Subject To - How an Actual Deal Worked - Including the Numbers

19 Replies

Subject To - How an Actual Deal Worked - Including the Numbers

Here is how I did it: I was contacted by an investor who hadn’t done any deals successfully. She was a little afraid to make the jump on her own. She invested $50k for me to put a deal together and I took over from there. She asked me to explain it to her so I decided since I had it written up, I would post it here for anyone to learn from. I found the property. (I find lots of properties using a technique that I’ve used many times over the years.) I bought “Subject To” (No Bank involved) I found a house in Mesa AZ suitable to the transaction. I still have to complete the other deals I've run across when she or someone else wants to do the next one. I'll try to post those too.

Zillow says this house is 5 beds 2 baths 1,526 sqft but actually has 3 beds (possible 4 beds) with fireplace, pool and RV Gate in Mesa AZ. The Seller was wanting as much for the house as possible of course. I offered $160,000 and he countered with $180,000. We settled on that $180,000. Not cash nor financing but on MY Terms. This property was off market and no real estate agents involved. That is an old sign in the picture from a previous sale, not this sale. Anyway . . . 

There are some rough patches in the property that would have to be fixed up in order to qualify for FHA financing. The roof needs some work, a wall was removed to enlarge the kitchen but wasn't completed. The amount owing is about $145,000. Zillow has it valued at $212,524 and listed as 5 bedrooms.

So, the basics are that I offered $15k in cash to the Seller towards their equity with the remaining equity to be held as a second. I take over existing payments.

Now, why would the seller agree to that? Well, he understood that using a real estate agent would require that he fix up the house to at least FHA requirements and he wasn't prepared to do that. It would also mean that he would have to pay 6% or about $12,000 to a realtor to list it in the MLS. It would also mean that he would be uncertain when the sale would happen. Selling to me he had a guaranteed sale.

So, the numbers look like this: (round numbers)

$180,000 I bought for “Subject To” (I took over the underlying mortgage)

$15,000 I gave him cash so he could move on

The rest of his equity to be held as a note. (A second mortgage to him)

$145,000 the amount I took over on the loan

$995 My payment per month PITI (I pay every month to the underlying mortgage)

I was able to find what I call a Tenant Buyer and Sell on a Lease Option. He is responsible for all maintenance and repairs. I didn’t do any repairs. This is not a Fix & Flip.










1) One way to look at the Equity Profit:



$50,000 Amount she placed in Investment Fund


$15,000 Given to Seller for moving



$35,000 Remains in Investment Fund




To be used for reserves, carrying costs, marketing, closing, etc









Here is how I Bought


Bought $180,000 Amount Bought for


Paid Out $15,000 Gave to Seller for moving

Still Owe 2nd $20,000 (Seller carries a Second mortgage to us)
Still Owe 1st $145,000 Our amount owing on the property Taking it Subject To


So, we still owe $145,000 on the original mortgage


and $20,000 to the Seller on a carry back 2nd
Owe Total $165,000 for a total of $165,000 still owing


Here is how I Sold



Sold $235,000 "Sold" (Lease Optioned) Amount to a Tenant Buyer
Collected In $20,000 Option/Down payment from Tenant Buyer
Owner Carry $215,000 Lease Option to Tenant Buyer


So far on the Investment Fund
Paid Out $15,000 So, we have paid out $15,000
Collected In $20,000 And Received in $20,000

$35,000 Remains in investment Fund


The $20,000 goes into the Fund
Fund $55,000 Makes $55,000 still in Fund
Profit $5,000 Equity Profit, so far


10.0% Equity ROI , so far


Remaining Equity


We're Owed $215,000 Amount Tenant Buyer Still Owes Me
We Owe $165,000 Our Total Payoff (1st $145K + 2nd $20k)
Profit $50,000 Amount Gross Equity

100.0% Equity ROI , remaining

In Addition - We make monthly Cash Flow Profit

$1,650 Tenant Buyer Monthly Payment


$995 Our Monthly Payment


$655 Monthly Cash Flow



$7,860 Yearly Cash Flow



15.7% Yearly Cash Flow ROI

It's a reasonable deal. Needless to say she is quite happy.

thank you for this helps give me more insight and ideas on how to structure a deal. One question how did you come to find this home or in better words how did you See the potential in a possible deal with this property? 

You ask a good question: "how did you See the potential in a possible deal with this property?"

I look for people who want to sell but don't want to do the work to improve their property for the MLS or who want to sell quickly. This works in Arizona, Texas, California, Nevada - I've done these in WA, CA, TX AZ in fact it works all over the US and Canada. Folks from Australia and New Zealand can do this as well. It isn't long and drawn out like a Fix & Flip or even Buy & Hold. It brings cash right back at you and cash flow as long as you care to.

Thanks for the write up Mike! So you didn't have to get involved with the bank at all with you taking over the existing mortgage, or how did that communication work?

