subject to

8 Replies

Hi BPer's 

My first question/post here. I'm a Realtor so not new to Real Estate but new to the creative options. (and excited about them!) I'm considering approaching one of my clients with the option of buying their house subject to because I don't have 20% down (and I want to get my feet wet on this) and just offering them some $$ upfront (they need some of their equity) and taking over payments and leasing it out... then I can continue to pay them an agreed upon amount towards that additional equity. Will I be able to refinance to get it in my name and if so, how long is title seasoning or is there, since it's subject to? And if so, can I, since I will have all that equity in the home, cash out some of it to pay them off on the refi?? Also, since it's in an HOA, how does that work on something like this? I already have a rental in the neighborhood so I know the transfer fees etc... but how to handle me taking over that too on a subject to?

Any advice or other creative thinking?- I'm open

Sub2 means you take title leaving their exiting mortgage in place. This means, that mortgage stays attached to the Subject Property and will be factored into their credit until such time as it is satisfied in full.

It's not real clear you are aware of the real risks with this type of scheme.  Sounds like you have only heard creative guru stuff, allowing you to get something for nothing.  I suggest you do some research in the threads so you understand the upside and down side risks in all of this.  

If you do not have 20% now to put down, it is unlikely you will earn enough equity within the minimal seasoning requirements for a refinance, which is 12 months, to allow you to refinance a non-owner occupied property.  If you are trying to arrange the deal with some innate amount of equity for you to step into, not saying you mean to, but if you are thinking that, you are not acting in the best interest of your clients.  

There are lots of threads here on BP around the matter that have done some pretty good jobs of presenting both sides of Sub2 investing. A quick search for Sub2, Due On Sale, FHA Assumptions and some other key words will point you in the direction to a fair amount of reading on the subject matter.

The HOA topic has not been covered all that much though. The HOA may have terms in their CC&R that can prevent this from taking place or that have restraints on the use of the property as investment. Perhaps once you explore some of the other ideas and look at the CC&R's, you can come back an ask specific questions about that and they can be addressed.

Good luck.

Thanks Dion for the prompt response.  I understand the mortgage stays with the home and I'd be purchasing the home subject to the existing mortgage.  I am not trying to take an innate amount of equity from them either as I agree that wouldn't be in their best interest. These are friends as well.  I'm trying to see how I can purchase this home without going the traditional route is all I'm trying to do so I don't have to pay 20% down and closing costs (for the moment and do that on the refi). Lender requires me to pay my 2013 IRS balance in full too if I go the traditional route.  I have 5 closings next month so I will have a lot more to work with then but I still don't want to go traditional 20% if I can help it. I'm basically wanting to spread out the payment of their equity to them over time instead of closing traditionally and them getting it on one lump sum.  They have already got another home and don't want two mortgages nor to deal with tenants so it was just a thought since I want to accrue more investment property and wondered if this might work.  

I could pay them their equity due to them (on our agreed lower price than what we would list for retail) and I could pay them 10K now take over payments, 10K next month, and spread the rest over the year until I refi in 12 months.. then at that time, when I refi, they would be paid and out of the picture....

would it be better for me to do HM just to get it in my name and then refi out of that in Oct once my bank account matches my ambitions??

In general, it sounds like you should be close to working with something with the $20k over the next 60 days and some periodic payments. We don't understand the sale price and therefore the financing demand for down payment or equity. In general, it takes 12 months and proof of payment to transition the transaction from a purchase to a refinance. Other conditions, per lender may apply. I believe the equity demand for a R&T NOO refinance is 15%. The down payment demand for a purchase is 25% for NOO.

I do not see how a Hard Money loan would work, since a HML would require the satisfaction of the current mortgage meaning a larger down payment from you.

True on the HM, as soon as I hit send I thought.. 'now that makes no sense!' haha

value 200K

their bottom line 190

I'm wanting 180K with no realtor fees like they're selling to me as a FSBO so it still matches their bottom line as that's what they'd get if they sold it on mls

I will have 20% true in the next 60 days but they don't want to wait 60 days...and pay 2 mortgages. I'm going to list it soon but had the thought late last night... wait a minute, there's got to be a way I can get this w/o 20% down etc..  so I put it out here..

trad lender wants 20% plus closing costs plus 6 months reserves plus pay off my IRS so that leaves me cash poor and too uncomfortable..... and it would probably already be sold on the retail market and closed by then..   If I can get in for 5-10% down someway, I could swing the additional equity over the next few months and get the sellers and the IRS  paid off but the timeline is now or never...  and since I've never done anything but traditional.. I'm just putting it out there..

IMO, there is no deal here if you are trying to flip the property.  Exiting at $200k, why don't you just take a rental management fee, help them offset the mortgage payment and find a buyer and double side the sales commissions.  Pocket the listing for a brief period.  To me, it seems like, putting your money into the deal is a waste of exposure and time to make a couple extra thousand bucks.   I don't see the value there.

I'm not trying to flip

I'm a buy and hold gal (for now)

Just wanting to buy without 20% at the moment 

Correct me if I'm wrong please but can't you buy the property sub2 for 180 contingent to you finding a buyer within 30 day who will buy it with owner financing (at a price closer to or at market value), require a 10-20% down payment then use part or all of that down payment to pay the original owner of the house (assuming they will use that to pay down the mortgage. From then on you collect a higher mortgage from the current tenant, pay the existing mortgage, and cash flow the difference every month. If tenant can no longer pay you just carry the financing to a new buyer, requiring ANOTHER 10-20% down payment: but this time the down payment will be full profit to you.

The downside risk to this is the potential that the lender will call the note due, so you need to make sure you are playing your cards right to avoid that.

Would love some feedback from more experienced investors.

I wold think, as a realtor, doing a subject to transaction with your client would put your license at risk.  If anything goes wrong with the deal it is going to look like the licensed Realtor took advantage of their client.......

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