Asking bank to ok a Sub2 deal or Lease Purchase?

Question

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.

Michael Carbonare · Answer

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.

Al Mcbee · Answer

Bill Gulley

Please read my latest post, I could really use some guidance.

Brian Gibbons · Answer

You can buy a property subject to an option as Bill Gulley  has said ad nauseum

The memorandum of option helps tho.

Brian Gibbons · Answer

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

Kevin Francis · Answer

@Brian Gibbons

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.

Guy Gimenez · Answer

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.

Brian Gibbons · Answer

@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)

Bill Gulley · Answer

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. :)

Guy Gimenez · Answer

@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.

Al Mcbee · Answer

@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.

Asking bank to ok a Sub2 deal or Lease Purchase?

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