Originally posted by @Dustin P. :

Thanks for the write up Mike! So you didn't have to get involved with the bank at all with you taking over the existing mortgage, or how did that communication work?

With a "Subject To", it is between the Seller and the Buyer, no bank involved. It is a little more sophisticated transaction and that is why I recommend working with someone on the first couple of "Subject To's" but after that it becomes pretty easy. It's also important to have reserves, use escrow, have disclosures and do the other things you do in a normal transaction.

"Folks from Australia and New Zealand can do this as well"

Just for the sale of clarity you can't do this in NZ or Australia. You would be prosecuted if the bank found out. In addition you can't put a second mortgage on a property these days banks wont allow it AND the goods and services tax issues would make the deal impossible anyway even if it were legal.

The only way you could do it is to have a straight option so the title stays in current owners name and then flip it and close contemporaneously.

Hey Mike,

In a "Subject To", there is a 2nd note created, that is the difference between what seller owes on the property, and the selling price, correct?

And so that note is simply the proper paperwork filled out and signed by owner and me?

I see the benefits to both you and seller; what are the downsides? I assume since the seller still holds the original note, that if you fail to pay, he is still on the hook? Any other liabilities for the seller?

And was your name added to the deed in addition to the seller?

It seems that the only risks to you are the ones inherent in investment property, in general; is that correct?

Thank you for sharing your numbers and story, Mike.

-

Aaron

Originally posted by @Dean Letfus :

"Folks from Australia and New Zealand can do this as well"

Just for the sale of clarity you can't do this in NZ or Australia. You would be prosecuted if the bank found out. In addition you can't put a second mortgage on a property these days banks wont allow it AND the goods and services tax issues would make the deal impossible anyway even if it were legal.

The only way you could do it is to have a straight option so the title stays in current owners name and then flip it and close contemporaneously.

 Please provide your source. Simple case law will suffice.

Originally posted by @Aaron Metthe :

Hey Mike,

In a "Subject To", there is a 2nd note created, that is the difference between what seller owes on the property, and the selling price, correct?

And so that note is simply the proper paperwork filled out and signed by owner and me?

I see the benefits to both you and seller; what are the downsides? I assume since the seller still holds the original note, that if you fail to pay, he is still on the hook? Any other liabilities for the seller?

And was your name added to the deed in addition to the seller?

It seems that the only risks to you are the ones inherent in investment property, in general; is that correct?

Thank you for sharing your numbers and story, Mike.

-

Aaron

 In a Subject To, Title has transferred to the Buyer and the Seller is no longer on the deed but the loan stays only in the name of the Seller. No new note is created.

There are serious downsides to the Seller. If the bank finds out, they can exercise the "Due on Sale" clause and foreclose. If you don't make the payments it messes up his credit. If you don't make the payments he can't foreclose on you but the bank can foreclose on him. If you don't make the payments, he will likely personally sue you and probably win. Nasty stuff. So, if you choose to do Subject Tos, know what you are doing, use an attorney to close, have reserves in the bank to make sure you can make the payments, get plenty of disclosures and play according to the rules.

The much safer way for the seller is to do a Wrap where a new note is created and the seller can foreclose on you if you don't make the payments and the seller is given credit for your payments on his income when he applies for another mortgage.

Account Closed. I am a kiwi and I have trained investors in NZ for years and also invest in OZ.  Our financial rules are very different to the USA.

Originally posted by @Dean Letfus :

@Mike M.. I am a kiwi and I have trained investors in NZ for years and also invest in OZ.  Our financial rules are very different to the USA.

 Nice to meet you. But that doesn't answer the question. Please state your source that it is against the law to do Subject To in New Zealand. I personally know two people doing so. It appears that the lender has a right to call the loan due IF THEY CHOOSE to, but they are not required by law to exercise that right. Just like in the U.S. So, again, 

Please state your source that it is against the law to do Subject To in New Zealand. I find nothing to that effect.

**************************************

Finance and secured lending in New Zealand

Global, New Zealand April 23 2018

Asset classes used as collateral for security

Real estate Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes. Where real estate is a significant asset, security will almost always be taken using a mortgage. Mortgages are put in place through an online registration system (Landonline). Parcels of land in New Zealand are assigned a title reference. When a mortgage is registered against such a parcel, the mortgage is noted against the title reference in the online register. Various memoranda of mortgages (essentially sets of terms and conditions) lodged in that system can be referred to in the registration, which are then incorporated into, and provide the detailed conditions for, the mortgage.

Enforcement

Criteria for enforcement What are the common enforcement triggers for loans, guarantees and security documents?

Common enforcement triggers are:

  • insolvency (including events relating to insolvency, such as receivership);
  • failure to pay an amount under the loan;
  • breach of a transaction document (although sometimes only if a materiality threshold is passed or a remedy period has expired);
  • misrepresentation (although sometimes only if a materiality threshold is passed or a remedy period has expired);
  • in many cases, cross-default;
  • in many cases, material adverse change in the borrower’s circumstances; and
  • in many cases, change of control.

