Landed My First Subject To Deal!!!
Please excuse the long post. I searched high and low about the tactical steps involved in doing a “subject to” deal and it took a while to learn and document the steps. So I’m laying it all out for the next person and hope that this post is useful for someone!
Seller scenario, motivation and purchase:
The seller purchased this house as his primary residence and then ended up moving into another house a few years later. Instead of selling this house, he turned this one over to a property management company. They did a decent job managing it for him, but his profits were being eaten up by the property manager’s high cost of repairs and fixes. The tenants recently moved out and the place was now vacant. The seller recently decided to move out of town and didn't want to be a remote landlord entrusting his property to a property manager, so he was uncomfortable holding onto the property (this is a critical piece of information; always figure out what the sellers motivation is and keep the conversation tailored around that). He was also dealing with listing/selling his current primary residence, while coordinating his out of town move to happen within a few weeks.
How I found the deal:
I found this seller through my social network. I work full-time in Healthcare IT (Nashville, TN) and interact with a lot of people on a daily basis. Folks know I’m a real estate investor on the side and are always asking me for advice. Whenever I give advice, I always tell folks what I’m looking for and tell them to give me a call if they ever need to buy or sell a property. This seller came to me asking for advice on what to do. I asked him how much he owed, discussed the cost of hiring a real estate agent, the items potential buyers would ask him to coordinate/fix (cosmetic; floor, paint, cleaning) and the time it would take to sell. All of this while he is trying to sell his primary house and move (remember to focus on motivation). I offered to take it off his hands within 2 weeks.
The numbers:
The seller purchased the house towards the mid/high end of the market before the 2009 recession, but paid it down to 83% LTV of original purchase price ($155,000). He owed $129k. His monthly PITI is $850. My offer to purchase was at his current balance. I know I could rent the property for $1300 a month. My property manager charges 10%, so my monthly PM fee is $130. I like to put 5% towards capital reserves and 5% towards vacancy reserves, because I have a reserve balance already built up for my portfolio. If I was starting from scratch, I'd allocate more. Additionally, I like using 1% of purchase price as a general rule for buy/holds in the Nashville market.
Rent = $1300
- PITI $850
- PM $130
- 5% cap reserve $65
- 5% vac reserve $65
= $190 cash flow
How I structured the deal:
This is the tricky part and being the first subject to deal I’ve ever done, I hired an attorney. I didn’t alert the seller to my lack of knowledge on the subject, but remained confident in knowing what I was doing. The attorney drew up the contract and due on sale acknowledgement. Contract was for me to pay the seller $850 a month and for the seller to continue paying the mortgage. This keeps everything calm with the bank. Seller would add me as an additional insured on the escrowed insurance policy. Quit claim deed would be filed and my name would be added to the deed with the seller. Additionally, we signed deeds in trust that remain with the attorney. If I default on the payments, the deed goes back into the seller’s name. If the seller doesn’t make the payments to the bank, the deed goes in my name. 12 month contract for me to payoff/refinance the seller’s loan out into my name. I know after 6 months of owning the property, I’ll be able to go to my bank and refinance the seller’s loan out. The seller was fine for the loan to remain in his name and on his credit report for up to a year.
Why I did the deal:
Some folks would wonder why you would do a subject to deal and put a 12 month timeframe on it? Others might also wonder if 83% LTV is a good deal for a property? For me, my main goal is buy/hold for the long term (another key item, always know your goals). I like the part of town this house is in and I know the house is perfect for a family. 1,600 sq ft, 3bed 2.5 bath, 2 car garage. I know the neighborhood, zip code, comps and the rental market. This house will consistently rent out to long-term tenants. I'll make $190 a month on it, not counting principle being paid down and 2-4% appreciation every year. Additionally, this was a great way to learn the ropes on how to do a subject to deal. It was a turn key opportunity, only took about 4 hours of my time and total cost was $312. $300 for the attorney and $12 to record the deed.
By the way, I closed on this last week and today just got the phone call that we’ve got it rented for $1350!!!
