Viable subject to deal??

Question

Hello BP,

I have a question about a property that I think could make a good subject to deal, but because I'm new to all this I'm not sure so I'm seeking some guidance here from the more experienced investors.History: We initially found this duplex earlier in the year.  We got our financing in order and had our realtor contact the seller's agent.  We scheduled a showing and quickly got the home under contract after some negotiating. During inspection we found out the home needed some big ticket items replaced: both AC units, both furnaces, some electrical work, and mold was present in the bathrooms. Cosmetic work also needed to be done to both units.  Seller is unable to repair/replace anything.  We got bids for all the major system updates and for paint, carpet, etc, and we estimated 15K to get the home in good condition, which we were ready to do. Unfortunately, our lender would not extend us financing on this home due to its condition.  We scrambled trying to find financing, and ultimately had to let the property go.The property has since been taken off the market.  We know the seller is motivated and needs to get rid of this property.  It has been vacant for some time now.  Our plan was to purchase, rehab, and rent out. I don't know what the terms of his loan are, but I do know the asking price we agreed on was 77K. I don't think there is much equity here. We could rent both sides for at least 700/ month. I'm thinking about having our agent approach the seller again to see if he would be interested in selling the property subject to.  I've been reading a lot about this strategy.  It seems that most people hold onto the property for a very short time because of the due on sale clause.  How can a subject to work if we wanted to keep it and rent it out? How would a cash out refinance work under these circumstances, if at all?Would I need to hire a third party servicing company to make monthly payments on the existing loan or would I pay directly to the lender? How would I do that?Thanks for reading, and thanks in advance for your help.

I have a question about a property that I think could make a good subject to deal, but because I'm new to all this I'm not sure so I'm seeking some guidance here from the more experienced investors.

History: We initially found this duplex earlier in the year.  We got our financing in order and had our realtor contact the seller's agent.  We scheduled a showing and quickly got the home under contract after some negotiating. During inspection we found out the home needed some big ticket items replaced: both AC units, both furnaces, some electrical work, and mold was present in the bathrooms. Cosmetic work also needed to be done to both units.  Seller is unable to repair/replace anything.  We got bids for all the major system updates and for paint, carpet, etc, and we estimated 15K to get the home in good condition, which we were ready to do. Unfortunately, our lender would not extend us financing on this home due to its condition.  We scrambled trying to find financing, and ultimately had to let the property go.

The property has since been taken off the market.  We know the seller is motivated and needs to get rid of this property.  It has been vacant for some time now.  Our plan was to purchase, rehab, and rent out. I don't know what the terms of his loan are, but I do know the asking price we agreed on was 77K. I don't think there is much equity here. We could rent both sides for at least 700/ month. I'm thinking about having our agent approach the seller again to see if he would be interested in selling the property subject to.  I've been reading a lot about this strategy.  It seems that most people hold onto the property for a very short time because of the due on sale clause.

How can a subject to work if we wanted to keep it and rent it out?

How would a cash out refinance work under these circumstances, if at all?

Would I need to hire a third party servicing company to make monthly payments on the existing loan or would I pay directly to the lender? How would I do that?

Thanks for reading, and thanks in advance for your help.

Robert Smith · Answer

First off, is your agent skilled in sub 2 or an investor? 99% of agents can't see outside their box. I can talk bad about agents because I am one... If it doesn't conform they cannot see the other side, or worse yet, they can see it but their principle broker don't like it and may try to kill the deal. You can do anything an agent can do, you will also have to consider paying him in addition to the 15K you are putting into the home.

For the due on sale clause, and I may get yelled at by others for this, that would be the least of my worries. If you are paying the bills on time every time they don't care if the check comes from Santa Claus. I have done many and to date, knock on wood, have never had anything called due. If you are cash flowing it may be possible to refi after a short time but let the sub 2 work for you. If you are really worried about the sub 2, take the property on a lease option for 10 years. You could also transfer the property into a trust and there are ways that this would not violate the due on sale, get an attorney who knows what they are doing. I used to take all properties into a family trust but stopped after I saw how much time and money it cost every year and just took it into my company name. Third party servicing is a great tool and can really work for you but if the money is already tight that could take needed income out of your pocket. Again, they want the check no matter who it comes from, I pay my notes online and everyone is happy.

If doing a lease option make sure your lease allows you to sublet the property so that you can rent the home out no problem. If he sells with a sub 2 you can do whatever you want with the home as it is yours.

