Why Buying With Subject To Sometimes Makes Sense

[Ken M.]

Subject To is definitely not a “No Money Down” technique”, Here’s why . . .

It costs money to locate a willing seller. One of the largest wholesalers in Phoenix says it takes them $2,220 to get a wholesale that closes. It’s about the same for securing a Subject To. Think about the time and money you put into marketing. I do it for a lot less than that, but I’ve streamlined the process. Yet, $2,220 is the normal.

Here is an example I did of a Subject To, in foreclosure, bringing their loan current, taking over their loan and giving them “cash out”, they had a previous loan mod as a 2nd loan. Think of it this way, if they aren’t paying their mortgage, chances are they don’t have money to move, which creates a problem. So, give them money to move.

Bought for $157,100.38 ARV $245,000.00

5 bed 3 bath – Phoenix AZ

These are the numbers from one of my HUD statements

Existing Loan Amount Payoff $118,145.37 Subject To $118,145.37

Closing Costs From HUD

Title $ 1,045.00

Escrow $ 1,400.00

County Taxes $ 538.38

Recording Fee $ 120.00

Cash to seller $10,000.00

Misc other charges $ 525.00

Total Amount Due $ $13,628.38 $

Arrears To Bring Account Due

Total Number of Missed Payments: 11
Total Payment Amount $10,095.47
Unpaid Late Charges $ 146.84

Additional Amounts:

Foreclosure Fee/Cost $354.19
Unpaid Advance Bal $1,101.75
Total Amount Due $ $11,698.25 

FHA Loan Mod 2nd $11,582.44 

My Out of Pocket $36,909.07 

Total Basis Cost of Purchase $155,054.44

ARV (After Repair Value) $245,000.00

Repairs Post Purchase $ 5,000.00 +/-

Unrealized Profit $84,945.56

Equity (ARV minus Subject To payoff) $126,854.63

I strongly recommend having 3 months reserves as follows:

Monthly Mortgage $917.77

(Taxes included)

Electric Monthly $362.21

Water & Sewer Monthly $102.80

HOA – None $ 0

Reserves

3 months mortgage payments @ $917.77 per month = $2,753.31

3 months Electric payments @ $362.21 per month = $1,086.63

3 months Water payments @ $102.80 per month = $ 308.40

Total $4,148.34

Then I turned around and sold it on a Lease Option for $265,000 getting $20,000 down on a nonrefundable Option fee, and rent of $1,900 a month.

So, I sold it for $20,000 more than street value, I get tax write offs, I got $20,000 back immediately as an Option fee, I cash flow at $982.00 a month and if they exercise their Option, I’ll get $146,854.63 (minus the $20,000 Option fee) equals $126,854.63 cash along with any pay down during their Option period.

Whether you are new, looking for lenders or cash or real estate & considering Fix & Flip, BRRRR, or rental, as a buyer, I’d ask the owner / seller to be one of my private lenders with creative financing. This works for property in Southern California (CA), AZ, WA, and TX & GA

[Bo Smith]

Ken, solid breakdown on the actual costs. Too many people see "no money down" and skip right past the reality of what it takes to execute. Your example is exactly the kind of deal where Subject To makes sense -- you've got a motivated seller, a salvageable property, and the capital to fix the problems.

What people don't talk about enough is the due diligence cost. Finding a seller, underwriting the deal, getting title work done, negotiating with the lender (some will allow it, many won't) -- that's all in the k-5k range before you even close. You're essentially buying the ability to control that property at a discount to market. The ARV-to-acquisition ratio is what matters. In your Phoenix example, you're looking at roughly 65% of ARV after all costs, which is respectable on a rehab flip.

The other thing Subject To gets right that wholesaling misses is optionality. You're taking over the note, so you can refi, hold for appreciation, rent it, or resell. You're not forced into a quick flip. Where it goes sideways is when you underestimate the carrying costs or the lender calls the due-on-sale. Have you dealt with any lender pushback on these deals, or are you mostly finding notes from banks that are sleeping?