Creative Sub2 Deal

[Christopher Morin]

Alright so I'm on the precipice of taking on a Sub2 deal that is just tricky enough for me to question if I'm able to pull it off...

Lis Pendis has been filed already.  The home is in arrears by about 11k, and has a total payoff around 196k.  It's worth about 196 as well, so little to no equity.  Mortgage is $1140, and market rent is around 1300-1400.  Ocwen is the lienholder and is willing to restore the loan to good standing if it is brought current.  I'm in Okaloosa County, FL.

The seller wants to stay in the home, so we disqualified short-sale as an option. But the 11k in arrears makes it too thin for work for a sub2 (at least for me) and too risky if the bank calls it DOS or continues foreclosure. But the father is willing to help.

I'd like to front the 11k in arrears, and recover it as a note personally guaranteed by the father, secured by a second position lien on the father's home. I'd then take the delinquent home Sub2 the Ocwen loan, and rent it back to the current owner at slightly above mortgage payment (1250). The father could co-sign on the lease to give me an alternate method to collect payment. The seller wants to buy the home back down the road, so the tenant situation is fairly ideal as long as his income doesn't tank again (divorce and job loss are the initial hardship reasons).

I'd also like to incorporate into my financing agreement something that states that non-payment of rent by the seller would result in non-payment of the mortgage, mitigating my risk in the mortgage. If the seller chose to move-on, I'd just put a new tenant in.  The home is in fantastic shape.

What concerns should I have here? Should I worry about originating a 11k loan to the father? Is there more risk of the bank triggering DOS if the loan is in foreclosure? I'm not an agent, but one of my team members is a licensed realtor. What foreclosure protection law concerns do I face? I plan on having a lawyer review my paperwork and process prior to closing.

Am I just making this too complicated for the limited benefit?

@Bill Gulley curious to your thoughts on originating a loan like this .  I don't think I'm triggering any red flags, but I've never acted as a lender before.

[Bill Gulley]

Well, you are funding a consumer loan, taking a secured position in an owner occupied property, so the first question to your attorney should be to your compliance requirement under Dodd-Frank.

You also have issues with a buy-sell arrangement being viewed as another financing arrangement with the occupant of the subject property. And, the IRS may not buy your claim as to buying an investment property for depreciation and expenses with a buy-sell.

If you actually have the cash to bring the loan current, I don't see the bank barking about getting involved with their foreclosure process, but......that property is now on their radar screen and they won't be going with a Sub-To, slim chance IMO. If you did not have that financial ability to perform, getting involved with an on going foreclosure should not be undertaken by anyone who does not hold proper licenses or extreme RE experience.

There is no up side as to the purchase price. Long term appreciation is about it as well as the principal reduction and that is going to take time to be worth the brain damage and risks.

All you might have is rental income. While you may think you can raise rents to that occupant, keep in mind, they are the folks who couldn't pay the mortgage at a lower amount. I'd bet daddy was there then too, so his guarantee may not really mean much.

Without more specific details. this isn't an investor deal, more like charity with risks of getting nailed in financing and tax matters. I'd pass! :)