Subject To deal analysis

[Ben Roberts]

I'm in Memphis and typically look for wholesale deals.  I came across a deal too thin to wholesale but I think it would make a great Subject To (sub2) deal.

The current owner owes almost $50K, the house is worth around $52-$55K. She says that her monthly payment, PITI, is $494. Rents in the area, for this size home, run $800 to $850.

The owner can't afford to make the monthly payment so, in a rush, found someone who is paying only $600/mo.  The tenant is leaving next month and the owner is tired of being a landlord.

Does this sound like a good deal to anyone else?

What questions have I not asked/answered that I need to?

Having never done one of these before, what steps do I need to take to make this happen?

Any analysis/help would be GREATLY appreciated.

Ben

[Bill Gulley]

@Brad Pickett

I'm don't dig up foreclosure history or court cases to justify what I may say, those who can't take advice without such examples can look things up for themselves.

I'm sure I have had over 50 transactions, contract-for-deeds, Sub-To, wraps that notice was received based on the due on sale clause, all, as I recall, were Boatmen's or Wells, they were paid off. I owned a mortgage company and serviced installment contracts and acted as principal. More often than not, through discussions, they knew I was a mortgage company, past bank examiner, knew what I was doing but it boiled down to "Bank Policy". Now, smaller banks were a bit different. 

Bank employees are like everyone else, some could care less when they punch the clock. But, if you get a responsible bank officer, not clerk, in the larger institutions who knows there has been a title change, my bet is your note will be called due. There is also a thing we call "luck".      

Your perception of the reason why banks call loans due has been discussed here on BP at length, there are loan servicing contractual obligations as well as regulatory matters that influence a bank or note holder to call a loan due much more than any reasoning of it being paid or performing or the common misconception of interest being earned. 

The OP stated the value at 55K, your suggestion of selling on a lease option with another 10K is predatory dealing, don't care what state you the deal is in. Not picking at you personally Brad, I see you're new here, but when investors use the line of "helping families" is a psychological play in justifying messing over someone, you're not helping anyone by overcharging 10K for your pocket by the virtue of you being a middleman.  

Your lease-option does not add value to the property. 

It's not clear what your "network" is, are you saying you have a portfolio of 100+ sub-to L/O deals or you have an affiliation with other investors and 100+ collectively have accomplished these transactions, then, if the loan is called you simply pay it off? That implies cash reserves or the ability to finance quickly, that tells me there needs to be significant reserves despite the method to payoff. Large reserves means optional costs, high cost require more profits. That then means higher fees on transactions, like the 10K sale suggested, unless you are dealing in high volume on a short term basis generating customary fees for services.

But, you have 3 year options, that's not short term. Not only does your Sub-To trip the lever on the due on sale, so does your option contract, for any length of time. So will any lease greater than 3 years or that automatically renews beyond that limitation, a new lease is fine. 

The use of a Trust is only valid in that respect for Trusts having an estate planning purpose, not a business purpose. 

L/O animals have new spots in 2016, the IRS looks to the intent of the option and defaults to a sale unless other intentions are clearly stated in the agreement. This generally means your taxes will be going up even if you did not collect enough off the transaction to pay them.

As to disclosures with Sub-To deals, it's required generally, but just because you disclose dangers does not absolve an investor of the responsibility, allowing, facilitating, being a party to an owner getting messed over. Telling someone they might get hurt going over the cliff doesn't cover you when you help them jump or push them. 

It is a business decision, prudence is always a business decision.

Good luck! :)

@Brian Gibbons  my BS Meter is going off, the needle points toward guru operations. :)