Should I Buy Subject To, Lease Purchase Or Land Contract?

21 Replies

I have a motivated seller that is willing to sell on terms. Here are the quick numbers: 

  • ARV = $600,000 to $625,000
  • Repairs = $25,000
  • Purchase Price: $500,000
  • Mortgage Balance: $500,000
  • PITI: $2,750/mo
  • Annual HOA Fees: $2,350 + $1,500 initiation fee
  • Market Rent: $2,700 to $3,000

Repair Details

  • Update master bathrooms, update kitchen cabinets, re-sod front yard, other minor cosmetics

The owner has told me that he is willing to sell it on terms. The purchase price is the mortgage balance and he will let my payments basically be the same as the mortgage payments. Unfortunately he will be ~$10,000 behind in mortgage payments next month. He told me he doesn't care about his credit anymore and that in the worst case scenario, he would do a deed in lieu of foreclosure. 

I would like to tie this property up as quickly as possible but want to do it the right way where I am protected and have as many exit options as possible. I thinking buy this under contract for deed, fixing it and then selling it. If I can't sell it, then sell on owner finance as he's willing to give me 24 months. The more I think about it though, buying it Subject To has merits as well as just doing a lease option.

The other thing I should note is that I am also concerned about expenses because I would be covering closing costs. If I have to close on the front end and back end that's probably going to be $40,000 in closing costs total which is why I'm considering doing a lease option instead and simply executing it that way. 

Anyone have suggestions on the best way to make this work?

@Marvin McTaw

You can not flip it

there no cash flow

it costs 10% to sell w agent and costs

600 - 60 = 540

- repairs = 25 = 515

he owes $10K plus $500K

Where is the deal here?

sale on Lease option?

Hi @Brian Gibbons . I think that's a little short sighted. I see plenty of ways to make money from this. I can lease option it out (i.e. enter into lease purchase, collect down payment in excess of the $10K behind in payments, and have rent at PITI + HOA). That way I'm not paying for any repairs and making my money on the front end and potentially on the back end as well without realtor commissions by selling to a tenant buyer.

Another option is to simply do FSBO. My team and I can do pretty much everything a realtor can do including getting it listed on the MLS using one of the flat fee services out there like Fizber or ByOwnerMLS. Even if I have to pay a Buyer's Agent, that's still $18,000 saved.

I should also add that the $500,000 includes the amount he is behind. The mortgage balance is actually closer to like $470 or $480K. I'm still waiting on the latest statements from him to get the exact amount.  

The deal is a little "skinny" for an investor but ideal for an Owner Occupant.

I would personally put an option on the property then market it to find an owner occ buyer that has money but no ability to qualify for a mortgage at this time.

I would then assign the option to the buyer, use his money to bring the loan current and to pay my assignment fee. Then I would step aside and let the Seller & Buyer take it from there.

Good Luck,

Desi Arnaz

@Brian Gibbons - thanks for the suggestion. A couple questions for you:

  • Real Estate Agents: Why are you against doing this FSBO in lieu of using an agent? I can take part of what would be going to them and use it to market the property. Additionally, I can get the property syndicated to a number of online properties the MLS would syndicate it to anyway (e.g. Zillow, Trulia, RedFin, Realtor.com, HotPads, etc.). In Georgia, we have to close with attorneys so I'm not really as concerned about the documentation since my attorneys handle that.
  • Why Should I JV?: I'm not facing any competition and the owner just wants to break even and get rid of the mortgage. He's ready to do deed in lieu of foreclosure if he can't sell it. 

@Desi Arnaz - thanks for your suggestion. One thing I should note is that this property is essentially a failed listing. It sits in a nice country club and there have been several sales in the past several months DOM's have been between 30 and 60 days. According to him, the feedback they've received is primarily that the buyers want updated bathrooms and carpet but he doesn't have the money for the updates. 

Also why do you think the profit potential is skinny? What do you think would be "reasonable" for this?

