggled with starting in El Paso.@Clarence M Canty I agree with your multi-family strategy. That was one of the only strategies, I found that would cash-flow. The others were flipping and wholesaling. Both are great but I'm trying to build long term collection of assets since I'm doing this part time. Also, the payoff from mortgage interest and depreciation is more appealing than capital gains and the steep tax associated with it.

Below I'll give you an example of my numbers. Please let me know if I am being too conservative or if my numbers are not matching yours. All information is based on comps I received for September-November (90 day) Bottom line up front, I would require a home at 45% ARV in order to cash flow $150-200 after factoring in PITI, CapX, Property Management, and vacancy. This does not include closing costs, rehab, or HOA. Also, this example is a monster of a house. I prefer 3/2around 1200 sq ft for investments but this is one of the average homes in the far east that seemed to sell due to its proximity to the loop. The numbers were proportional to several 3/2 1200 sq ft homes and rent averaging around 1100-1300 a month. This just happens to be the only example I didn’t delete.

I can get a positive $58 cash flow if my maximum offer is 55% of the valuation. 4 Br 3 ba 2707 sq ft home ARV = 202,333. If the purchase price is 55% for $95,387 ($0 for repair costs). The Primary Mortgage is 92,523.85 @ 3.5% APR (Based off early November's rates, add .5% for today's rate) for 30 years amortized ($415 P&I monthly). Private Loan is interest only $21,140 @ 8% APR for 30 years amortized with a balloon at 10 years ($140 monthly). CMA/Comp average rent for the property is $1750. Expenses total $1035.55 monthly. ($482.23 taxes @ 2.86%, $143.31 insurance @ .85%, $175 Property Management Fee @ 10% Rent, $160 for CapX). The Vacancy Loss% is 5.75. With all that I have a NOI of $603.83 less $555.48 for both loans. Grand total of $58.35 cash flow. As mentioned above, this is how many of them work out if I remain conservative. Sure, I could skip saving for maintenance and vacancies or try my luck with increasing rent by $200 but based off the conservative numbers I tend to draw a negative cash flow with most properties. These number only get worse if I try to purchase at 70% or 75% of ARV/Valuation.

However, I remember Brandon Turner mentioning that sometimes we should be embarrassed at our offers. If that is the case, then we know we are setting ourselves up for a deal. I just thought an offer of $91,049 for a $202,333 home was more of a punch in the throat. Thoughts?

Subject to, plus Taxes and Insurance?

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