I'm about half way thru listening to podcast 70 on Sub2 financing deals and find it really fascinating. I have a distressed home owner that I was trying to work with a few weeks ago but we couldn't get close on the numbers for a flip or rental. I'm now thinking that a Sub2 deal might be a winning strategy for her situation. However, I have a couple of questions...
1. Anticipating her question: Since the existing mortgage stays in place in her name, what happens in a couple of years if her situation improves and she wants to purchase another house? Would she have a problem obtaining conventional financing for a second home that would be her primary residence?
2. Assuming that I were to close the Sub2 deal and then owner finance to a new occupant, who is responsible for the insurance on the property?
3. If there is significant equity in the deal I understand that I could structure the owner financing to require a significant down payment to "cash out" some of that equity. Is it also a viable strategy to simply recoup that equity on the back end of the loan after the existing financing is paid off? Or is this just simply a bad idea?
I'm sure that I have more questions but I'll start there. Thanks in advance for any feedback.
Just thought of another clarification...
I assume maintenance, repairs, upkeep is all the responsibility of the individual you are selling the property to via owner financing? This makes the numbers easier than a traditional rental in that you don't have to account for these expenses.
Another question... I assume that I would be responsible for the property taxes and this is probably covered in the Sub2 contract, but does that entitle me to use those property taxes on my income tax filing or does the original owner still retain that benefit since the mortgage is in her name?
One is that if you wrap the existing mortgage and sell with owner financing, you better make dang sure that the balance you owe on the original mortgage is always below what your end buyer owes. That podcast talks about selling with 15 year notes. If you wrap a note with, say, 20 years left to pay with a 15 year note, the end buyer will pay off the loan five years before you do. That means you will need to come out of pocket to pay that off when the end buyer does or else you won't be able to deliver the clear title you've said you would.
You need to be VERY, VERY, VERY clear with the end buyer that there is a very real chance that they will have to refinance quickly in order to keep the house. Just being current on their payments IS NOT adequate to ensure they will be able to keep the house. If they cannot refinance on a moment's notice, they may lose the house even though they have complied with everything they agreed to. Guess who's getting sued if that happens?
Property taxes, insurance and maintenance are the responsibility of the owner. That's the end buyer. Neither you nor the original owner can deduct the property taxes on your tax return, even if these are, in fact, being paid by the underlying lender. These go to the end buyer.
On your tax return (you need an accountant, by the way) you would show income from the payments you receive and deductions for the interest you pay.
Listen to Jon's advice.
My advise: use sub2 for buy and hold. Reselling or lease optioning us a recipe for future disaster and litigation if a loan gets called and you are (or were) in the middle.
If you've got the dough to okay off a called due, that's fine. However, most people who post here are long on desire to make a profit but short on cash.
There used to be a low chance of loans getting called. It happened to me once in 1987 and I got the letter that began, "It has come to our attention..."
Now, loan investors are buying paper for the precise reason to play the upside.
OK... I'm going to be going to talk to an owner on Monday about possibly doing a Sub2 deal on her property. Is there a Sub2 for Dummies kind of primer that I can use as a guide for talking with her? I'm really in need of some guidance as to how to explain Sub2 and how to structure the deal. Thanks in advance for any advice on this.
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