Is it dangerous to whole sale using subject-to when the lien has an adjustable rate?

Question

Hey BP,

I will be acquiring houses using subject-to financing. I will sell the house using a wrap mortgage to buyers with bad credit.

I want to know if it's dangerous to acquire the houses sub-to when the lien on the property has an adjustable rate?

I don't know how volatile these adjustable rates are, so I want to make sure I'm not taking over a lien that is going to sky rocket.

Thanks BP!

Dick Rosen · Answer

I suggest you get the loan docs to find out what the ate is based on and when the adjustments occur, then make your decision as to whether or not you want to be responsible for that note.

Jay Hinrichs · Answer

@Jordan Redar

that strategy is a receipt for disaster if your just starting out and or have limited capital.

Its Far to risky for the seller... These types of transactions have a very high mortality rate when you sell to bad credit homeowners.. ( think Sub Prime) you place the seller in jeopardy not of their own making.  To be above board and able to pull this strategy off means you have the means to take out the sub too loan if the alienation clause is called by the lender... and or you can make payments on the home when your end buyer defaults and you have to either foreclose them out.. ( which in FL.) is a 18 month process.

So think about it.. you sell to a dead beat bad credit. they move in.. Stop paying you now have to pay the first plus pay all the foreclosure costs... What usually happens is you don't have the wherewithal to do this.. ( of course you might).. you then default on the sub too from your original seller.. The original seller is in a very crappy position.. they don't own the house and do not have a security interest in the property and could end up with a foreclosure on their FICO

Not a good strategy at all for the sellers.. Unless you can prove you have some substantial capital and will use it to protect the seller, (again when your end buyer goes TU which happens very often in this scenario)

Hattie Dizmond · Answer

You have to look at it on a case by case basis to determine what the adjustability is tied to and what the terms are.  A lot of the ARMs have a limit on how much they can adjust.  In that case, just do your analysis on the upper limit.  If the numbers still work, you're good.

Jordan Archer · Answer

Kristine Marie Poe

I did not know that foreclosures in Florida take 18 mo's! Thanks for bringing to my attention the importance of capital reserves for this type of wholesale strategy.

Jordan Archer · Answer

Kristine Marie Poe

From what you are saying, I want to know how you fully understand all the terms of the note? Would you ask the seller for their mortgage docs or can you do outside investigation?

Thanks for the enthusiasm.

- Jordan

John Thedford · Answer

WAY risky in my opinion. This sounds like a guaranteed way to find yourself in court defending against several plaintiffs. Find a better approach with less disaster potential.

Account Closed · Answer

There's the buy side, where you would want to understand all the details of the mortgage you are taking over.  You can read the mtg docs and the actual terms of the note.  You can even understand and prepare for the risk of due on sale.  However, that does not address your sell side plans.  It sounds like you are planning to resell via wrap to home owners/consumers, correct?  If so, you've got a lot to consider.  Due on sale, Dodd Frank, mortgage origination to consumers, note servicing requirements and CFPB being just the tip of the iceberg.  If those phrases don't ring a bell, start googling.  :)

Jason Farmer · Answer

@Jordan Redar it can be a steal or it can tank you.

Like everyone says,  get a hold of the terms, and see if it works, see what the cap rate is, when it will adjust, will there still be room even when it adjust to make a profit if im renting it out, is there going to be enough equity at that point to fix and flip. It just a numbers game. Nothing is ever 100% in REI. Know your exit plan, and plan towards to top of that rate change. If it still makes sens when that thing caps out a 8% or whatever the rate will be. Then make you move.

Account Closed · Answer

"I don't know" is not an acceptable answer for you, your seller or your buyer.  The fact that you are asking such an open-ended question here means you do not understand the risk.  Thereby potentially putting the seller and your buyer at risk. "Volatile" is a relative term.  Due on sale, Dodd Frank, Consumer Finance Protection Bureau...... not so relative.

How could you know what you are selling when you don't understand what you are buying?  Many mtgs do, indeed, "sky rocket".  Read and understand the terms of the note.  Know and be able to explain the risk.  Don't sugar coat the risk to yourself, your seller or your end buyer. Learn a lot more than you know today before you "acquire" a property subject-to.  Please.

Jordan Archer · Answer

@Dick Rosen  & @Hattie Dizmond

Thanks for the suggestions. I'll do my diligence with the rates!

Is it dangerous to whole sale using subject-to when the lien has an adjustable rate?

Most Popular Reply