Would you get a house "subject to" at full retail value?

19 Replies

Would you ever use the "subject to" method to get a buy and hold property if you had to pay full retail for the house? 

I've watched several of my neighbor's houses sit for 6 months or a year with a for sale sign in the yard. I see other houses selling around them, but theirs never sells. I see their pictures on zillow and the houses seem nice. I think they don't sell because they are priced too high. 

I want to send them a letter or go knock on their door and tell them I'm interested in buying. I want more rental properties. I don't have cash for a 20% down payment to get a mortgage on them. I'm thinking about trying to get some properties "subject to" so I can get them with very little money up front. With these properties that people are selling, I'm thinking that they are in rent ready condition since the people are trying to sell them. I could get in them with very little money upfront and then rent them right away.

Any thoughts or advice is greatly appreciated. 

This may or may not work depending on the unique circumstances of the seller. Most sellers want to get out completely and thus would not likely have the luxury of doing a subject to with you.

@Russ Brantley

You can offer to pay retail for the house "subject to" if they have a fixed 15/30 year mortgage and the rent is higher than the PITI payments each month. This means you will cash flow each month you own the property and it will also be paying down the mortgage so you can sell at a later time. Talk to an experienced investor or attorney in your area if you go this route.

If a house has been sitting on the market for several months, a lease option (rent to own) or owner financing would be the best route. Remember, if you agree to favorable terms with the seller, you can most likely sell the property on better terms and make a good profit without putting hardly any money into the deal.

@Russ Brantley

for long term rentals, buying on sub 2 I do not reccommend, there is a possible due on sale being called

Use sub 2 for getting on title and fixing and flipping, paying off existing financing quickly

I like sub 2 for JVs with sellers on minor rehabs, getting more money to the seller than traditional wholesaling (70 per cent of ARV less repairs)

I'm with Brian, you want a short term exit on a Sub2. There are a lot of pitfalls in holding sub2 long term. They are hard to insure- the mortgage holder wants to be on the insurance and so do you, but you don't want the mortgage company to know you own it, right? Gets a little tricky. You control the contact with the lender through a power of attorney, but they start to frown on those things when they get to be 2-3 years old. I've had them refuse to give me a payoff before. A few other things- accounting can be a bear, due on sale clause, escrow checks are paid to seller, etc.

I also don't recommend accumulating a bunch of rentals with thin margins and no cash.   If you cant afford to replace the A/C unit, you have no business renting out a house IMO.  That may not be your case, just saying.  I guess you could insure that stuff starting out with home warranty, but there are some big checks you have to write in the rental biz, it is pretty far from rent - mortgage = profit.

Anyway, I got my start in sub2's, its a viable strategy for some situations, but I got some hard lessons on some things when the market turned.  You should chat with your neighbor(s), get their situation.  Bring it here and we'll tell you what we'd do.  I sure wish I had this resource when I was starting out...

You need why they are selling, why they think it hasn't sold, what they owe, how much their payment is, interest rate, if they'd take what they owe and walk and just have a convo on what they want and need in order to move on.  When you look at the house, you need to do your own analysis on why it isn't selling.  Priced too high?  Functionally obsolete?  Needs updating?  You need to have a plan for solving whatever that problem is.  Also, too many guys try to fit what they want to do into any situation when it needs to be the other way around.  If creative real estate doesn't solve a problem, you are going to get a "no" when you present it.  Your offer simply has to be tailored to their needs when you get into the creative stuff.  I had someone in foreclosure once, they owed $35k on a condo worth $120k or so after about $15k in work and when I asked what they needed, it was just help getting an apartment.  Their mailbox was full of postcards and letters from other investors and we got the deal because we were the only ones that helped them find and rent a new place to live, which they cared about way more than the equity they were losing (they were 2 weeks away from losing it anyway, btw).  

Anyway, I'd read up on Sub2 and some of the other options if you are going to work in the low equity market. There is money to be made there if you are willing to put in the time, but you need training on how things work. You can do some real damage to people's lives if you F things up.

