Subject to Financing
Good afternoon. I recently came across an interesting situation where I believe subject to financing would be a good situation but I have never been through this before so looking for some help.
Long story short I was in contract to purchase an investment property to BRRRR (or flip depending). We were in contract but two days before closing, it turns out they had a $9,800 tax lien against the property. The issue is they have no equity in the home so it was either they paid $9,800 they don't have, or I took on the lien which I didn't want to do as that would have needed to come out of pocket before the title is clear. I was using a hard money loan for the acquisition and renovation.
The seller is in pre foreclosure. Would a subject to deal make sense? I could pay off the tax lien right away, get them paid up, and have the deed signed over to myself while taking over the mortgage payments. The property would be vacant upon closing and then I then plan to complete the renovations. At that point, the out of pocket costs would actually be less as well since it would just be the tax lien.
I've never gone this path before so just wondering if that makes sense. Any experts in the Tampa or FL area? I don't have a lawyer on my team which I'd assume is needed. Anyone with any experience in this would be great. I'm trying to get creative to not only acquire the home but save the sellers from a foreclosure if I can. She's a really nice woman, going through a nasty divorce, and trying to move on.
Thanks so much in advance.
hi David (best name in the world),
Personally, if I was in your situation, I'd move on to another deal. However, if you want to move forward with a Subject To Original Financing deal, be careful of Due-on-Sale clause from the Lender. Apologies if this info is redundant, but that clause can bite. I would contact the bank and see what they will allow. Just going Subject To on the hope that the bank won't call the note due, is not my favorite. Who knows, maybe the bank may be willing to allow a lease with option to buy on the property or other creative financing options without triggering a refinance or sale.
Just my thoughts, hope it helps,
David
Keep in mind they are in this situation presumably because a number of companies whose whole purpose is to lend money have said no to lending them that 9800 dollars even accounting for that risk to be spread across a much larger pool than you would have. That is not someone who you should engage in a transaction like this with where another problem could leave you with massive liability and an unsellable investment due to a title defect. Does the deal still work paying an extra 9800 and having the tax lien paid out of seller side at closing?
Maybe stating the obvious here, but their current lender would almost certainly not allow the terms you are proposing, and given that she is already behind on payments, it's going to be scrutinized much moreso than if it were a loan that is performing, so any plan that involves crossing your fingers that the lender doesn't find out is a bad one.
Having been in the position of selling a property with title issues, it is absoutely not something you should mess with while you are paying hard money rates. I appreciate your heart to help them, and I think the way to do that is either pay more for the property to get clear title or walk away and provide them with a list of local nonprofits with funding for foreclosure prevention.
can someone give an example of a subject to deal that they have done?
The creative financing strategy of subject to is used best when there is no bank involvement because you are essentially transferring the deed but making payments to the mortgage company from an LLC. One trick I learned is, let's say you are doing a Tampa subject to deal, you can create an LLC like "Tampa property maintenance" and send the mortgage bill payment checks from there. This will not raise any suspicion with the bank.
I’ve never dealt with a subject of a foreclosure deal and I am assuming if the home seller wants to get caught up it would require some more legal ppw between the bank and yourself and things could get complicated. Let us know how you do. Best of Luck!
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Real Estate Agent
- Kristina Kuba - KW Tampa
- http://www.ClickTampaHomes.com
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Hey all. Thanks so much for your responses. I think it's just time to move on to another deal lol. I was trying to get creative to get a win/win situation but without the experience, I don't think it's worth the risk. There's a big spread overall but any mistakes would be all out of pocket which I'm not willing to risk.
Much appreciated!
Quote from @John McKee:Here's a rough example. Borrowers Unpaid Principle Balance is 280k and is 30k behind, so 310k payoff. Borrower has a favorable first mortgage, 2% interest and a deferred balance due to a previous loan modification. ( this is just a bonus as the loan is AMAZING ) - Property is worth Est. 440k as-is. and with a rehab of est. 50k could resell for est. 550k. Purchase price 345. Seller to NET est. 30k. Purchase the home and reinstate the mortgage for 30k reinstatement. I am now into the property for Est. 65K and have about 60k equity. I put est. 50k in and am now into the home for est. 115-120k. I sell for 550k and make est 110k. The main benefits of a subject to IMO are to get favorable loan terms or to come into a property with less cash out of pocket. In this example If I got a conventional loan at 345K with 20% down, I would of had a larger down payment than if I went subject to and my loan terms would of been far worse. Subject to deals can be dicey and come with additional liabilities, but if the numbers make sense and if done properly it adds value to the purchaser.
can someone give an example of a subject to deal that they have done?
Quote from @Brett Goldsmith:
Usually subject to's work best when there is equity in the property. Spending 10k to pay off a lien to still be under water seems not ideal unless if there is some sort of huge upside in developing the property.
Hi Brett,
I respectfully disagree, I've found the best time for subject to for both the buyer and seller is when there is no equity in the property and the seller is looking for a way to be relieved of the mortgage obligation without having to cut a check to sell the property.
@David Caradonna Perhaps I'm reaching out a little too late here, but this sounds like a great opportunity to save the seller's credit and put a little bit of cash in their pocket. Subject to needs to be done very carefully in how you structure the deal. I'll dm you, but my partners and I specialize in these types of transactions.
Quote from @Kristina Kuba:If you're dealing with a local bank that hasn't sold off the mortgage, there is a much greater chance of a bank pursuing the due on sale clause as they'll have their eyes on their own portfolio loans. Typically, most loans end up being sold off and repackaged into a mortgage-backed security fund. My understanding is that the best way to avoid the due on sale clause is by utilizing a land trust to hold the property
The creative financing strategy of subject to is used best when there is no bank involvement because you are essentially transferring the deed but making payments to the mortgage company from an LLC. One trick I learned is, let's say you are doing a Tampa subject to deal, you can create an LLC like "Tampa property maintenance" and send the mortgage bill payment checks from there. This will not raise any suspicion with the bank.
