Do you like Subject-to-existing financing? Why or Why not?

Question

Last year I took over the payments on a couple of houses, rehabbed them, put tenants in them to pay the mortgages for me. It has worked out very well so far. It's a relatively cheaper way to get into a property and cash flow. I am in Birmingham, AL so this is a cash flow market. I have heard all of the scary talk about the lender calling the loan due, but I even talk to them. They could care less about who makes the payments. They don't want the house they want the money. And they know if they call the loan it would be foreclosed. So I feel as if it's a good strategy for me and my business. I have so many that come across my desk but I don't want to bite off more than I can chew so I help my clients find buyers/ investors who like this strategy as well. What do you think about this strategy and does it work in your market?

Steve Vaughan · Answer

I like them for low equity pretty houses where the seller needs to relocate.  Not rehabs, not distressed pre-foreclosure situations.   No they are not common in my market, not since the great recession.

What I don't like is undercapitalized buyers that get hung up and wreck the sellers credit.

Cool you have lots of sub2 opportunities.  Do thorough title searches and don't do too much rehab for a flimsy quitclaim deed.  Cheers!

Jack Eyer · Answer

As noted above they are Hazards, particularly if you do too many before exiting to another Buyer.

New Investors who need a home, lack creditworthiness, a great way to enter the market with a nice property. In Birmingham area, you later default on your agreement, you are at an extreme disadvantage in court when you default back to original Owner when they have clearly thought they sold you their property and mortgage and gone onto another. Despite what you are told about the Liability. You do not want to be in court against that owner in a Default situation on your part for whatever reason.

Advice little to no work to be done or seller fixes before they leave and KNOW you can make the payments or Payoff if you have to- tenant goes bad etc. And be the Property Manager when you talk to the Lender, now a new owner- asking for a problem imo. Yes, they mostly want payments but don't push it. I have always put them on Bankdraft for their payments from me to be certain they are paid on time. If you don't have Capital to fall back on in reserve, then I advise you to stay away from them that are very close to a wash on the Equity. I would probably do  Lease Option  Contracts with the seller.

Jason Carter · Answer

I like this strategy @Roderick Smith. I tried to do it on 2 in Centerpoint but couldn't get the seller to complete the deal. They insisted on some cash and then sure enough, they lost the property to foreclosure and now have that on their record. I would've saved them from that.

If you get any you don't want, please send my way. I'd love to take a look.

Frank Chin · Answer

@Roderick Smith

Yes, it's a low cost way of getting into real estate. One of the major selling points of sub-2 transactions is it's a painless way for the original owners to save their credit.

But there's been instances where if you do to many, things can go wrong. You could own dozens of these, some tenants don't pay the rent, you fall behind, and pretty soon you have 5 to 10 sub-2's that you fall behind on. One famous case reported some years back, discussed on another site, the Porter Case, fits this pattern: Porter case

True, banks keep their mouths shut when they get paid. When they don't, they get nasty, tell fellow banks own loans you may not even be behind on, and these start calling loans, and you'll be in a mess.

Steve Vaughan · Answer

I haven't done sub2 on commercial yet.  I'd imagine it's the same, but commercial loan terms vary widely and usually have 5yr calls or expirations.  Know the loan terms!

Zach Quick · Answer

@Steve Vaughan Kind of what I had in my head, especially if you’re buying commercial, to be sure you are buying value-add in case they do call the loan you have the ability to refinance. Fair summary?

Zach Quick · Answer

@Steve Vaughan Steve, I know you have done some mixed use/commercial. Have you done/How did you handle Subject 2(assuming you have) with Commercial?

Apologize if that’s vague, I buy self-storage and have had success with owner financing on free and clear, but want to open my toolbox more of subject to makes sense on a property.

Do you like Subject-to-existing financing? Why or Why not?

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