@Davey Wilde

Thank you for your response. I will be checking all potential subject to deals to see if they have a fixed mortgage. I definitely want that. I don't need a changing interest rate eating up my cash flow. I've been studying a lot about subject to deals. I will start learning about lease option also. I own one rental property in this neighborhood already. I'd like to get a few more properties in the same area. As far as owner finance, doesn't the house have to be paid for in order for the owner to owner finance it for me?

@Darrell Shepherd

Thank you for the response and detailed advice. I see that you agree with many others that sub to is not a good strategy for a long term buy and hold. 

I have some some cash available for minor repairs but a major expense like a/c would be going on a credit card. 

There are 2 houses in this neighborhood that I've got my eye on. Both are updated and have been for sale for a long time. I have owned a house in this neighborhood for 9 years, so I feel like I know the area and a little of the history of these properties. They are across the street from my house that I have rented out now. One home just sold in the neighborhood within a few weeks for $114k. The 2 houses that have sat for a long time are priced at $125k and $139k. That is why I'm guessing they are priced to high. I've seen pics of the insides and they look nice and updated. 

I'm gonna keep studying and learning before I make any moves. I want to build a solid reputation for myself. 

No.  Do a search on "sandwich option" here in BP.  I'm sure you will find some good info on it...better than I can give you here in a brief response.

Sandwich L/O is where you lease option it from the seller and lease option it out to another buyer for more.

A wrap is actually owning it (can be sub2) and giving a mortgage to someone without paying off the mortgage you have.  They pay you the mortgage you gave them, you pay the mortgage you have.

Like Rod said, more to it than is easy to explain here. None of it is rocket science, but it is pretty advanced stuff few people use. I'm not a big fan of buying with a L/O, mainly because you dont have as much control, but also because I don't do repairs on other people's houses.

@Russ Brantley

sandwich lease options aren't a terrible idea but you do need cash reserves and I understand the tenant buyer doesn't pay you still have to pay

It takes a talented contract attorney to protect your interests as the middleman, 

what happens if the seller dies, 

what happens if the seller is incompetent,

what happens if you can't find the seller to close?

@Darrell Shepherd

Is a pro, Who might want to add to this

I do like lease-option sandwiches only if the property is absolutely in  perfect condition and truly remarkable as to location

I think Sub2 was born out the the necessity to sell highly leveraged property. The issue is that in most cases it is, or could be, highly dangerous for all three parties. The only time I would recommend it is if the person wrapping the Sub2 has the ability to extinguish the voluntary lien.

However if you can do that youre probably not buying Sub2 anyway.

I agree with @Brian Gibbons Sub2 is great for short term... Although I would not do a Sub2 JV with the seller.

As for Sandwich Leases... Why??? If you're talented enough to buy and sell via a Sandwich take it a few steps further and get title... Title is kings as long as you don't create deeds restrictions...

sub to is indeed the best way to buy but many people do not like giving up the Deed and keeping the loan in their name for a period of time

I agree with @Michael Quarles

If I find a sub to do that I really want, I will offer to create a quick claim deed to be held in escrow in case I do fail to make payments in order to protect the interests of the seller on the sub to

There's no one tool that works with every to particular seller, I like to have a wraparound mortgage purchase tool, lease option or lease purchase tool, a sub to Tool, and @Bill Gulley is teaching me a TIC tenants-in-common tool

@Bill Gulley

@Brian Gibbons TIC brought up the past... I actually still have this thingy.. I am certain some of it is outdated but youll get a good laugh.

TENANTS-IN-COMMON AGREEMENT ADDRESS CITY California

This TENANTS-IN-COMMON AGREEMENT ("Agreement") is made and entered into on DATE, among the undersigned co-owners ("Co-owner" or collectively "Co-owners").

I. RECITALS

A. The Co-owners desire to acquire, hold, maintain, keep in repair, rent and/or sell or exchange, as tenants-in-common (co-owners), that certain real property more fully described in Exhibit "A" attached hereto and incorporated herein by this reference (the "Property").