I’ve never dealt with a subject of a foreclosure deal and I am assuming if the home seller wants to get caught up it would require some more legal ppw between the bank and yourself and things could get complicated. Let us know how you do. Best of Luck!
Quote from @Jared Prevost:
Quote from @Brett Goldsmith:
Usually subject to's work best when there is equity in the property. Spending 10k to pay off a lien to still be under water seems not ideal unless if there is some sort of huge upside in developing the property.Hi Brett,
I respectfully disagree, I've found the best time for subject to for both the buyer and seller is when there is no equity in the property and the seller is looking for a way to be relieved of the mortgage obligation without having to cut a check to sell the property.
@David Caradonna Perhaps I'm reaching out a little too late here, but this sounds like a great opportunity to save the seller's credit and put a little bit of cash in their pocket. Subject to needs to be done very carefully in how you structure the deal. I'll dm you, but my partners and I specialize in these types of transactions.
Not sure if I am missing something, but I haven't found one that has made sense. I am not sure why I would want a property that is upside down as I am incurring liabilities. Not to mention I will end up spending money fixing up the property, maintaining, etc. Seems like a losing situation in most circumstances.
I would prefer to walk into a property with six figures of equity as the lions share of profit in most small projects is made in the buying. Taking a property subject to when it helps me acquire a property for less out of pocket than a traditional loan is ideal or having a loan in place that is considerably better than anything obtainable today. For example; I have acquired properties for less than a standard down payment and walked into 30 year loans with a 2% fixed interest rate and deferred balance due to a prior loan modification. This is just icing on the cake in the case you want to hold it.
@Brett Goldsmith Really depends on your investing goals right? I'm looking for the highest possible cash-on-cash return.
Let me illustrate the power of buying a home with no equity by giving you an example of a sub to we're closing on this month.
The Situation
Seller bought the place last year with a 3.25% fixed interest rate, 30-year am, and a PITI of $1,503 a month. The seller bought the place in decent condition, but wanted to fix it up himself to build equity as he had done a few times before. However, he got a great job offer in Colorado and needs to sell. He can sell the property for about what he bought it for, but he's on a tight timeline, doesn't want to keep paying the mortgage and property expenses through a traditional sales process period (60 - 120 days), and by the time realtors get paid out, he'd have to cut a check to sell the property
How Sub To Works for the Seller
The seller has actually sold sub to before (he's even had a loan called via the due on sale clause) and thought this would be the best way for him to net money on the sale. Additionally, he doesn't mind having someone else paying down his mortgage as that can benefit his credit. Instead of cutting a check to sell and pay thousands in holding costs, he'll be able to net $18,000 at close and close in under a month without having to show the property.
How Sub To Works for the Buyer
For this deal, we had a few exit strategies. Ultimately, what we plan to do is resell the house on seller finance to an end buyer by 'wrapping' the existing loan. We'll get a downpayment of at least $20,000 so we're $0 into the deal, have a 3-4% interest premium as our cash flow, and give someone the opportunity to buy a house when they normally wouldn't qualify.
In summary, $0 into the deal and cash flow way beyond a traditional rental. If the buyer defaults we can resell the house on a wrap to someone else.
As far as the due on sale clause is concerned, the way in which we structure our purchasing entity makes it extremely difficult for the note to be called due on sale. Additionally, this is a federal loan so it's been sold off and repackaged, which makes it very unlikely that any lender would ever notice that the property has been sold
That my friend, is the power of Sub To :)
Quote from @Jared Prevost:
@Brett Goldsmith Really depends on your investing goals right? I'm looking for the highest possible cash-on-cash return.
Let me illustrate the power of buying a home with no equity by giving you an example of a sub to we're closing on this month.
The Situation
Seller bought the place last year with a 3.25% fixed interest rate, 30-year am, and a PITI of $1,503 a month. The seller bought the place in decent condition, but wanted to fix it up himself to build equity as he had done a few times before. However, he got a great job offer in Colorado and needs to sell. He can sell the property for about what he bought it for, but he's on a tight timeline, doesn't want to keep paying the mortgage and property expenses through a traditional sales process period (60 - 120 days), and by the time realtors get paid out, he'd have to cut a check to sell the property
How Sub To Works for the Seller
The seller has actually sold sub to before (he's even had a loan called via the due on sale clause) and thought this would be the best way for him to net money on the sale. Additionally, he doesn't mind having someone else paying down his mortgage as that can benefit his credit. Instead of cutting a check to sell and pay thousands in holding costs, he'll be able to net $18,000 at close and close in under a month without having to show the property.
How Sub To Works for the Buyer
For this deal, we had a few exit strategies. Ultimately, what we plan to do is resell the house on seller finance to an end buyer by 'wrapping' the existing loan. We'll get a downpayment of at least $20,000 so we're $0 into the deal, have a 3-4% interest premium as our cash flow, and give someone the opportunity to buy a house when they normally wouldn't qualify.
In summary, $0 into the deal and cash flow way beyond a traditional rental. If the buyer defaults we can resell the house on a wrap to someone else.
As far as the due on sale clause is concerned, the way in which we structure our purchasing entity makes it extremely difficult for the note to be called due on sale. Additionally, this is a federal loan so it's been sold off and repackaged, which makes it very unlikely that any lender would ever notice that the property has been sold
That my friend, is the power of Sub To :)
Yes, that is another way to do it. In your example the home isn't considerably upside down and there is upside that can be captured. I think the point I was trying to make is that I would not subject to a house that truly has no equity and requires capital contributions.