Why is a subject to deal a viable option?

Question

As I understand it a subject to is when you take the place of the original owner in a property. Money is made when you buy a house not when you sell it so how is this beneficial? Are you paying less for the equity they have in their house? Does this only work when the owner is threatened with foreclosure?

Wayne Brooks · Answer

A sub2 makes sense if the mtg balance, plus any cash you need to give the seller, is below market value. The only real benefit to the buyer is if they couldn’t qualify for a straight up loan or this method would require less cash.There are risks in a sub2 to both parties.....the due on sale clause being the biggest risk to the buyer, and the seller. The seller has the risk of the buyer not making the mtg payments and there is very little the seller can do about it.Proper state required disclosures need to be executed by the seller, otherwise the buyer has some legal/criminal liabilities.Once a sub2 is done, a short sale is no longer possible.

Larry Turowski · Answer

@Mack Bailey You could just rent it out, but there is still always that risk of the bank calling the loan. You should have an three year exit plan out of the sub-to-- either selling or refinancing. If there is no equity and you do not qualify for a refinance, then you are going to think twice before making major repairs when they come up and even every day repairs. i would do it if it were a good deal because I could pay off the property if necessary. If I weren't able to do that or to refi out of the sub-to in 6-12 months, then I wouldn't do it. I just don't think it would be fair to all parties involved.

Brett Goldsmith · Answer

@Mack Bailey Sounds like you don't fully understand what a subject-to existing lien transaction is. It simply means you take ownership of a home with the other owners lien, typically a mortgage, in place. Typically you would take the property to the existing mortgage(s) and cash the borrower out a portion of their equity ( if they have equity ) for the deed conveying ownership and resume paying the mortgage. Less money out of pocket = increased return on your money.A simple example illustrating the concept; 300K senior loan. Borrower/Owner wants 50K. You take the home subject to 300k senior loan and NET the borrower 50k. You resume paying the mortgage and resell and make Est. 50K. You're into the deal for about Est. 55k ( yes, i know this may be higher ). You resell and make Est. 50K so you made about Est. 90% cash on cash. Same example; 300k Loan and borrower/owner wants 50k. You put 20% down to obtain a conventional loan which is 70K. You get a 280K loan and pay Est. 1-2 loan points and maybe a higher interest rate vs the loan that was already in place. So you put more money ( est. 80k ) in and made Est. 50k which is quite a bit lower cash on cash. You also had to go through the motions of obtaining financing. Now if you don't qualify for conventional financing, now you go hard money, 30% down and more points so maybe you'd be into the same deal for 100-105k and make Est. 50k.The cons are you incur liabilities when taking a property subject-to. You need to ensure you have many proper disclosures in place and that the deal is done properly. Also, need to ensure you are capable or curing the note if it goes into default. You don't want to be the guy defaulting on someone else's note for many reasons. Hope this helps.

Don Konipol · Answer

@Mack Bailey The main benefits to a buyer is that using a subject to is much quicker, and can provide much greater leverage. If the seller is an owner occupant, he may have an LTV much higher than any investor can obtain The main benefits to a seller is that the transaction is quicker than a buyer obtaining new financing, and that he may get a higher price because the buyer does not have fees associated with obtaining a new loan and the buyer may pay more for greater leverage or pay more if he can’t qualify for a loan The downside to both is primarily that the buyers equity can be wiped out if the note holder accelerates the note, further the seller now has liability on a note secured by a property he does not own.

Larry Turowski · Answer

@Mack Bailey To add to what @Wayne Brooks said, a seller in foreclosure may agree to a sub-to because they are going to lose the house and their credit is taking a beating anyway. You just bringing the payments up to current will help their credit. But you would only want to do this if you stand to make money on the deal, which you could if the arrears, monthly mortgage and expenses are low enough that you could rent it out and cash flow nicely, or if there is a little bit of equity, say 5% to 10% where you could rent-to-own it or possibly sell it leaving the original mortgage in place and using a residential mortgage loan originator (RMLO). But you'd have to make the risks clear to all parties.For me, I would only do it on a flip. I almost just did one a few weeks ago. There wasn't enough equity to make it worth buying and flipping, but there was enough that I'd do a sub-to and rehab it and sell it. I'd be in and out of it in a few months. In the unlikely event that it wouldn't sell for a profit, I could cover any loss.

Brett Goldsmith · Answer

There are pros and additional risk taken when entering a subject-to. A subject-to can be beneficial as it allows you to enter a deal with potentially no financing or limited financing of your own, lower money out of pocket, and increased cash on cash returns. Also, some borrowers have extremely good rates. I did a subject-to that had a fixed 2% interest.

Nick Rutkowski · Answer

@Mack Bailey It's one reason why an investor would use a sub2, another was your example of someone going into foreclosure. I think any motivation from a seller is good for an investor but you still want to make sure they win too. Think win-win. Short sales are different, that's when a the bank agrees on a reduced price so the seller can sell the house in lieu of foreclosure.

Mack Bailey · Answer

@Nick Rutkowski ok so it's used when a seller needs quick money to get out from under taxes and mortgage payments? Is this good for the investor because the seller is somewhat desperate? Also is that the same as a short sale in the example you gave?

Nick Rutkowski · Answer

@Mack Bailey I'd only do a sub2 there is little to no equity in a property and my last option. Take someone who bought a house and has to relocate 2 months later. They can't sell their house - they'll take a loss, they need money quick to cover moving costs and an apartment, and they can't refinance. They could have an investor sub2 their house so they can walk away. That's one example I could think of.

Mack Bailey · Answer

@Larry T. Agreed. Thanks for walking me through that