B. The Co-owners have discussed the co-ownership of the Property and have concluded that to avoid conveyance and ownership problems created by death, bankruptcy or insolvency, disputes and the like, it is in the best interest of each Co-owner that the holding of the Property be governed by an agreement which defines the rights and obligations of each Co-owner in the form of this Agreement and in compliance with IRS Revenue Procedure 2002-22.

II. AGREEMENT

NOW THEREFORE, in consideration of the foregoing Recitals and the conditions and covenants hereinafter contained, the parties agree as follows:

1. Parties. The Co-owners hereby agree that their interests in the Property shall be governed by this Agreement. The name, address and respective interest of each Co-owner are set forth on Exhibit "B" attached hereto and incorporated herein by this reference. The number of Co-owners shall be no more than thirty-five (35) persons.

2. Title to the Property. Concurrently with the recordation hereof, title to the Property shall be acquired by, and in the name of, the Co-owners as their interests appear in Exhibit "B" attached hereto and by this reference incorporated herein, and shall thereafter be held in the name of the Co-owners as tenants-in-common.

3. No Treatment of Co-ownership as an Entity. The Co-owners shall not file a partnership or corporate tax return, conduct business under a common name, execute an agreement identifying all or any part of the Co-owners as partners, shareholders, or members of a business entity, or otherwise hold themselves out as a partnership or other form of business entity (nor may the Co-owners hold themselves out as partners, shareholders, or members of a business entity).

4. Co-ownership Agreement. It is the intent of the Co-owners that this Agreement be recorded and run with the Property.

5. Voting. Co-Owners shall have the right to approve the hiring of any property manager, the sale or other disposition of the property, any leases of a portion or all of the property, or the creation or modification of a blanket lien. Any sale, lease, or re-lease of any portion or all of the Property, any negotiation or re-negotiation of indebtedness secured by a blanket lien, the hiring of any property manager, or the negotiation of any property management agreement (or any extension or renewal of such contract) must be by unanimous approval of all Co-owners. For all other actions on behalf of the co-ownership, the Co-owners shall be bound by the vote of those Co-owners holding more than fifty percent (50%) of the undivided interest in the property. Pursuant to Section 12 below, a Tenant who has consented to an action in conformance with this Section 5 will provide the property manager or other person with a power of attorney to execute a specific document (such as a lease) with respect to that action, but will not provide the property manager or other person with a global power of attorney.

6. Restrictions on Alienation. Each Co-owner shall have the right to transfer, partition, and encumber the Co-owner’s undivided interest in the Property without the agreement or approval of any person. However, restrictions on the right to transfer, partition, or encumber interests in the Property are subject to the requirements of a lender so long as such requirements are consistent with customary commercial lending practices. In addition, the Co-owners agree as follows:

a. Buy-Out Rights. In the event of a divorce, bankruptcy, death, default or any other event that would cause an interest of a Co-owner to be either voluntarily or involuntarily alienated to a party that is not a tenant in common, then such an event shall constitute an offer (or option to the remaining Co-owners) to sell such Co-owner’s interest on terms and conditions of this agreement to the remaining Co-owners.

b. Terms of Buy-Out. Any right to buy-out or compel sale of the property shall be exercised as set forth below.

1. Manner of Exercising Option. The Option may be exercised by the remaining Co-owners by delivering to the withdrawing or defaulting Co-owner, within thirty (30) days from notice of the event giving rise to the option, written notice of the exercise which shall state that the option, written notice of the exercise which shall state that the option is exercised without condition or qualification.

