The INFAMOUS SUB TO Discussion *Not for the Scared Investors*

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The INFAMOUS SUB TO Discussion *Not for the Scared Investors*

Tony Roberts
Member since 2019 · 21 posts · 8 votes

Now that I have your attention DONT RUN NOW!  

So I heard about Sub To and I understood it. This makes so much sense!  It makes so much sense that....it isnt a popular topic on Bigger Pockets?  WTF?  Sure a few posts here and there but come on!

So here is the chance for the Sub To Gurus to regale (ITS A WORD I SWEAR) with their big brains.

So here is how I figure it goes.  Seller has a property worth $50K because this is Baltimore, ok?  Here is a creative option I came up with if I understand this whole thing correctly.

I can go in with an offer of $50k using owner financing.  Lets say he wants 10% Interest bringing the total to $55k and to offer another $5k up front to sweeten the deal.  (Am I doing this right?)  I finance the total amount of $55k for 10 years.  $55,000 / 120 months equals $458 monthly.  Great!  Now I just have to find a renter who can put down anything more than $5,000 to cover what I owe the seller in up front money.

Rent the property for $1000 monthly which is $542 cash flow.  After 120 months I've paid back the initial investment of $55,000 and also cleared $542 x 120 months = $65,040.  

Now I get there are concerns like vacancies, legal docs and the dreaded boogie man of the Mortgage being called due immediately.  BUT do I have the general structure right?  Please Sub To Gurus let me know if I am on the right path.  What am I missing?  Any other crucial things to consider?  

Is this thing on?  

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Ryan Freet
New to Real Estate · Columbus, OH · Member since 2018 · 41 posts · 30 votes
6y

A subject to deal would be you taking rights to the property but leaving the existing mortgage in place, or taking it "subject to" the existing mortgage. I'm definitely not an expert on the subject but I don't believe you would be able to obtain seller financing in a subject to deal. Using your numbers, I believe it would work more along the lines of the seller having a $50k mortgage on the property, you pay them $5k to "sweeten" the deal at which point they transfer title to you. You would then pay on the mortgage while it remains in their name. There are other points which are more thoroughly explained elsewhere on the forums but I believe this is the gist of it.

My experience to this point as been with homeowners which are several months behind on their mortgage and rather than paying the entire $5k to them, the deal would have required paying 6-8 months of their mortgage and bringing it current.

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  • Bill Turner
    Investor · Tallahassee, FL · Member since 2013 · 77 posts · 24 votes
    6y

    @Tony Roberts I would doubt if anyone will do a 10 yr loan for a flat 10 percent. I believe where you are making the mistake would be he wants 10 percent a yr.

    hope that helps

    Bill

    2Reply
  • Ryan Freet
    New to Real Estate · Columbus, OH · Member since 2018 · 41 posts · 30 votes
    6y

    A subject to deal would be you taking rights to the property but leaving the existing mortgage in place, or taking it "subject to" the existing mortgage. I'm definitely not an expert on the subject but I don't believe you would be able to obtain seller financing in a subject to deal. Using your numbers, I believe it would work more along the lines of the seller having a $50k mortgage on the property, you pay them $5k to "sweeten" the deal at which point they transfer title to you. You would then pay on the mortgage while it remains in their name. There are other points which are more thoroughly explained elsewhere on the forums but I believe this is the gist of it.

    My experience to this point as been with homeowners which are several months behind on their mortgage and rather than paying the entire $5k to them, the deal would have required paying 6-8 months of their mortgage and bringing it current.

    4Reply
  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    6y

    FWIW I do 1 day trainings in my local REIA on subjet to. Another GaREIA member makes her main business deal helping home owners in pre-foreclosure buying their houes piror to the auction. Some times subject-to.

    Other sources of possible sub-to deals is FSBO, MLS long days on market. Some of those long days on market are due to too much debt, balance on the mortgage is at or over as-is value. Those sellers might say Yes to: "would you sell for what you owe". Your job is to call all FSBOs over and over and over, same for long days on market and expireds.

    PM me I'll send you a PDF of my sub-to training as a help for you to understand the complexities at closing AND after closing.

    I have never heard in recent times of a bank calling a loan due when payments are being made.  Proper closing steps uses tactics to reduce the near negligable risk, close into a trust bla bla bla.

    I might ad;  one seldom offered but IMHO the most important tip for success is;  join your local REIAs.  You need local experts to learn from, get help from re local issues, contractors etc.

    2Reply
  • Tim JacobPro Member
    Real Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
    6y

    Please get title insurance when you purchase this.  Do not skimp on that.  It would suck to find put later the title has a heavy amount of liens attached.  Ask them if they are giving you a quitclaim deed or something better.

    Furthermore understand getting reliable pm will be difficult.  I would allocate much more for vacancy and maintenance.  If you dont mind buying yourself a job you can profit quite well.    

