Unique deal with seller who owes more than property value

Specialist · Chicago, IL · Member since 2018 · 16 posts · 0 votes

I have a seller that owes too much on his loan for a SFR-rental (in Chicago, IL) that brings in $1500 monthly via Section 8. The problem is he bought in the RE boom in 2008 and owes too much. He does however have a 40yr mortgage at 1% and is up to date. He only pays $950 a month not including expenses. He just wants out without any out of pocket expenses.

Does anyone have experience with these kind of deals??? How would you structure AND close it???

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Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

@Marco Calderon I think the big question for you would be... why would YOU, as an investor, want to buy a property for way more than it's worth? If you're willing to do that, just buy a bunch of rentals off of the MLS, and you'll be further ahead

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Amanda G.
Rental Property Investor · Augusta, GA · Member since 2017 · 825 posts · 278 votes
8y
Does it cash flow, when you factor in delayed maintenance? If so, this sounds like a "subject to" deal. I haven't done one, but I'd search the forums for that phrase, and also look at Brandon Turner's book. Good luck!
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Account Closed
Chicago, IL · Member since 2016 · 88 posts · 29 votes
8y
You can buy the property 'Subject To' existing financing depending on the loan balance and market value of the property.
I can refer you to attorney/title company who can help you.
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Marco Calderon
OP
Specialist · Chicago, IL · Member since 2018 · 16 posts · 0 votes
8y
Abhijeet can you inbox me that contact info for the attorney and title co? Thanks
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y
If he has a loan at 40 years, it’s a loan mod, done because he was way upside down. Be careful, the “balance” likely doesn’t include the 1/3rd or so of the loan balance that was moved/deferred to the back end and Not figured into his monthly payment.
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Marco Calderon
OP
Specialist · Chicago, IL · Member since 2018 · 16 posts · 0 votes
8y
That is something my attorney and title company would pick up in their searches right
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Maurice D.
Coppell, TX · Member since 2015 · 485 posts · 310 votes
8y
I wouldn't subject-to if it was upside down, assuming it's possible. his only clean way out is a short sale, which ruins his credit.
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Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
8y
Originally posted by @Marco Calderon:

That is something my attorney and title company would pick up in their searches right
Sometimes there is an unrecorded non-interest bearing 2nd lien from a loan modification. Ask the homeowner if they have done a loan modification. Most homeowners that have a Loan Mod don't realize the 2nd is still sitting there. The title report may or may not find it. It is best to ask for a payoff statement from the bank so that you know what you are dealing with. The homeowner can request it without raising any flags. I'd probably take it as a Subject To if it is cash flowing.
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Tchaka Owen
Real Estate Agent · Merritt Island, FL · Member since 2017 · 986 posts · 1k+ votes
8y
@Marco Calderon - if the numbers work (based on the little info you've provided, it appears as though there's probably $350+/mo. positive cash flow) and you do obtain the place, I recommend that you put an additional $150-200/mo towards the mortgage. With a 40-year FRM, you're barely touching the principle, however that small additional with start to dig in and will cut the length of it down significantly as well as help you gain equity.
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Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
8y
Originally posted by @Account Closed:

That is something my attorney and title company would pick up in their searches right
Sometimes there is an unrecorded non-interest bearing 2nd lien from a loan modification. Ask the homeowner if they have done a loan modification. Most homeowners that have a Loan Mod don't realize the 2nd is still sitting there. The title report may or may not find it. It is best to ask for a payoff statement from the bank so that you know what you are dealing with. The homeowner can request it without raising any flags. I'd probably take it as a Subject To if it is cash flowing.
The title will always reflect the 2nd. It's the owner/borrower who requires convincing that there is a 2nd that must be paid. But the ink from the loan mod package doesn't lie... these blow up deals and turn resales into shorts or foreclosures.
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William Friedmann
Investor · Cleveland, TN · Member since 2016 · 6 posts · 1 vote
8y
Guys, correct me if I'm wrong but I think the owner of the 1st has the right to call the loan with a subject to. I would definitely ask your attorney about this.
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Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
8y
Originally posted by @Tom Gimer:

Originally posted by @Account Closed:

Originally posted by @Marco Calderon:
That is something my attorney and title company would pick up in their searches right
Sometimes there is an unrecorded non-interest bearing 2nd lien from a loan modification. Ask the homeowner if they have done a loan modification. Most homeowners that have a Loan Mod don't realize the 2nd is still sitting there. The title report may or may not find it. It is best to ask for a payoff statement from the bank so that you know what you are dealing with. The homeowner can request it without raising any flags. I'd probably take it as a Subject To if it is cash flowing.
The title will always reflect the 2nd. It's the owner/borrower who requires convincing that there is a 2nd that must be paid. But the ink from the loan mod package doesn't lie... these blow up deals and turn resales into shorts or foreclosures.
I bought one about 18 months ago that had an unrecorded FHA loan mod non interest bearing 2nd. It didn't show on title and only became a problem when the payoff said it existed. We worked it through but it wasn't part of the original plan.
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Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
8y
Originally posted by @William Friedmann:

Guys, correct me if I'm wrong but I think the owner of the 1st has the right to call the loan with a subject to. I would definitely ask your attorney about this.
The lender has a right to call it due but usually won't if the loan is being paid on time, especially if the property is underwater.
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Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
8y
Originally posted by @Account Closed:

Originally posted by @Tom Gimer:
Originally posted by @Account Closed:
Originally posted by @Marco Calderon:

That is something my attorney and title company would pick up in their searches right
Sometimes there is an unrecorded non-interest bearing 2nd lien from a loan modification. Ask the homeowner if they have done a loan modification. Most homeowners that have a Loan Mod don't realize the 2nd is still sitting there. The title report may or may not find it. It is best to ask for a payoff statement from the bank so that you know what you are dealing with. The homeowner can request it without raising any flags. I'd probably take it as a Subject To if it is cash flowing.
The title will always reflect the 2nd. It's the owner/borrower who requires convincing that there is a 2nd that must be paid. But the ink from the loan mod package doesn't lie... these blow up deals and turn resales into shorts or foreclosures.
I bought one about 18 months ago that had an unrecorded FHA loan mod non interest bearing 2nd. It didn't show on title and only became a problem when the payoff said it existed. We worked it through but it wasn't part of the original plan.
Then it wasn't a 2nd lien per se. It was part of the loan mod and the paperwork (new note, etc.) would reflect that a balloon would be due after X years, at settlement of a sale or refi, or some other arrangement. Getting payoffs is part of the title process... I'm sure we both agree that you can never take a seller's word for their equity position!
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Brett Goldsmith
Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
8y
Short sale is the only way for a new buyer to get "in" initially with a potential equitable position on an upside down property. If you want the deal even though it's upside down then you can look into a different option. Ensure to get a payoff to see exactly what is owed. I've never seen or heard of a loan at 1%. I'd double check that, 40 years and 2% is typically the best a loan mod can get without a principle forgiveness or deferral.
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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
@Marco Calderon I think the big question for you would be... why would YOU, as an investor, want to buy a property for way more than it's worth? If you're willing to do that, just buy a bunch of rentals off of the MLS, and you'll be further ahead
2 Reply
Tom S.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
8y
@Marco Calderon Completely agree with Jason, why even consider this property? There's no equity and the rent of $1500 with a $950 mortgage is break even at best, when factoring in other expenses (50% rule).
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