Asking bank to ok a Sub2 deal or Lease Purchase?

20 Replies

I have a potential seller who wants out of their mortgage. I was trying to decide if it would be a good idea to get the banks approval for me to do a sub2 deal with the owner of the property? If I don't, I'm afraid one of bankers may get wind of the deal and call the note due. Or, would it be better to do a lease purchase? I'm sure they could call the note due with this deal as well? This is a local bank in a small town.

Has anyone done this before? How did it work out? And if turned out well, what did you say to the banker to get them to agree?

Should this be a big concern of mine? This will be my second SFR. I am new at this but I am learning everyday about different ways to be creative. Any feedback would be much appreciated. Thanks in advance.

Medium logo8107749 smjpegAl Mcbee, 26.2 Property Investments | [email protected] | 785‑709‑0308 | http://www.262propertyinvestments.com

Al, I can't speak for Sub To because I don't do them.  But I have to think if you approach the bank about such a deal they are going to tell you in no uncertain terms that it ain't gonna fly with them.

As for a lease purchase, I've been doing them for 21 years and not once have I had a bank call the underlying note as a result of the Due on Sale clause.

I would not suggest this.  There is nothing wrong with it but banks wouldn't like it.

Some people keep the old insurance in place as well as get new insurance.  That way there is no trigger for the bank to find out something was changed.

Medium logo 5545John Horner, Core Developments LLC | [email protected] | 614‑664‑3174 | http://johnbuyshousesohio.com/

@Al Mcbee  

For low equity deals I look at sub2, wraps and lease 2 own assignments as tools.

Sub2 and wraps have due on sale clauses, but they do not call the loan due automatically. Lease options should be done with 12 month leases with possible extensions if rent is paid on time.

Good DOS info is here

http://bundlr.com/b/due-on-sale-clause

If you are nervous about the dos, try the lease option assignment.

Read all of my posts, and @Michael Carbonare  s which are excellent.

And most importantly, I do not buy on a  wrap or sub2 unless the property is in perfect shape and has good existing financing-taxes-cash flow.

The Big Mistake - just because you can buy on a wrap or sub2, does not mean you should. Always be ready for the DOS with private financing.

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Originally posted by @Michael Carbonare :

Al, I can't speak for Sub To because I don't do them.  But I have to think if you approach the bank about such a deal they are going to tell you in no uncertain terms that it ain't gonna fly with them.

As for a lease purchase, I've been doing them for 21 years and not once have I had a bank call the underlying note as a result of the Due on Sale clause.

While doing a Lease Purchase agreement, does the seller retain title or the deed for tax purposes? Or is that just on the Sub2 agreements? If either the deed or the title needs to signed, how do you convince the seller of that?

Medium logo8107749 smjpegAl Mcbee, 26.2 Property Investments | [email protected] | 785‑709‑0308 | http://www.262propertyinvestments.com

@Brian Gibbons  

I think I will be approaching the seller with a three year Lease Purchase agreement with the right to renew for another three if needed.

Are there any tax benefits with the Lease Purchase, or will not get those until the purchase is actually made?

Can he use the property as collateral to get another loan to get another place that he can afford once we have an agreement?

Medium logo8107749 smjpegAl Mcbee, 26.2 Property Investments | [email protected] | 785‑709‑0308 | http://www.262propertyinvestments.com

@Al 

@Al Mcbee  undefined You file the option of memorandum with the county to cloud the title that way the seller cant go and borrow against the property. 

As far as the end buyer/tenant they cant borrow against it bc they don't have any ownership in the property just an option to buy it within a certain timeframe for a certain price.

Folks, I have no idea why people do not heed good advice, that being to learn real estate and not ways to shuffle real estate around, you MUST know title rights before you can begin passing rights as a tenant/landlord or buyer/seller or optionor/optionee. Threads are full of suggesting doing one type of transaction after having a different transaction completed and they carry different rights in and to title. 

It's like people trying to deal in some horse trading and they don't know the difference between a horse, a mule and just make an *** out things.

Filing a notice of an option is an encumbrance, it's a lien that clouds title, it doesn't prevent a future sale, just as a property can be sold subject to that lien, a sewer bill, tax bill, mortgage, workman's lien or whatever, the buyer takes title subject to the lien interests held by that lien holder. That option simply goes to the buyer and they must sell under the terms agreed if that option is taken, otherwise, the option expires and is no longer an encumbrance to title.

Most buyers and lenders will avoid trying to do something on a property if an option is filed, it gives notice of an equitable interest outstanding and most don't want to deal with future claims, rights or transactions arising. To a knowledgeable investor or operator, they may be willing to buy now at a lower price and take or assume that option, if it is taken, they make money, if not, they be buying at a better price when the option expires!

Unless some state has a statute to the contrary, options do not "tie up" title as suggested by gurus and I've never seen or heard of any such law. Options are bought, sold, assigned, financed along with contracts to deliver assets everyday. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill G

@Brian Gibbons

Ok then... here's the skinny. The owner of the property is have a difficult time making the mortgage payment, and wants out. 

Here is where I come in, I want to suggest that I take over the payments and then pay him around 10 or 15k at closing once the note is satisfied.

