Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
So I'm by no means an expert in these types of transactions, but will attempt to clear things up a little. A Sub2 and Lease Option are vastly different.
So first a lease option is a lease like any standard lease; "I rent property XX for $XX/mo" and an option; "I have the right to buy property XX for $XXX". Those are two separate documents a lease and an option to purchase. There will be terms such as how long both the lease and option are for. If you don't execute your option and the terms in it by the agreed date then your option to purchase goes away. If you do exercise it then you would close and take title to the property at that point. So with a LO you don't actually own the property you just have some contractual control over purchasing it at some point in the future.
A Sub2 you actually close on the property and take title in your name, meaning you are the owner of that property. However the mortgage that was originally on the property in the sellers name stays on the property and in their name. The only closing costs you will have will be those to close the transaction without any of the mortgage recording, down payment or underwriting costs. The risk is that there is a "due on sale clause" which says that basically the lender has the right but not the obligation to call the loan due in full. Meaning they can say because there was a title transfer they are owed their full loan amount and they can initiate the foreclosure process to recoup their loan balance. It is a risk and one you should absolutely be in a position to refinance the loan out should it be exercised.
Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes
12y
Subject to is just that....subject to the financing in place. If the borrower is behind on their mortgage or taxes, these often have to be paid. Also, if you are renting the property out to a tenant, and they don't make their rent payment, you should cover the payment to protect the person you are taking the property over from. So, it just depends on the deal.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
So I'm by no means an expert in these types of transactions, but will attempt to clear things up a little. A Sub2 and Lease Option are vastly different.
So first a lease option is a lease like any standard lease; "I rent property XX for $XX/mo" and an option; "I have the right to buy property XX for $XXX". Those are two separate documents a lease and an option to purchase. There will be terms such as how long both the lease and option are for. If you don't execute your option and the terms in it by the agreed date then your option to purchase goes away. If you do exercise it then you would close and take title to the property at that point. So with a LO you don't actually own the property you just have some contractual control over purchasing it at some point in the future.
A Sub2 you actually close on the property and take title in your name, meaning you are the owner of that property. However the mortgage that was originally on the property in the sellers name stays on the property and in their name. The only closing costs you will have will be those to close the transaction without any of the mortgage recording, down payment or underwriting costs. The risk is that there is a "due on sale clause" which says that basically the lender has the right but not the obligation to call the loan due in full. Meaning they can say because there was a title transfer they are owed their full loan amount and they can initiate the foreclosure process to recoup their loan balance. It is a risk and one you should absolutely be in a position to refinance the loan out should it be exercised.
Investor · Annandale, VA · Member since 2014 · 57 posts · 15 votes
12y
@Matt Devincenzo , it seems as if your explanation for the lease option is as if you were the tenant/potential buyer, whereas your explanation for the subject-to is that you are the investor.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
@Account Closed in both I was explaining as you being the buyer. You can buy using a sub2 or could sell that way if for some reason you wanted to. Same for a LO, a sandwich LO is just that you are the seller's tenant buyer and find another tenant buyer for more money. You collect a spread in the middle hence sandwich LO.
The big take away there with the difference in the sub2/LO is what you actually control. In a sub2 you have actually transferred title and have full control of the property. In a LO you have a contract on that property and rights to it, but don't yet have title vested in your name.