In the case of land, a process for carrying out a mortgagee sale of the land is prescribed in the Property Law Act 2007. In particular, notice must be given to the mortgagor with prescribed particulars and there is a duty to obtain the best price reasonably obtainable for the property.

Account Closed please PM the details of the person who is doing it in NZ i would love to talk to them.

As far as i know there is no legit way of doing "Subject to" like its done in the US. 

As far as i know, subject to means that the assets is transferred to new entity. 

in NZ this would trigger a TAXABLE sale. Once ownership is changed you have an issue with the lender if yo didn't do a full discharge of the loan. 

there is no Quick Claim deeds and all that Jazz down under. 

What you Copy and pasted above from a website is not accurate.

Well let's hope they never get caught. 

You cannot assume mortgages in NZ or OZ., just ask any bank. It would be clearly covered by misrepresentation in what you posted above anyway.   (That info looks like it's from some generic overseas website it is quite meaningless.  Our finance systems are highly regulated.)

In addition you are legally required to advise the bank of any change in your circumstances so the seller is immediately in breach of their mortgage from day 1 regardless.  Plus it would trigger a deemed sale so depending on their circumstances it could breach the bright-line rules and trigger GST and several other potential liabilities.  

So to be clear you cannot do it in NZ or Oz legally. It would cause the immediate recall of the loan by the bank for non disclosure of a change in circumstances.  Read any bank loan doc it will become clear you cannot execute this strategy in our regulated environment. We have no private note industry so many things Americans do cannot be done easily or at all.  That's why America is so cool to invest in!

Anybody reading this who is looking to find out what you can do in NZ please feel free to contact me. There are a some strategies that are legal but not many.

Account Closed, just to give you one clause of the hundreds involved:

"You agree:

a. not to give, and to ensure any guarantor does not give, any security interest over, or deal with the title of, any secured property without our prior written consent; and

b.

that we can demand immediate payment of the amount outstanding (or any part of it)

and/or cancel your loan amount if (without our prior written consent) there are any security interests

given over, whether registered or informal, or dealings lodged on the title of, any secured property. If

this occurs, we will be entitled to exercise any of the rights set out in clause 7.1

, including repossessing and/or selling any secured property."

Originally posted by @Dean Letfus :

@Mike M., just to give you one clause of the hundreds involved:

"You agree:

a. not to give, and to ensure any guarantor does not give, any security interest over, or deal with the title of, any secured property without our prior written consent; and

b.

that we can demand immediate payment of the amount outstanding (or any part of it)

and/or cancel your loan amount if (without our prior written consent) there are any security interests

given over, whether registered or informal, or dealings lodged on the title of, any secured property. If

this occurs, we will be entitled to exercise any of the rights set out in clause 7.1

, including repossessing and/or selling any secured property."

Your comment: "You agree:

Your comment: that we **can** demand immediate payment


Yes, I agree.

Notice the word **can** demand - that is different than the word. Shall, Must or Will.

I won a real estate Subject To court case on this issue.

I Enjoyed the discussion.

Originally posted by @Dean Letfus :

@Mike M., but you miss my point, which is that it's illegal to do.  The USA is different and easier, way easier.

You still have NOT provided, proof by Statute, Law, Case Law, or a Judge's opinion that it is illegal. Maybe I DID miss your point, Or, are you just assuming because that is what you were taught or believe? Don't you think you should be able to point to the law before you say it is law? If I said that unicorns that fart rainbows are illegal, it makes it no less illegal. I can't point to a law that makes unicorns farting rainbows illegal. I suspect that is the problem you are having with Subject Tos and their legality. There is no law to point to.

Which law school did you graduate from?

We aren't like the USA. There are no case laws or precedent. We aren't a litigious nation. It is simply illegal.  I have already shown you why with just one of many standard mortgage clauses. You wanting it to be different doesn't change our laws or banking conditions.

Account Closed, some of the confusion here may be a terminology or jargon issue. When I first dropped in the USA I could hardly understand y'all even though I trained investors in New Zealand. Our rules are largely legislated and there is no interpretation. The banks have rules, terms and conditions, many of which are set in legislation.  We only have 4 main banks, all Australian owned, so the rules are consistent across both countries.

This is another clause out of one particular banks documents to further show you why subject to can't be done legally.

  1. You must not sell or lease your property unless we’ve agreed

    Unless we’ve agreed to it in writing, you must not do any of the following:

    • You must not sell your property, lease it, or allow others to use it.
    • You must not allow someone else to register a security, or any other rights, over your property.
    • You must not sell, give security over, or let others use any licences, authorities or consents you need to use your property.
    • You must not change the use of your property.
      If you die, our agreement is needed before your property is transferred to someone else, unless you owned your

      property with them jointly.