Structuring Subject-to on a preforeclosure

11 Replies

Hi Everyone,

Has anyone structured a subject-to deal while the seller is in pre-foreclosure? I was thinking about coming up with the missing payments, fix the house and sell it or just keep it as a rental.

Will the lender require the entire balance to be paid off since the seller is behind?

@Daniel Moctezuma Generally, the lender just wants the account fully caught up (called reinstatement) rather than requiring you paying off the entire balance. If foreclosure in your state involves an attorney, you might need to request the exact reinstatement figure from them, otherwise the lender should be able to provide you with the amount.

Just be sure to perform all your normal subject-to due-diligence and pre-closing prep before you commit your funds.

The lender could possibly call the loan if they found out that it was transferred without their approval.

Although its well known I am not keen on sub too because there are too many nefarious folks out there using this strategy to do bad things to sellers..

@John Thedford   but in IL and some other states were the foreclosures are so intense and take so long and cost so much.

Me thinks if you do bring it current and take title.. the bank probably is not going to want to start all over again.. in some states they would.. and maybe they will there.. but I am thinking those states with long foreclosure times it could be less likely.

Although as stated I think most sellers unless they are totally devoid of credit standing and little or no equity should NEVER sell sub too.. but we are on a deal making site that fosters how to and not really a site that is about protecting sellers generally speaking look at all the wholesale threads.

This property is actually in Oklahoma. I recently moved to Dallas but competition is crazy down here so I expanded my marketing into different areas. 

My intention is to fix it and turn it into a rental. The spread is too thin to finance the deal through a HML and flip the property. My main concern is the due on sale clause but I've read that for the most part lenders don't foreclose on you as long as you keep making the payments.

Generally it's a bad idea to sub2 or Lease Option when a bank default exists. You want pretty houses with low equity for these.

There could be all kind of pending problems you don't yet know about. 'But your honor, they gave me a quitclaim deed. Judge Judy would say tough cookies. Shoulda known better. And she'd be right.

When there is also a lot of work needed, that's strike 2 for me. You just won't have the strong ownership you would if you were to do a short sale or regular buy. A qcd with no title insurance plus DOS risk and other unknowns.. How many clients would you recommend do this as their agent?

@Steve Vaughan You spoke about Pretty Houses with low equity, What would the number look like on a potential deal, say cash on cash ROI , monthly cash flow etc. I'm considering this as an option to pick up some property and was holding of as I don't know what the numbers should look like. I know what I want when I do My FHA and conventional loans but no SUB-To.

Thanks for any Info on this 

Tom 

To bring an account current it needs to be reinstated in full. 

Depending on the numbers I think these deals can be amazing if worked out properly. Doing transactions like this are potentially a slippery slope for all parties if not done correctly or with the right people. Ensure to structure it the right way and disclose everything properly. 

Originally posted by @Thomas Poloncarz Jr :

@Steve Vaughan You spoke about Pretty Houses with low equity, What would the number look like on a potential deal, say cash on cash ROI , monthly cash flow etc. I'm considering this as an option to pick up some property and was holding of as I don't know what the numbers should look like. I know what I want when I do My FHA and conventional loans but no SUB-To.

Thanks for any Info on this 

Tom 

 Hard to say what the specific returns would be, Tom.  I've only done a few of these back when the sky was falling and when I did, I made sure to make the sellers payment for them, no matter what. Do not screw your seller ever.

The biggest benefit to me was not having to wait and pay for new financing.  That's 45 days and $4k, usually.   I typically gave $2k in 'moving money', made 1-2 payments and paid closing costs and legal fees if you need an attorney to draft a proper QCD for you of about $150.  Also paid about $150 for an O&E title report.  That's extremely important.  Then 2 guys, 2 days, $2k for clean-up and lipstick. Call it $7k all- in.  

Unless you're in a state like mine that charges 1.7% of PP to transfer title. I hold the QCD and record an option to avoid title transfer.  Otherwise I would be in for $10-11k.

I would lease option the house to a TB for 18 months at about a 3% option  fee ($6k).  Their lease payment would be about $200 more than my payment and I'd get a waterfall on the back of about 5%  ($10k on a $200k house) when they exercised at my higher option price.

So, break-even finally at about 6 months, then 120% total COC if they exercise. The IRR in my example would be about 65% per year including principal pay-down.

Lesson here- you need reserves going in. No return for 6 months. Potential large % return, but small money, akin to mobile homes.  I did it mostly to help the sellers and the TBs. Do right by your seller always. Don't miss a payment, no matter what!

I will always do right by the seller. The Lord Jesus prevents me from doing wrong like that. and I to would give about $2k to assist in anything the seller needs, and 2 payments would be my max unless the deal was extremely good and closing cost and legals would be factored in on my part. I never thought of an O&E title report, is that something I would ask the lawyer to get. Or do I get it somewhere else?

I'm curious if NY is a state that charges a % or if its a set figure on the transfer title? So you hold the QCD to not have the title transfer. I was led to believe you want to transfer title. Huh.

Is that the norm I can expect? about $6k-$7k reserves going in then about 6 months before any return? And breaking even after six months to me sounds good.

Are you always looking for more turn-key properties or will you do this strategy on fixer uppers as well?

Steve thanks for your time and for helping me understand a few more things about this crazy RE game.

Tom

Originally posted by @Thomas Poloncarz Jr :

I will always do right by the seller. I never thought of an O&E title report, is that something I would ask the lawyer to get. Or do I get it somewhere else?

I'm curious if NY is a state that charges a % or if its a set figure on the transfer title? So you hold the QCD to not have the title transfer. I was led to believe you want to transfer title. Huh.

Are you always looking for more turn-key properties or will you do this strategy on fixer uppers as well?

Steve thanks for your time and for helping me understand a few more things about this crazy RE game.

Tom

 Sure, Tom.  Glad you plan to do right by the seller.  That is numero uno in my book.

An O&E/L&E (owners & encumbrance/lien and encumbrance) title report or title abstract would be ordered through a title company normally.  Ask them about title transfer costs, too.  If you're in a state where attorneys do closings, I guess a title attorney would be the one to ask.

Yes, with sub2 and more so lease options, it generally needs to be a pretty house with current payments.  When they stop making payments, chances are they also stopped paying taxes, utilities, contractors, etc. so there could be pending liens you won't see until later.  

However, I would do a sub2 on a fixer with current payments provided the title was clean.  Would not do work on a fixer without title - so no lease options or Land Contracts for me. 

You will want title to be in your name, of course.  I held the qcd, only recording an Option on a couple because it was going to be a quick turn and 2x 1.7% (1 at the buy and again at the sale) for excise transfer taxes would've been ridiculous.  Just take title 90% of the time in 90% of the country.  Again, ask a title co what transfer fees are in your county.

Thanks for the question @Thomas Poloncarz Jr & thanks for your answers @Steve Vaughan . I live in PA and plan to send yellow letters to owners of pretty pre-foreclosures with the intent to help them by bring the payments (depending how long/bad it is) back to current, giving the owners some cash to move, and placing lease-purchase or tenant-buyers into the home. 

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