    If its a typical 3/1 rowhome with an unfinished basement in a rough area try 900.  That should get a quality tenant.  If you do a lot of your maintenance especially painting, your own pm including legal services and are as diligent as possible with screening you could make decent money.  You could off the bat if you get a good tenant.  Over time the law of averages will even out.  I would bump vacancy around 20% in that neighborhood and water, alarm, taxes, and insurance around 200 as well.  Water will be more most likely but you might get lucky they pay it so Im factoring that in.  So you wouldn't make much until payoff.  This model isn't scalable either.

    Good luck

    1Reply
  • Tony Roberts
    OP
    Member since 2019 · 21 posts · 8 votes
    6y
    Originally posted by @Bill Turner:

    @Tony Roberts I would doubt if anyone will do a 10 yr loan for a flat 10 percent. I believe where you are making the mistake would be he wants 10 percent a yr.

    hope that helps

    Bill

    Dont hold back Bill!  In your experience what does the market call for in your area?  

    0Reply
  • Tony Roberts
    OP
    Member since 2019 · 21 posts · 8 votes
    6y
    Originally posted by @Tim Jacob:

    Please get title insurance when you purchase this.  Do not skimp on that.  It would suck to find put later the title has a heavy amount of liens attached.  Ask them if they are giving you a quitclaim deed or something better.

    Furthermore understand getting reliable pm will be difficult.  I would allocate much more for vacancy and maintenance.  If you dont mind buying yourself a job you can profit quite well.    

    If its a typical 3/1 rowhome with an unfinished basement in a rough area try 900.  That should get a quality tenant.  If you do a lot of your maintenance especially painting, your own pm including legal services and are as diligent as possible with screening you could make decent money.  You could off the bat if you get a good tenant.  Over time the law of averages will even out.  I would bump vacancy around 20% in that neighborhood and water, alarm, taxes, and insurance around 200 as well.  Water will be more most likely but you might get lucky they pay it so Im factoring that in.  So you wouldn't make much until payoff.  This model isn't scalable either.

    Good luck

     What typical time would you place on vacancy?  At $900 monthly do you still foresee more than 3 months on average for vacancy?

    0Reply
  • David MartinPro Member
    Cypress, TX · Member since 2016 · 137 posts · 119 votes
    6y

    @Tony Roberts So, market value of the property is $50k, and you're willing to pay $60k for it in interest and a sweetener. Am I understanding your scenario right?

    0Reply
  • Michael Heisterkamp
    Member since 2020 · 122 posts · 62 votes
    6y

    Uh outside of the fact that you are paying 20% over market value for something that will take on average 3 years to get that value back in appreciation.  Likely never will given the extremely poor market condtions unless this a fix and flip.  That doesn't seem likely given the 10 year loan term.

    0Reply
  • David MartinPro Member
    Cypress, TX · Member since 2016 · 137 posts · 119 votes
    6y

    @Michael Heisterkamp I mean his numbers here aren't insanely off the reservation, he's not accounting for any FML moments, but beyond that I just think he's organizing the acquisition and finance structure in a way that's way more risky than is needed for same-ish results, given the scenario he's running. Instead of paying $55k out of pocket to seller and some interest over 10 years, just to buy access to a seller mortgage that might become an instant pay situation, he could potentially just float an 84 month $50k personal loan (again, no math done here for contingent situations), use the $5k sweetener to cover closing costs at the title company, and just own the thing outright, with non-recourse money on the property. The month to month cashflow shrinks in this situation, and of course no reserves are mentioned for operating expenses, but from a purely acquisition oriented look, he could get started. Maybe a few years out he gets a little appreciation and some loan paydown and can get himself refi'ed in to a better situation with a proper like 10 year mortgage on the thing, but as nuts as it sounds to do what I just said, I'd still consider it a better approach than the sub-to strategy on this one particular scenario he's flushing out.

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    6y

    @Tony Roberts,   

    1. sellers carrying back financing don't want total interest of 10% over 10 years; like all note holders they want an annual interest.  For example, $50K principal paid over 10 years at an annual interest rate of 10% results in payments of %660.75 monthly.  You don't add 10% and divide the total by 120 .... you need to use a time value of money calculator which in effect amortizes a remaining balance each month to arrive at a number that remains constant through the entire loan but changes the principal and interest proportion of the payment each month.

    2. The technique you describe is a combination of owner financing and lease option.  Purchasing a property "subject to" an existing mortgage means that first, there needs to be an existing mortgage on the property.  Second, the seller must agree to let the buyer purchase the property while leaving the existing mortgage in place, and also not require the borrower to assume the mortgage.  This usually occurs when the borrower has a difficult property to sell, difficult property to finance, owes more than the property is worth, or in times of high interest rates when he can obtain a higher price by allowing a lower interest mortgage to remain in effect after the sale.