During that time, I will rent out the property. After one year, if the note isn't paid off, I will finance the remainder including what we agreed upon 10 or 15k using conventional financing. 

This is where I'm in the dilemma as to the best way as to make this happen. 

Medium logo8107749 smjpegAl Mcbee, 26.2 Property Investments | [email protected] | 785‑709‑0308 | http://www.262propertyinvestments.com

@Al Mcbee  

Filing a Memo of Option is nothing more than a tool. It gives constructive notice to the world of your option to purchase a specific property but it does not necessarily provide details regarding your option (price, terms, etc.). 

Once filed, generally speaking, the seller will have a difficult time trying to go around the optionee (presumably, you) and sell the property to third party unless the third party will purchase the property without title insurance or purchase with the option as an exception to coverage. Otherwise, the option will usually need to be released by the optionee.  When an optionee forgets to file a release after the expiration of an option, I usually hear about an attorney calling on behalf of a seller and threatening legal action if the optionee fail or refuse to timely release the Memo of Option because it is harming the owner from selling the property. 

I have found the Notice of Memo of Option can be a very useful tool when properly used.

Guy Gimenez, Buying Texas Today | [email protected] | (512) 270‑7279 | http://www.BuyingTexasToday.com

@Al Mcbee  

Buy the property subject to existing financing and make the payments directly to the lender on what ever the PITI payment is

You must get strong title (Warranty deed)

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Originally posted by @Al Mcbee :

@Bill G

@Brian Gibbons

Ok then... here's the skinny. The owner of the property is have a difficult time making the mortgage payment, and wants out. 

Here is where I come in, I want to suggest that I take over the payments and then pay him around 10 or 15k at closing once the note is satisfied.

During that time, I will rent out the property. After one year, if the note isn't paid off, I will finance the remainder including what we agreed upon 10 or 15k using conventional financing. 

This is where I'm in the dilemma as to the best way as to make this happen. 

 Seller may go for that, your future payment needs to be in the note, can't just say I'll pay you later. That amount simply comes due, no real need to explain your alternatives to finance later on really, but;

Refinancing generally takes 30 days, often it can stretch out to 45 days, that's on the long side of a normal processing period.

Lenders usually don't make loans to borrowers who are in default, being past due on an obligation is a killer, that includes any balloon payment!

If you set a balloon payment at one year, 12 months, you'll need  to apply in the 10th to 11th month, your application will be within one year of your purchase when that obligation was made. That means the lender may look at the purchase price instead of the appraised value for the loan to value, the rule is appraised value or sale price, whichever is less.

After one year, the appraised value is used, hopefully that should be more than your purchase price allowing you to get a higher loan amount.

So, instead of setting a balloon payment on the date 12 months off, set it a bit longer telling the seller/note holder the time is needed for processing the new loan required in the future, if you explain it, you shouldn't have a problem getting a couple extra months. I'd rather allow 90 days to get those ducks in a row, especially if you may be required to sell to exit the deal.

I agree with Brian, you should go with a Sub-To deal and describe the future payment in the note to the seller, have your attorney do this.

As to options, I mentioned that most people or lenders will avoid transacting any business on a property encumbered with an option, but you can buy it Sub-To. When you buy Sub-To, you get title insurance and the title company will exclude coverage for the encumbrance, it can be listed on Schedule BII of the Standard ALTA policy.

A properly drafted option has a release clause contained in the option, it will state an expiration date and automatically expires. This can avoid having to file future releases and filing fees as the title examiner can see that the option is no longer effective. In some areas, an option or memo of an option can not be filed without the expiration or effective date(s)  stated. :) 

  

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

From a buyer perspective, I don't (nor is it required by law in Texas) include an expiration date in a Memo of Option, but I do it for strategic reasons. 

Doing so gives notice to other investors as to when my option expires...something I would rather not disclose to my competition. Without an expiration date included in the Notice, another investor has to be wary of interfering with my contract since he/she doesn't know when my option expires unless the seller personally advises the investor...something that has never happened to me because so few seller's can even find a copy of their contract once it's provided to them. 

Fortunately, I've never had a conventional lender care about the Notices I filed because all the Sch. C conditions will be resolved at closing (per lender requirements), including the release of the option notice. 

I'm not sure how FHA / VA / USDA lenders would handle such a notice because I only sell to cash or conventionally financed buyers on my flips.

Guy Gimenez, Buying Texas Today | [email protected] | (512) 270‑7279 | http://www.BuyingTexasToday.com

@Brian Gibbons  

"You are foolish to give more than 12 months lease w option see http://bundlr.com/b/due-on-sale-clause second link"

Brian, I'm very familiar with the DOS terms, but why is it foolish to give more than a 12 month lease w/ option?? Typically a tenant buyer is going to need longer than that to fix their issue. Extensions are the answer to that but in most contracts they will be losing their option fee.

As long as the tenant pays on time they can keep their lease extended. I just re lease it with similar terms, I may increase the rent w COLA, depends, they don't lose their option as long as they pney the lease terms. CCRs Conditions Covenants and Restrictions

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com