2. Option Price. The Option Price shall be determined by reference to the section entitled Purchase of a Co-owner’s Interest below.

c. Purchase of a Co-owner’s Interest. The purchase price for a buy-out shall be determined as follows:

Determination of the Purchase Price. The determination of the Purchase Price shall be set in accordance with the formula set forth below.

i. Fair Market Value. The Fair Market Value of the subject property shall be set by the Co-owners or their authorized representatives (sometimes hereinafter referred to as “party” or “parties”). If these parties cannot agree within 30 days after the date of notice of buy-out is given, then the Fair Market Value shall be determined by appraisal in accordance with the appraisal procedure set forth below. No discount shall be made because the subject interest is a fractional interest.

ii. Appraisal Procedure. The Fair Market Value shall be determined by an appraisal of the property. Each party shall have the right to appoint an appraiser. Any and all appraisers must be qualified independent appraisers with at least 5 years experience in the valuation of real property in Kern County State of California. Each party agrees to obtain a qualified independent appraisal within 30 days of the date notice of exercise of the option is given. The parties agree to exchange the appraisal reports as soon as they are received. If the appraisal reports are within 10% of one another, then the Fair Market Value shall be the average of the two appraisals. If the value set forth in the appraisals is more than 10% of one another and if the parties cannot agree to the valuation of the property, then the appraisers employed by the parties shall select a neutral third party appraiser whose decision shall be binding.

Such evaluation shall be binding on all parties. Each party shall pay for his own appraiser and shall pay one-half of the neutral appraiser fee. During the pendency of the appraisal, the provisions of this agreement and the obligations of the parties remain in full force and effect.

iii. Purchase Price of Interest. The purchase price of the interest shall be established in accordance with the appraisal procedures set forth herein. The withdrawing Co-owner’s interest shall be the withdrawing Co-owner’s percentage interest (set forth in paragraph 2 adjusted as set forth elsewhere in the agreement) less that party’s pro rata interest in all outstanding property liens and outstanding property expenses (which include costs incurred but not yet paid (i.e. property taxes). If the withdrawing Co-owner is in default due to failure to pay that party’s share of property expenses, then the payment to a withdrawing Co-owner shall be offset by any amounts so owned.

iv. Status of Withdrawing Partner. Until the purchase price is determined, a withdrawing party remains a party subject to all provisions of this agreement. Once the purchase price is determined and the purchase price paid, then the withdrawing party shall no longer be a party to this Tenants-in-Common Agreement.

v. Status of New Tenant in Common Owner. Any new tenant in common owner shall be subject to this Tenants-in-Common Agreement.

d. Payment of Purchase Price.

If the withdrawing party’s interest is sold to a third party or if there is a voluntary sale to any of the tenants in common, then the purchase price shall be paid as the parties agree. If the withdrawing party’s interest is involuntary alienated, then the purchase price for the withdrawing party’s interest shall be paid in cash within ninety days (Interim Period) of the determination of the buy-out price. During the Interim Period, the purchase price shall be secured by the withdrawing party’s interest with interest accruing on the payment at the interest rate in effect as posted in the Money Rates column of the Wall Street Journal on the date the buy-out price is determined.

e. Default Defined.

1. Failure to pay any obligation on thirty (30) days after notice sent;

2. Failure to perform any other obligation required by this Agreement after notice.

f. Cure of Default.

1. If any party makes any payment that is the obligation of the defaulting party, then the defaulting party may cure such default by reimbursement to the non-defaulting party (or paying party) such payment plus interest at the rate of ten percent (10%) per annum within 30 days of written notice.

2. Failure to cure default within 30 days of written notice constitutes an irrevocable offer to sell to the remaining parties the defaulting party’s partnership interest.

3. Costs paid by the non-defaulting party shall be offset and the defaulting party’s partnership interest. Such costs shall include out-of-pocket costs plus reasonable attorneys’ fees and any arbitration or court costs.

7. Sharing Proceeds and Liabilities upon Sale of Property. If the Co-owners elect to sell the Property, any debt secured by a blanket deed of trust or other secured lien must be first satisfied and the remaining sales proceeds (or losses) shall be distributed to the Co-owners in their proportionate share.

8. Proportionate Sharing of Profits and Losses. Each Co-owner shall share in all revenues generated by the Property and all costs associated with the Property in proportion to the Co-owner’s undivided interest in the Property. Neither the other Co-owners nor the property manager may advance funds to a Co-owner to meet expenses associated with the Co-ownership interest, unless the advance is recourse to the new owner and is not for a period exceeding thirty-one (31) days.

