Buying Using Subject To vs Using A Bank - How Do They Compare - Actual Deal

[Ken M.]

For starters, you run out of money using a bank to finance and you pay huge fees for the "privilege" of using their money. You can avoid all of that by knowing how. This can be done in CA, FL, AZ, TX you name it, ANYWHERE. It varies a little bit in each location, but it's a great advantage to serious investors. You can rent out the property, you can "fix and flip", you can STR, all with or without a LLC.

I was asked by a couple of people to compare doing a Buy & Hold Rental using conventional financing and buying Subject To with selling to a Tenant Buyer and what that would look like.

This is an actual deal I recently did. I bought a 4 Bed 2 Bath 2000' property in a decent neighborhood in Mesa AZ that was built about 1985.

In this Spreadsheet I am comparing:

OPTION: 1 Conventional Financing for "Buy & Hold" for a Rental vs ---- OPTION: 2 using "Subject To" and Reselling to a Tenant Buyer

OPTION: 1 As a Rental, the Kitchen and Bathrooms needed updating requiring about $5,000 of work in order to be ready to be a Rental. From the Renter I would get first month’s, last month’s and deposit. I would have to have a loan from a bank with 20% down or about $45,000 to qualify.

OPTION: 2 Selling it to a Tenant Buyer requires no rehabbing on my part. 

The Tenant Buyer will do (or not) the rehab to their liking. From the Tenant Buyer I get an Option Payment of $25,000 and a rent payment when they take possession. There is no deposit. Here I simply take over the existing loan and payment & need about $15,000 “Cash on Hand” to cover expenses & reserves etc. I can sell the property for more because he doesn’t have to qualify at a bank and will pay a slight premium.

Let’s see how the numbers work.

Click On Each Section To Enlarge

[Doug P.]

Quote from @Ken M.:

Quote from @Doug P.:

Quote from @John Clark:

You say “can be little $ down,” but you don’t mention how much you’re paying the original owner to take out his equity. At least I didn’t see it.

Not Ken, but I've never put down more than $10. There are just too many opportunities to bother with the ones who want a large down payment, unless they're willing to give me a ton of equity in exchange.

I've got up to 25% equity without the seller wanting a penny of it, they just wanted to be done with the property.

In The U.S., the court looks at how much was put down in a transaction for example. They look at things like "were the payments being paid on time" by the new owner (especially for a Subject To buyer) and other indicators. There are specific laws that came out of the "Great 
Recession " that are national, and obscure, that a lot of people run afoul of. It only matters when you get caught. :-)

Some of the laws make no sense, (I look at them as "trip wires" that make the case "worth pursuing" when they don't have anything else, but one gets to explain that to the judge.

We're lucky here in Canada that we had virtually no fallout from the GFC. We're getting a long overdue price correction now but it wasn't caused by the insane lending policies that caused the credit crisis, just good old fashioned irrational exuberance and interest rates getting pushed down too low during the pandemic. I haven't heard of any weird legislative stuff relating to financing here except for a temporary moratorium on foreign buyers and possibly putting limits on how many single family homes private equity firms can buy.