Should You Pay Out of Pocket for a Property?

We love doing terms deals with no money down, but that isn’t possible in some situations…

Should you pay out of pocket for a property you’re buying subject-to the existing mortgage? Well, to answer that question we first need to define what a subject-to deal is!

A “Subject-to” is a deal where you’re buying a property subject to the existing financing staying in place. That means the mortgage stays in the seller’s name even though the deed transfers to you.

This is different from a sandwich lease deal because you’re actually buying the property and you will own it throughout the term—it’s just that the mortgage stays in the seller’s name and you pay it off.

So, why would you want to do this? Well, subject-to deals are very hands-off for the seller. Depending on their situation, it may be more preferable for them. You may also be restricted legally on what type of deals you can do—for example, the deal we’re looking at today was done in Texas, which doesn’t allow sandwich lease deals. In that case, a subject-to can be a great alternative.

Let’s look at how this one worked out so you can see why you may want to pay out of pocket for a subject-to property.

Helping a military family sell their home

The source of this property was an expired listing. The seller was in the military, and he was currently living in Las Vegas (while this house was located in Texas). Naturally, he didn’t like having two payments so he wanted to get rid of the house quickly, but he was having trouble listing it with a realtor.

In fact, the house had been on the market for multiple years without finding a buyer. Our Associate made contact with the seller and gave him a new opportunity to sell the house that would allow him to get it out of his hands quickly.

The house was originally put on the market at $350,000 but over the course of a few years, it had dropped down to $330,000.

Our Associate was able to “purchase” the home for $315,500. Now, purchase is in quotes because what’s really happening when we do these deals is we’re paying off the seller’s loan and giving them the remaining equity on or before the end of the term. In this case, he had a loan balance of $293,500—meaning he would be getting $22,000 at the end of the term.

So we’re literally saying to the seller, “I’ll pay off your loan and give you roughly $22,000 on the back-end.” There’s no need to even bring the purchase price into the conversation.

And there’s one more nuance here before we get into the Paydays… As one of the potential buyers was walking through the home, they noticed a leak in the ceiling. We had a contractor come out and give us a quote to fix it, which was going to be around $2,500.

There are two learning opportunities here:

1. You should always get a state-required property condition disclosure statement ahead of time. This document will tell you if any repairs or issues exist, OR it will give you proof that the seller lied to you when things do come up. Either way, it’s a great document to have and it would have helped alleviate this situation or prevent it from happening in the first place.
2. Our Associate ended up telling them he would cover the costs of the repair but he’d be taking double off the back-end. That means instead of getting $22,000, the seller would be getting $17,000. This is essentially a fee for handling it for them—because the seller really should have dealt with that leak themselves. We’ve done this many times, even adding up to five times the repair costs on the back end. Instead of repair costs, sometimes it’s a small amount of “moving money” or anything else you may negotiate.

And with that said, let’s get into the Paydays to see how this deal shaped up.

The three Paydays

Payday #1 on this property ended up being around $25,900. We originally shot for a 10% down payment—which would come out to $34,900—but we needed to take out the $2,500 for repairs and an additional $6,500 for closing costs. When you subtract those costs, you’re left with $25,900 for Payday #1.

Payday #2 was the monthly spread. In this case, Our Associate had $2,850 coming in each month from the tenant buyer and $2,750 going to the seller. That’s a small spread at $100 per month, but as with most of our deals, the principal paydown made it all worth it in the end. Still, Payday #2 came out to $4,800 in total over the 48-month term.

Payday #3 is always the profit from selling the home plus the principal paydown over the course of the term. In this case, the profit on the sale of the house was $35,000 and the principal paydown ($450 per month) came out to $21,600. When you remove the initial down payment, that’s $31,600 in total for Payday #3.

All three Paydays add up to right around $52,300 in total!

This is just one example of another type of terms deal that can help a seller out of a sticky situation and help a buyer get into a home they otherwise wouldn’t be able to afford. In the case of subject-to deals, paying out of pocket can be well worth it in the end—as you saw here!

Have you ever had to deal with a last-minute repair like the one here? How’d you approach it? Would a property condition disclosure statement have alleviated the issue?