To 'subject to' or to not 'subject to'

6 Replies

Okay BP-ers, looking for some advice/opinions regarding a property I own in Charlotte, NC,. Like most other owners who purchased a new construction property in 2006 I am even/slightly upside down still. It was originally purchased as owner occupied, converted to rental in 2009 when I moved to Florida where I still live. Details of the current situation: 

30 year mortgage (PITI): $864/month, HOA: $80/quarter

Previously rented: $1000/month, self managed from 600 miles away. With repairs I basically break even each year if lucky. Have gone 2 for 4 with good tenants, 2 tenants stayed 2+ years and left on good terms, 2 have been evicted. Vacant now after most recent eviction. 

Owe around $120k on it, likely worth $110-115k due to other foreclosures in the neighborhood.

The property has been a big headache, hard to self-manage because I have not had good "boots on the ground" to do all the things needed to get the property cleaned and rented out again. I have no desire to sell and come to closing with $10-20k so selling outright is not an option. Looking into other alternatives than just renting again and hoping for the best, I am sick of this house and don't care whether I make money or not. Handing it back to the bank is not an option, I have an 800+ credit score and have no desire to change that. I have been presented with different offers: 

- lease option. $864/month (covers my PITI) , buyer covers HOA fees and repairs, $4k upfront for 5 year option to purchase at whatever my current mortgage balance is at the time.

- lease option: $5k down, $1000/month, 3 year term. Same option structure, purchase price is whatever I owe. Only difference is $5k is held in escrow and only paid IF they exercise the option. In other words, could also be seen as $1000/month for free option to pay me $5k more than I owe if they want to buy. 

- re-rent it out. I have found someone who is willing to help find a new tenant, likely in the $1000/month range again. Will not be ongoing PM but will be willing to assist with anything needed in the future. 

- Attempt to find end user who has a desire to do rent to own option. Would be looking for similar structure, someone to put down some money to rent for $1000/month and get credit towards closing if purchased or option to buy at a certain price. 

I guess I am hesitant to take a lease option because I always want to be the one BUYING via lease option, not selling. On the other hand I don't care about making any money on this house, I just want it to be the least amount of headache as possible. I have enough going on here in FL that this house just ends up being a pain in the butt more than anything. I would honestly love it if someone exercised their option to buy it, I don't want to have to carry that debt on my personal debts any longer. 

What would you BP-ers do? 

@Zach Protzko

First off I have never entered into a Subject-To arrangement so take my advice with a grain of salt....

To me it sounds like Option #2 would be a good choice. Best case scenario you have someone that pays you $5K more than you owe in 3 years plus in the meantime you are still braking even with rent collected if not coming out ahead if they are paying HOA and covering repairs during those 3 years. If they choose not to invoke the option to purchase you have still had a single tenant for 3 years who has covered HOA and repairs. Is there any way to add a clause that if they move prior to the 3 year term expiring there would be only a partial refund of the escrow amount?

Best of luck and let us know what route you end up going.

@Brandon M. Hello. Sounds like you have a big pot and this one keeps messing up the rest.  Just reading your post and from your concerns I think the easiest way through is;

- lease option. $864/month (covers my PITI) , buyer covers HOA fees and repairs, $4k upfront for 5 year option to purchase at whatever my current mortgage balance is at the time.

You have no PITI, HOA fees or Repairs and a 5 year tenant with $4000 up front to earn a little interest on. The only expense would be insurance deductible if there is a claim. Then it is either sold to them for balance on mortgage, or you might get a better price depending on home sales at that time. Things change and you might like the changes then. Best of Luck to You. Tom

If you take Door #1have them meet with a mortgage company and make sure they are willing to do what is necessary to get a mortgage in 3 years.

None of your scenarios are viable if you have a deadbeat tenant that can not get a mortgage when it comes time to exercise the option.

@Brandon M

My attorney friend drafted a lease and a contract for option to purchase 

Send the lessee to a Mortg broker RMLO 

You need to find someone that wants home ownership and that will overpay

I think cheap rent for 24 mo and 3% down is a good strategy

Can you make up the shortfall or pay extra principal to get to zero upside down over 24 months?

If buyer for option 1 has good credit and can get a loan I would go that route. Like another poster said, you potentially could have the same scenario in 3 years if they cannot get a loan. 4K is not a bad down payment. I would try to negotiate a higher one though. Suppose 4K down and 2K each additional year. Your option can state that they additional 4K will be credited back IF they close. The more skin in the game they have the more likely they will work to close the deal. I haven't done any leases with options but understand they can end up in court and the owner has a BIG mess. Make sure your bases are covered. In Florida a highly respected speaker at one of classes suggested options OUTSIDE of the lease. This may avoid having to foreclose on someone versus evict someone. Since your deal is in a different state you need to have an attorney i  that state give you advice.

The thing about options 1 and 2 is the buyer is an investor, not the end tenant. Not that I really care WHO is giving me the money. 

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