Many times sellers, like many agents, cannot see the end game with a sub 2 or think it sounds illegal. Back in the 70's they did it all the time but called it assumption and depending on the lender may or may not roll the loan into their name so if they are older mention this. Pitch the rewards before you pitch the strategy. If he still wants paid off and it is vacant offer him a cash price at half his asking and work up from there. Tell him the only way you can pay even close to his asking price is if he works with you on the loan since you are putting your money into the home. Paper up the deal and make it work for you. Even if there is no equity but will cash flow year after year the long term could make more money over the life of the loan then a little bit of equity now. Read the forums and educate yourself here and by talking with other investors. The only thing he can do is say no, it is worth the trouble to ask. He don't have to fix up, he don't have to pay for lost rent, you are putting your money in the home and if you don't pay he takes the fixed up home back and can sell or rent then. Those are the reasons he should do it, obviously it is a money pit for him but can be a cash maker for you. Good luck.

Stacey Paulin · Answer

Robert, you've been so helpful.  I feel like I have a better grasp of sub 2 and other seller financing options.  What I worry about is all the details that I DON'T know.  I will PM you.  You've been so very helpful.

So we met with our agent today to look at some other homes.  As expected she knows nothing about owner financing.  That's ok...we will teach her, LOL.  She's a great agent otherwise.  We pitched the idea to her after we saw the last house on our list for today, and she said she would reach out to the seller's agent ASAP.  30 minutes later she called and told me the seller sold the home just two weeks ago.  Someone was able to get an FHA 203 loan.  Ouch!

Talk about being crushed!!  I know there will be other deals, and now that I'm more familiar with seller financing I won't let an opportunity like that slip through my fingers again.

Brian Gibbons, I know you are one of the resident experts in seller financing.  Thanks for the blog post link, and I'll go watch those videos right now.

Robert Smith · Answer

Let us know how it goes, good luck with your agent tomorrow.

For the taxes and insurance payments, if the seller has a mortgage with an escrow account you can leave this in place. If there is no escrow account you can pay them yourself, this would be my suggestion to make sure they are getting paid. For the insurance you can do one of two things. The more expensive option would be to get your own policy, which you would end up paying for insurance twice cutting into your profit. The other option would be to make yourself an additional insured on the current policy. Banks and interest holders do this often, the insurance company will be familiar with this.

For the authorization to release form, that for me is a must. I also get a power of attorney for the seller so that I can do anything I need with the home without his constant approval, generally once they are out of the deal I rarely ever hear from my sellers in a sub 2 deal. For lease option it is the same. I would only do lease option if he would not transfer the ownership or you were concerned with the due on sale / acceleration clause. The first offer I would make him would be payoff but remember someone has to pay your agent. I would only offer him money as a last resort in addition to pay off.

For the refi on the home, if he is not pushing I would wait until you have to. Other peoples money and credit are what sub 2 are all about. You could tie yourself up financially and not be able to get other loans for other deals out there when you are ready. However, I can understand the refi to put money back into the home if you can cash out the equity, if any. Again, with the lease option, if you go that route, make sure your contract states you can sublet the property so you don't have any issues down the road. 9/10 times tenants don't care who the owner is, you can be the "manager". Even on homes I own or control I would much rather be know as the manager then the owner. As a manager I am carrying out the owners wishes and they have someone else to blame when I don't give them a break on rent and such. As the owner you will hear every sob story in the book and get the 2am calls for the leaky toilet.

Good luck and keep posting, interested to see if it works out for you. And we all get busy and can't post as much as we like, if you would like you can pm me and I will get to your questions soon as I can.

Brian Gibbons · Answer

Learning how to negotiate with sellers with terms deals is a key skill.  See my BP Blog.

Stacey Paulin · Answer

First, pardon me for not responding sooner.  I'm on BP daily and I had no clue that I had responses to this, so thank you guys so much for responding!

I'm not sure if my agent is familiar with sub 2 deals.  We meet with her tomorrow so I will ask her.  She worked so hard for us for four months to get that deal.  I know she wouldn't have a problem getting in contact with the seller, but I don't know what else she could offer us on a deal like this.  I will ask her!

We would likely plan on refinancing the property, and since there is so much deferred maintenance and repairs to be done I'm sure we could gain a lot of equity.

I'm comfortable with the idea of sub 2 but not so much with lease option.  Since this will be a rental I don't know how that would work, but I will research that.

I love your advice about explaining to the seller what the potential benefits are to him with this deal.  I'll have to give my delivery some thought, especially because I know he is motivated.

I think we will give it a try and see the seller bites.  I do have some follow up questions:

What happens to tax and insurance payments?  The insurance will still be in the sellers name.  I can't wrap my head around this.

I've read that when doing a deal like this the seller is asked to sign an authorization form to release mortgage information.  I could use this to find out how much equity he has in the home.  Is this the amount I should offer him up front so that he is made whole at least?  I think this could be a selling point for him.

Thanks again!

Viable subject to deal??

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