@Marvin McTaw

Please look at the video link that I gave you in a previous post

Jv with the seller is better than 70% of ARV - costs because sellers make more money on the JV if it is minor Rehab

Profit numbers aside, isn't this a textbook sub2 deal?  Pay the arrears for the deed.  If you need to pass along, (i.e. get someone else to pay the arrears) then obtain an option so your eventual owner-occ/ TB can pay assignment fee+ arrears for the deed like @Desi Arnaz suggests, then do that.

Either way, qualify your tenant buyer properly to ensure your seller's mortgage is paid and there are no issues with Dodd Frank / SA stuff. 

To your original question about Land Contracts @Marvin McTaw - they pretty much offer no more security to the buyer than a lease option or just an exclusive option to buy. I would use a seller-finance medium that actually gives me title!      

Hey @Brian Gibbons - I listened to it and like the concept i.e. it allows me a stronger offer than the competition. Although it's not the same, I view it similar to a contract for deed in many ways in that the JV is another form of seller financing. I see the downside being, if you don't sell for ARV or or whatever you think your exit price will be, you could end up with lower profit or no profit at all.

The one question I have is about getting on title. I'm trying to avoid as much of the "upfront" costs as possible. I don't want to have to pay legal closing costs, title insurance, taxes, etc. on the A to B transaction. I don't want to pay anything until the B to C transaction. If I buy it Subject To, it still implies a closing with an attorney (which is required in Georgia). Or am I missing something?

Originally posted by @Steve Vaughan :

Profit numbers aside, isn't this a textbook sub2 deal?  Pay the arrears for the deed.  If you need to pass along, (i.e. get someone else to pay the arrears) then obtain an option so your eventual owner-occ/ TB can pay assignment fee+ arrears for the deed like @Desi Arnaz suggests, then do that.

Either way, qualify your tenant buyer properly to ensure your seller's mortgage is paid and there are no issues with Dodd Frank / SA stuff. 

To your original question about Land Contracts @Marvin McTaw - they pretty much offer no more security to the buyer than a lease option or just an exclusive option to buy. I would use a seller-finance medium that actually gives me title!      

The complicating factor for this deal is that the owner's ex-wife is on the mortgage but not the title. Due to his failed listing (been talking to the seller for about 9 months), he only recently said he would be open to these other options. I think buying it Subject To and then selling it via seller finance or lease purchase as-is, is probably the best option at this point. Thanks for the suggestion. 

I've bought several properties through land contracts since coming home from prison. A land contract provides ownership with the seller being the bank. I think ownership is important and sellers willing to provide owner finance are very flexible. I've went back to a seller and offered them less than I owed on a mortgage they provided only a year later and they accepted my offer.

@Marvin McTaw

Its a skinny deal, no matter how you cut it.  There are some details not presented, like what are the terms of the underlying mortgage, interest rate, balloon?, fixed rate, and term to payoff. 

Also how did you come up with the ARV, is that a real number based on 4 to 6 comps in the same area and actually sold in the last 6 months, and preferably in the last 3 months?

There are plenty of deals in Atlanta that are not $500,000 deals.  $500,000 is not the entry point, and if it were me I'd start at a lower price and a much more meaty deal.  I've done million dollar deals and have done 800+ (soon to break another milestone) but some recent deals I've done are a $16,000 house in an older suburb, vacant for 5 years, that with a little cleaning and painting will be resold for $60,000.  Another house previous sale $95,000 was bought for $34,000 and rented for $1,250.  And another house previous sale for $108,000 was bought for $36,000 and rented for $895.  The downside is tremendously reduced when buying at 26%, 35% and 33%.

Your margin is 16% and the top 10% doesn't count because its vapor and if not vapor is closing costs and holding costs plus.

Marvin, I referred t this as a skinny deal because based on my experience, the % of potential profit is small in relation to the size of the deal.  

I realize that in dollars it seems like a lot of money (if you're new to the game) but I have learned to go in to my deals with a conservative mindset.

While the ARV estimate is $600k to $625k, I would expect to sell at the low end of the range because the house is "market weary" and we are entering the winter season.