    The seller is taking a high risk in allowing a subject to transaction to take place as he remain solely, and personally responsible for the mortgage.  The last assumable mortgage on residential property written by a conventional institution was in 1978, since all mortgages have due on sale clauses which allows a lender to accelerate the note should the property be sold.  As interest rates have declined lenders have no incentive to enforce due on sale clauses; should interest rates rise sharply we will see due on sale enforcement.

    If there is an existing mortgage and the seller is willing to provide financing of an amount greater than the existing moorage, he can do so utilizing either a wrap around mortgage or a second lien mortgage.

    In todays economy, where low interest rate financing is readily available, most subject to deals are done on properties with little or no equity; so that while the buyer doesn't get a discount on price, he does obtain a property with high leverage and no or a small down payment.  These buyers need to "juice" the potential rent by obtaining additional revenue through utilization of a purchase option, marketing the property to buyers unable to qualify for a mortgage but having and willing to pay extra each month above market rent to lock in a purchase price or believe that they are "building equity".

    The SAFE Act and the CFPB have placed some restrictions on these lease option agreements, so a much more careful following of agency regulations has to be observed by real estate investors doing these transactions.  

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    3Reply
  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    6y

    @Tony Roberts

    I like your energy, but some core things are off. Google amortization tables and change the term length, interest rate, and loan amounts to get a feel for how loans work.

    Also, low income area can be tough. Stolen HVAC and tenants trashing the place are the norm. I don’t know what 50k place out there is like but even here in the mid-west I’m expecting porch sitting and pit bull city. Exactly where poorly capitalized people get hurt the most.

    The best thing for a go getter in my opinion and buy a cheap house, fix it themselves, and sell it or rent out if a good area without drama. That equity will carry you for a long time. And no drama tenants don’t trash your place when they leave allowing for more consistent cash flow. My wife and I move 12 times in our first 9 years of marriage and it paid infinite life changing dividends.

    2Reply
  • NaDean Bowles
    Investor · Jacksonville, FL · Member since 2020 · 124 posts · 68 votes
    6y

    @Tony Roberts, you're *so close*.  

    Why are you offering 10% interest?  Wait until they ask.  When they ask, tell them the interest is already calculated in the payments then proceed to negotiate as necessary.  

    Why are you offering $5,000 down?  Has he said he needs that much to walk away?  Would he rather have more or less cash flow per month?  Have you heard of the three offer letter of intent?  

    If you require a renter to put down $5,000 for... rent?  for what?  You are just begging to get sued.  

    If you are doing a lease option, that's a lot down for a less expensive property.  Good luck with that.  I would NOT do a lease option though as a lease option purports that they will either have the cash, highly unlikely if they are buying a $50k house, or qualify for a bank loan and you'll be hard pressed to find a bank to do a loan that small.  


    If you are owner financing, you will still have a hard time getting $5k for a $50k house.  Good luck with that.  

    If your rent is $1000 per month on a $50k house, I'm in the wrong bloody market.  WOW

    I would do this:  $50,000 as $500/month for 100 months, so just over 8 years.  If it's an elderly person, offer to put it in a trust and/or carry the payments out longer so they can have cash flow in the nursing home that Medicaid won't look at.  

    Which bank is it?  Have you seen the mortgage documents yourself?  Have you checked for liens?  Are you going to close at a title company?  DO close at a title company unless you do a lease wrap instead.   


    1Reply
  • NaDean Bowles
    Investor · Jacksonville, FL · Member since 2020 · 124 posts · 68 votes
    6y

    @Tony Roberts Make that a title company or with an attorney depending on your state.  

    Also, if you are owner financing back out the other side, that's when you can charge interest.  Always keep your tenant's amortization or sudden payoff ahead of what you owe.  

    0Reply
  • Tony Roberts
    OP
    Member since 2019 · 21 posts · 8 votes
    6y

    @David Martin

    Yes, I think that's the right scenario but I'm a newbie and have never done one before. Just trying to see if I have the foundation of it right. I appreciate every response. Each one is giving me a little more insight.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    6y

    What you described is not subject to, it is owner financing. Subject to is when you basically pay their mortgage for the remainder of the term. As in "subject to existing financing". 

    As far as 10% interest for ten years, that violates IRS interest rules. You are required to charge a minimum interest rate or the IRS will impute the interest on the seller who is issuing the loan. Probably more of an issue for the seller, but I am don't recommend setting up agreements that you know create problems for anyone. It can only come back to bite you.

    First step is find out if the seller owns the property free and clear (no loans, mortgages, etc). If they do, then seller financing may be a good option. Just make sure the interest rate is within IRS guidelines.

    0Reply
  • Tony Roberts
    OP
    Member since 2019 · 21 posts · 8 votes
    6y

    @NaDean Bowles

    Thanks for the insight. Especially the part about the Trust to give them some side money that doesnt interfere with their current situation.  You asked all the right questions that I didnt AND gave the reasoning behind it.  Much appreciated!

    And Yes!  We have $50 - $60k homes that rent for $1000 in Baltimore.  If you want to partner let me know ;-)

    0Reply
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