9. Proportionate Sharing of Debt. The Co-owners shall share in the indebtedness secured by a blanket deed of trust or other security lien in proportion to their respective undivided interest.

10. Options. A Co-owner may grant an option to purchase the Co-owner’s undivided interest (“call option”), provided that the exercise price for the call option reflects the fair market value of the Property determined as of the time the option is exercised. For this purpose, the fair market value of an undivided interest in the Property is equal to the Co-owner’s percentage interest in the Property multiplied by the fair market value of the property as a whole.

11. No Business Activities. The Co-owners’ activities are be limited to those customarily performed in connection with the maintenance and repair of commercial real property for rent.

12.Management and Brokerage Agreements. The Co-owners may enter into brokerage agreement for a period of time until the property is sold, with a real estate broker, who may be a Co-owner or affiliate of a Co-owner. It is contemplated that the Co-owners will initially enter into a Agency Listing agreement with _________________ Real Estate Company (“Listing Agent”). The Listing agreement will authorize the Listing Agent to market the property for sale. The cost to be paid to the listing agent shall be 0.0f sales price plus a 00.00 fee.

13. Leasing Agreements. All leasing agreements shall be bona fide leases for federal tax purposes. Rents paid by the lessee must reflect the fair market value (rental value) for the use of the Property. The determination of the amount of the rent must not depend, in whole or in part, on the income or profits derived by any person from the Property leased (other than the amount based on a fixed percentage or percentages of receipts or revenue).

14. Loan Agreements. The lender with respect to any debt that encumbers the Property as a whole or with respect to any debt incurred to acquire an undivided interest in the Property may not be related to any Co-owner, the property manager, or any lessee of the Property.

15. Payments to Sponsor. The amount of any payment to a sponsor for the acquisition of the Co-ownership interest (and the amount of any fees paid to a sponsor for services) must reflect the fair market value of the acquired Co-ownership interest (or services rendered) and may not depend, in whole or in part, on the income or profits derived by any person from the Property.

16. Right of First Refusal. If any Co-Owner desires to sell or exchange his interest, he shall give written notice to the other Co-Owners of his intent to do so. No Co-Owner shall make a partial transfer of his interest in the subject property. The notice shall set forth the purchaser’s name, terms on which the entire interest is to be sold or exchanged, and the price. For 30 days after notice is given, the remaining Co-Owner shall have the right to purchase the selling Co-owner’s entire interest for the price and on the terms set forth in the notice. If the remaining Co-owners do not exercise their rights to purchase the selling Co-owner’s interest, then the offering party may, within 40 days from the date notice is given to the remaining Co-owner, and on the terms and conditions stated in the notice, sell or exchange the selling Co-owner’s interest to the purchaser named in the notice on the same terms and conditions. Any purchaser shall be bound by the terms of this Agreement.

17. Unenforceable Terms. If that any provision of this Agreement shall be unenforceable or inoperative as a matter of law, the remaining provisions shall remain in full force and effect.

18. Time is of the Essence. Time is of the essence of this Agreement and of each provision contained herein.

19. Governing Law. The validity, interpretation, and performance of this Agreement shall be controlled by and construed under the laws of the State of California.

20. Amendments. This Agreement is subject to amendment only by a writing signed by each Tenant. Any amendment or modification of this Agreement shall be dated, and where any conflict arises between the provisions of such amendment or modification and provisions incorporated in earlier documents, the most recent provisions shall be controlling.

21. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the Co-owners and their respective heirs, successors, legal representatives and assigns.

22. Entire Agreement. This Agreement contains the entire agreement among the Co-owners and supersedes any prior written or oral agreement among said parties concerning the subject matter contained herein. Except for representations and agreements contained in documents relating to the original purchase of a Co-owner's interest, which are hereby incorporated herein, there are no other representations, agreements, arrangements or understandings, oral or written, between or among the Co-owners relating to the subject matter contained in this Agreement, which are not fully expressed herein.