I would also expect to invest more into repairs & renovations than $25k because inevitably something else always comes up.

And lastly, when a deal has monthly carrying costs of $3,000 it doesn't take long to drain the profit bucket.

So for me, this is a skinny deal.  I would keep it simple by tying the property up with an option, then I would market it aggressively with the most attractive terms that I can arrange.

If someone takes the deal...great.  If not, I suspect you will at least add to your Buyers list for future deals.

Over the past 33 years, I have had many deals that didn't close but served to introduce me to Buyers & Investors that I went on to do deals with later.

For me, it's a "win" either way. 

Originally posted by @David Krulac :

@Marvin McTaw

Its a skinny deal, no matter how you cut it.  There are some details not presented, like what are the terms of the underlying mortgage, interest rate, balloon?, fixed rate, and term to payoff. 

Also how did you come up with the ARV, is that a real number based on 4 to 6 comps in the same area and actually sold in the last 6 months, and preferably in the last 3 months?

There are plenty of deals in Atlanta that are not $500,000 deals.  $500,000 is not the entry point, and if it were me I'd start at a lower price and a much more meaty deal.  I've done million dollar deals and have done 800+ (soon to break another milestone) but some recent deals I've done are a $16,000 house in an older suburb, vacant for 5 years, that with a little cleaning and painting will be resold for $60,000.  Another house previous sale $95,000 was bought for $34,000 and rented for $1,250.  And another house previous sale for $108,000 was bought for $36,000 and rented for $895.  The downside is tremendously reduced when buying at 26%, 35% and 33%.

Your margin is 16% and the top 10% doesn't count because its vapor and if not vapor is closing costs and holding costs plus.

Hi Dave and thanks for your feedback. In regards to the deal, I'm trying to solve a problem for the owner and but also make business sense for me. The mortgage balances are what they are and the banks aren't willing to negotiate yet. There are actually two mortgages in place: a primary and a secondary. The primary is at roughly $250,000 and the second is at $270,000. The loans aren't non-performing (yet) and they are floating rate loans currently at roughly 3.0%. They are 7 year ARM tied to 6 month LIBOR. The owner can't refinance right now either so that's out of the question.

The ARV is based on sold homes within a quarter mile radius, in the same sub-division, of similar size, build, age (all built in 1993), lot size, and style including a house two doors down that sold for $635,000 three months ago. In total, there are four comps I'm looking at. I also look at the active and pending listings as well in order to gauge what people think they can sell for and to assess the competition.

In regards to margin, I'm not looking to make the biggest profit. I want to help the owner and have it be worth my time. I typically wholesale or lease option properties making a couple thousand to ten thousand a deal. Given the feedback I've gotten, I don't view it as being that risky if we lease option this property or take it over Subject To. I'm essentially getting the property for no money down and will let the owner occupant or tenant buyer deal with the repairs. As of right now, I'm not going to execute the A to B portion of the deal until I have the B to C funds in place whether through a lease option fee or down payment on owner financing. 

Any additional thoughts given this information?

Originally posted by @Desi Arnaz :

Marvin, I referred t this as a skinny deal because based on my experience, the % of potential profit is small in relation to the size of the deal.  

I realize that in dollars it seems like a lot of money (if you're new to the game) but I have learned to go in to my deals with a conservative mindset.

While the ARV estimate is $600k to $625k, I would expect to sell at the low end of the range because the house is "market weary" and we are entering the winter season.

I would also expect to invest more into repairs & renovations than $25k because inevitably something else always comes up.

And lastly, when a deal has monthly carrying costs of $3,000 it doesn't take long to drain the profit bucket.

So for me, this is a skinny deal.  I would keep it simple by tying the property up with an option, then I would market it aggressively with the most attractive terms that I can arrange.

If someone takes the deal...great.  If not, I suspect you will at least add to your Buyers list for future deals.

Over the past 33 years, I have had many deals that didn't close but served to introduce me to Buyers & Investors that I went on to do deals with later.

