To Subject-to or Not To Subject-to

Investor · Decatur, GA · Member since 2014 · 56 posts · 16 votes

I have a seller that has offered to sell his house to me for what he owes on the mortgage. Still a little low but not that much lower than houses on the street are worth. But then I thought as a subject-to it might be worth it, so I wouldn't have the downpayment. Then I could put my capital into the fixes and not the loan. He owes $150,000 and pays $1000 a month. What do you think?

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Jeff G.Pro Member

Investor · Wethersfield, CT · Member since 2013 · 371 posts · 191 votes

11y

@David Cohen subject-to can be a good way to build your portfolio quickly. But be careful. Most of the people I know who do Subject-To transactions do so with a few added steps:

The Process

They provide the seller with a Subject-To hazards disclosure form. Find one that is valid for your state, have a qualified attorney review it, and use it.
They put the house in a trust and make the current owner the executor or the trust. A bank account gets setup for the trust with several months worth of reserves, etc. and the title gets transferred to the trust. All this juggling takes a bit of time The due on sale clause is not triggered, yet.
A good loan servicing company is hired to make sure everybody gets paid on time. This is critical to keeping everyone happy.
Once all of that infrastructure is put in place then the you're elected the executor of the trust by the end-end buyer. The Due on Sale clause is now violated. Which leads me to my next point....
Everyone I know who has Subject-To in their portfolio and stays in the business acquires the property at price low enough that they could sell the property retail within 90's or less. This is used as a stop-loss measure of last resort should the lender exercise their right under the clause. Adjust that timeline accordingly if you're in a judicial foreclosure state vs. a non-judicial one.

Things You Should Know

The Guru's will tell you that the bank is highly unlikely to foreclose. This is technically correct at present, but there is a vast difference between a statistically unlikely event and a statistically impossible event. Banks do occasionally foreclose on Subject-To deals. Typically, this happens when something goes wrong with payment processing and they have a reason to start looking at what's going on.
Also, as the economy changes note that should the Federal Reserve ever raise interest rates significantly during the lifetime of the subject-to agreement the lenders will have a vested financial interest in foreclosing because they can re-issue the loan at a higher rate of return.

I haven't personally done a Subject-To deal. I want to get more Wholesaling deals under my belt first. But, that's personal preference on my part. If you feel comfortable proceeding come back and tell us how it went!

Some Resources

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Mehran K.
Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
11y
That sounds like an awesome plan to control the property without having a down payment or needing to get your own financing. Some thoughts:
- Are you looking to keep it as a rental?
- Will you be refinancing it or selling it after you fix it up?
- The mortgage would be $1,000 a month, how much do you think you can rent the place for?
- What kind of fixes does it need? (aka. how much will you need to dump into the property) You say he owes $150k on the mortgage, what are the recent comps selling for?
- If you're looking to cash him out of his loan eventually, are you able to obtain financing later down the road?
Just throwing questions out there that need to be answered to evaluate the deal better.
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Jeff G.Pro Member
Investor · Wethersfield, CT · Member since 2013 · 371 posts · 191 votes
11y
@David Cohen subject-to can be a good way to build your portfolio quickly. But be careful. Most of the people I know who do Subject-To transactions do so with a few added steps:
The Process
- They provide the seller with a Subject-To hazards disclosure form. Find one that is valid for your state, have a qualified attorney review it, and use it.
- They put the house in a trust and make the current owner the executor or the trust. A bank account gets setup for the trust with several months worth of reserves, etc. and the title gets transferred to the trust. All this juggling takes a bit of time The due on sale clause is not triggered, yet.
- A good loan servicing company is hired to make sure everybody gets paid on time. This is critical to keeping everyone happy.
- Once all of that infrastructure is put in place then the you're elected the executor of the trust by the end-end buyer. The Due on Sale clause is now violated. Which leads me to my next point....
- Everyone I know who has Subject-To in their portfolio and stays in the business acquires the property at price low enough that they could sell the property retail within 90's or less. This is used as a stop-loss measure of last resort should the lender exercise their right under the clause. Adjust that timeline accordingly if you're in a judicial foreclosure state vs. a non-judicial one.
Things You Should Know
- The Guru's will tell you that the bank is highly unlikely to foreclose. This is technically correct at present, but there is a vast difference between a statistically unlikely event and a statistically impossible event. Banks do occasionally foreclose on Subject-To deals. Typically, this happens when something goes wrong with payment processing and they have a reason to start looking at what's going on.
- Also, as the economy changes note that should the Federal Reserve ever raise interest rates significantly during the lifetime of the subject-to agreement the lenders will have a vested financial interest in foreclosing because they can re-issue the loan at a higher rate of return.
I haven't personally done a Subject-To deal. I want to get more Wholesaling deals under my belt first. But, that's personal preference on my part. If you feel comfortable proceeding come back and tell us how it went!
Some Resources
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David Cohen
OP
Investor · Decatur, GA · Member since 2014 · 56 posts · 16 votes
11y
@Mehran K. Thanks for the respond.
1. I'd love to keep it as a rental. I can't do the 1% rule but can maybe get $1100-$1400. I could also possibly flip it as a plan B.
2. If the seller's financing is around 5% then I'll just rent it out. If not I'd refinance.
3. As far as I know right now, I'll: refinish the floors, reface the cabinets, new appliances, fix up the fence and shed and if I'm feeling really frisky put in another bathroom by the master bedroom. Recent comps for a 3/1 is 160,000-180,000.
4. Do I need to cash him out of the loan? I thought I could just assume it through the subject-to.
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Mehran K.
Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
11y
Is the $1k/month the full PITI (Principal, Interest, Taxes, Insurance) or just the P&I (Principal&Interest on the loan)? Make sure to get a full copy of the loan terms so you can verify this all,
You wouldn't need to cash out the loan no. You could definitely assume it subject to. On refinancing, just know that if the seller has a $150k loan balance, and the comps are $160k-$180k, it may a pickle to refinance the loan because of the appraisal and LTV (loan to value) requirements.
$1100-$1400 is a big range, narrow that down and be conservative. do some research on craigslist, rentometer, etc in that general area for similar properties. I repeat, be conservative just in case!
Get a handle on how much all those fixes are going to cost you so you can evaluate the deal better also. Since it's going to be a rental, be sure not to over-rehab as if it was a flip!
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Ericka Parrott
Residential Real Estate Agent · Atlanta, GA · Member since 2009 · 381 posts · 134 votes
11y
Sounds like a great deal. You can also consider doing a wrap mortgage and closing with an attorney in lieu of a subject-too.
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Joe Moore
Rental Property Investor · Los Angeles, CA · Member since 2010 · 804 posts · 230 votes
11y
A subject2 will not be a problem as long as you pay the mortgage payments as required. Though the bank can call the loan it is highly unlikely as long as they are getting paid. The bank do not care who pay as long as they get paid. I always get title insurance on the subject2 to make sure there no uncovered claims on the property that could cause future title problems.
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