23. Counterparts. This Agreement may be executed in counterparts and transmitted via facsimile, with each facsimile copy being deemed to be an original, but such counterparts, when taken together, shall constitute but one agreement.

24. Caption Headings. Captions at the beginning of each numbered Section of this Agreement are solely for the convenience of the parties and shall not be deemed part of the context of this Agreement.

25. Negotiated Transaction. The provisions of this Agreement were negotiated by all of the parties hereto and said Agreement shall be deemed to have been drafted by all of the parties hereto.

26. Further Assurances. Each Co-owner hereby agrees to promptly sign any additional instruments or documents that are necessary or appropriate to carry out the purpose of this Agreement.

27. Power of Attorney. To the extent permitted under this Agreement, each Co-owner hereby makes, constitutes, and appoints ____, a principal of _________, the property manager of the Property, with full power of substitution and re-substitution, his true and lawful attorney-in-fact for him/her and in his/her name, place and stead and for his/her use and benefit to sign, execute, certify, acknowledge, file and record all instruments that may be appropriate in connection with this Agreement and the Property, including without limitation, leases, amendments and documents relating to the leasing activities of the Property. Each Co-owner reserves the right to revoke the Power of Attorney referenced in this section by giving ________________ 30 days written notice of such revocation.

28. 1031 Exchange. Each Co-owner agrees to cooperate in a tax deferred exchange Internal Revenue Code Section 1031 without cost or liability to the other.

29. Attorney Fees. Should any party to this Agreement file suit against any other party, then the prevailing party shall be entitled to attorney fees and costs.

This Agreement is executed as of the date first written above at ___________

"Co-Owners".

____________________________ ____________________________

OWNERS NAME

____________________________ ____________________________

Owners name.

__[Attach acknowledgment of signatures by a licensed Notary Public for each party to the agreement]__

EXHIBIT "A"

LEGAL DESCRIPTION OF PROPERTY

EXHIBIT "B"

NAME OF TENANT; ADDRESS OF TENANT; AND

PERCENTAGE INTEREST IN THE PROPERTY

NAME AND ADDRESS OF TENANT % INTEREST

TIC, TAC, TOE is a method of obtaining an interest that can avoid many issues inside a TIC Agreement.

You can wholesale, do a buy and hold, fix n flip, contract for repairs, place a tenant in ownership over time, establish your full acquisition of title as a refinance instead of as a purchase (better underwriting terms), have delayed sales, do a sub-to (buy I agree it should be a short fuse deal as Michael and Brian mentioned).

Why sublet when you can take an ownership interest and lease as an owner?

TIC allow for estate planning, avoiding the due on sale clause.

You can have the power of sale under your TIC Agreement.

Tired landlords can retain tax benefits while you own and operate, seller financing can be used as well.....

Okay, I'm tired, I have a blog about it so you can read that, "How to Play TIC, TAC, TOE". :)

Originally posted by @Brian Gibbons :

[email protected] Gulley

I need the tic-tac-toe document!!😎!

I can tell you too, that "hard money lenders" who seek an equity share are missing the boat trying to be a lender when they should be a TIC investor!

I have used and profited very nicely from doing fractional interests. But, without proper instruction, like other advanced tactics in real estate, can be like giving a 12 year old an Uzi with ammo.     

I've always said there are no secrets in real estate, the TIC "method" has been around for about 25 years, is generally unknown is the simplified process and applications of a TIC arrangement.

I might go into a Sub-To deal for 90 maybe 120 days, then it's time to exit. You can accomplish the same thing with a TIC arrangement for years and using the estate planning tools keeps the investor out of harm's way much better than a Sub-To deal.

So Brian, you want the docs, well, this project has been off and on for several years actually, we haven't discussed TICs in depth on BP before because I needed to brush off the tactics to ensure compliance with all the changes that have come about in real estate the past few years. We have a green light!

Brian, you also have my number. :)