A subject-to deal is better than a short sale

[Joey English]

Ashley and I recently came across a listing with “possible short sale” in the title. If you don’t know, a short sale occurs when a bank agrees to accept less than what the borrower owes on their mortgage when the property sells. This listing was intriguing to us since we haven’t seen any short sales advertised in a long time.

Personally, I think short sales have almost gone the way of the dodo. My reasoning: we saw short sales being used after property values had plummeted. So from 2008-2014, properties mortgaged prior to these dates were upside down in their loan to value ratio. During this time, mortgage default rates reached an all time high. The banks, then, had two options: foreclose and be left with a house to manage (which would cost an unknown amount of time and money) or, sell it for a loss and recoup some of their principle on the bad loan which they could put back to work in a good loan. Banks liked the latter idea better and short sales became an everyday occurrence.

The properties we’re seeing foreclosed on today often have loans issued between 2009 and 2015 when houses were close to bottom dollar. Since house values have increased so much in the past three years, banks are getting more by foreclosing these loans and then selling the houses quickly on the open market.

In other words, short sales aren’t happening.

So when we saw the listing said “possible short sale,” we knew that wasn’t ultimately going to be an option and that we’d need another strategy. When we saw the house had a 2012 loan on it, buying the house subject to its existing mortgage became our main strategy. That’s when we buy a house but leave the seller’s mortgage in place after the sale.

Our plan was to flip this house. For a subject-to deal, that meant we planned to keep the house short term, making payments on the seller’s mortgage on their behalf, until we resold it and paid off their loan.

Instead of keeping this subject-to as a rental, we chose to flip it because it had 2012 mortgage. This meant two things: 1. The seller’s mortgage had a low interest rate, and 2. The mortgage balance would be well below current resale value – $50k to be exact. With a $30k rehab, that would leave us a $20k profit. That sounds like a great deal, right?

It gets better; buying this house subject-to also made it a safer deal for us.

The purchase price was $75k, but at the closing table, since we left the seller mortgage in place, we only had pay the agreed-upon closing costs out of pocket instead of a total of $75,000 cash. The less you have out of pocket, the safer a deal is.

Not only did leaving the seller’s mortgage in place make this deal safer, but it was also cheaper. That’s because we got to use the low interest rate already in place on the existing mortgage instead of the rates we see on our investor loans.

Now I’ve talked at length about the advantages to us on this deal, but what about benefits for the sellers?

It helped them in three main ways. 1. We stopped the foreclosure and saved their credit. Because of this deal structure, they won’t even have a short sale hurting their credit score. 2. We gave them some time to move. 3. They got finality in a situation that was emotionally charged and very bleak. I have to tell you, the feeling we get when we see the emotional burden of a housing situation like this lifted off the seller is indescribably good.

So, is a subject-to deal better than a short sale? These people and their agent thought so. What about you?