Subject-to - seller paying the 2nd mortgage - what should contract look like?

Question

Hi.  I am working with a seller on a subject-to deal.  Here is the info:

Owes 47k on first (payments = 387/mo PITI)
Owes 7k on second (payments = 90/mo PITI)

The seller has agreed to continue making the payments on the second mortgage.

How do you suggest I write up the agreement with this seller?  Should all of the above terms and conditions be solely written in the purchase and sales agreement?  Or should there be an additional contract/addendum regarding the seller paying back the 2nd mortgage?

The exit strategy is to assign this contract to a landlord who wants the property as a rental.  I want the end buyer (landlord) to be comfortable with the agreement.

Thanks

Scott Hubbard · Answer

In my opinion, you purchase the property subject to both mortgages as you do not want the seller to quit paying and running up the tab.  Anything could happen, job loss, illness, divorce, etc.  Also, if he is paying on a note secured by the property, then he may be able to make a claim to the equity through quiet title suit.

However, there may be a way to structure this and I am building on what Brian already introduced.  Here is what I would do:

First, you should agree to pay both mortgages, then create a note for $7K (preferably with some sort of collateral like other real estate, car, coin collection, art, etc..  You will need to the date of origination,loan amount, interest rate, and loan term.  Then using a mortgages calculator, recreate the note term by adjusting the term, rate, and balance due until you have a similar note schedule.

Explain to the seller the reason for doing it this way is for legal reasons and for peace of mind.  If he is paying you $90 / month and your paying $90 / month to the second mortgage, then the payment is a wash.

This way is much better because you no longer run the risk of the seller making a claim to the equity for payments on the second.  Also, if seller stops paying, you will know right away and avoid arrears.

I would not proceed with the above unless you can cash flow if forced to pay the seller's second on your own.

Good Luck!

Steve Babiak · Answer

One thing not mentioned was whether the second was "open ended" (aka a HELOC).  If it was open ended, then you have to shut down any further draw possibilities first, or else the tab just might get run up higher.

Bill Gulley · Answer

Welcome to BP Dawayne,

I have not seen that thread and if I had would have advised against that as any soultion!

There is alot of information needed before making a suggestion, a lower payoff on a second might be obtained, depends on who holds it.

This was to be flipped to a landlord, we know nothing about the end buyer or the purchase sale prices involved. If a sub-2 was even the best soultion. The easiest way is simply to buy at the price, the agreement is evidence of the debt assumed by that seller and there is no need for another note to be made to match the 2nd, the property is sold subject only to the first motgage and the seller must provide good title. Additional security could also be assigned under the agreement as well.

Dawayne Mosier · Answer

I know this is an old post, but just in case someone else happens upon this same issue I have heard of other investors that have done a short sale on the second to get it paid off.  Not sure if something like that would work on a 7k loan but I suppose it could be worth a try.

Bryan Hancock · Answer

If you use her car make sure it is worth something and the debt doesn't exceed the quick sale price.  You may also want to check on the legality of everything so you wouldn't be seizing their method of getting to work or some such.

Honestly the deal would be cleaner if you could figure out a way to not have the seller continue to make payments.  If you have them paying you may want to see if they can secure it will collateral that is easier to seize than a car.

Nick L. · Answer

Bryan and Scott - thanks for your advice!

The seller's motivation is not the amount of payment, but rather the distance to the house.  Because of this, I am thinking she would be ok with a little higher payment on the 2nd if it would be paid off more quickly.  I may work with her on that to create a note where she pays me $150-200/month to pay off the 2nd and then continue paying her loan.  I'll need to secure against her car or maybe her new house, although she may be renting right now.  Need to determine the collateral to be used.

Thanks again.  Anyone have any more insight or experience in this type of transaction?

Bryan Hancock · Answer

So what happens if the seller quits paying?  I wouldn't trust the seller to continue making the payments even if they were coming to me.  Do they have collateral to secure the loan you are extending to them in the case of default?

I am guessing this is what your buyer will care about.

Subject-to - seller paying the 2nd mortgage - what should contract look like?

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