For me, it's a "win" either way. 

 Desi I definitely understand what you mean. I primarily wholesale and lease option properties. I think what you're saying has merit. The thing I should mention is that the house is livable now. It just doesn't have the updates that typical retail buyers in this price range expect when they purchase. In any scenario, I plan to aggressively market the property to find a buyer. I definitely appreciate the advice!

Nice to see someone trying to help a seller out @Marvin McTaw .  That's a big reason I do this.  It usually comes back someday, treating people right.

That is a huge 2nd - $270k.  Larger than the 1st even.  Is it some kind of private or small lender by chance?

Originally posted by @Marvin McTaw :
Originally posted by @Steve Vaughan:

Profit numbers aside, isn't this a textbook sub2 deal?  Pay the arrears for the deed.  If you need to pass along, (i.e. get someone else to pay the arrears) then obtain an option so your eventual owner-occ/ TB can pay assignment fee+ arrears for the deed like @Desi Arnaz suggests, then do that.

Either way, qualify your tenant buyer properly to ensure your seller's mortgage is paid and there are no issues with Dodd Frank / SA stuff. 

To your original question about Land Contracts @Marvin McTaw - they pretty much offer no more security to the buyer than a lease option or just an exclusive option to buy. I would use a seller-finance medium that actually gives me title!      

The complicating factor for this deal is that the owner's ex-wife is on the mortgage but not the title. Due to his failed listing (been talking to the seller for about 9 months), he only recently said he would be open to these other options. I think buying it Subject To and the and selling it via seller finance or lease purchase as-is, is probably the best option at this point. Thanks for the suggestion. 

 I had a problem like that, seller (husband) on title and mortgage, wife on mortgage only, recent divorce; See the divorce decree.  DO NOT BUY SUB2 WITHOUT WIFE AGREEING.  She will mess it up.

Originally posted by @Steve Vaughan :

Nice to see someone trying to help a seller out @Marvin McTaw.  That's a big reason I do this.  It usually comes back someday, treating people right.

That is a huge 2nd - $270k.  Larger than the 1st even.  Is it some kind of private or small lender by chance?

 re: Second Mortgage, I have no idea. I've asked him to get me the latest statements so I can look them over. The situation has changed from when we initially started talking last year. I was planning on lease optioning the property so the mortgage wasn't that big of a deal to me. 

Typically in this scenario with late payments and what not, I would try to negotiate a settlement amount with the second mortgage to make a better deal. I've done it once before and it worked out pretty well. That being said though, there is a good amount of equity in the house already and he's only not paid a few months so I don't know how willing the lender will be to settle right now.

Originally posted by @Brian Gibbons :
Originally posted by @Marvin McTaw:
Originally posted by @Steve Vaughan:

Profit numbers aside, isn't this a textbook sub2 deal?  Pay the arrears for the deed.  If you need to pass along, (i.e. get someone else to pay the arrears) then obtain an option so your eventual owner-occ/ TB can pay assignment fee+ arrears for the deed like @Desi Arnaz suggests, then do that.

Either way, qualify your tenant buyer properly to ensure your seller's mortgage is paid and there are no issues with Dodd Frank / SA stuff. 

To your original question about Land Contracts @Marvin McTaw - they pretty much offer no more security to the buyer than a lease option or just an exclusive option to buy. I would use a seller-finance medium that actually gives me title!      

The complicating factor for this deal is that the owner's ex-wife is on the mortgage but not the title. Due to his failed listing (been talking to the seller for about 9 months), he only recently said he would be open to these other options. I think buying it Subject To and the and selling it via seller finance or lease purchase as-is, is probably the best option at this point. Thanks for the suggestion. 

 I had a problem like that, seller (husband) on title and mortgage, wife on mortgage only, recent divorce; See the divorce decree.  DO NOT BUY SUB2 WITHOUT WIFE AGREEING.  She will mess it up.

 re: Divorce and ex-wife messing it up, thanks for the heads up. The divorce was roughly a decade ago but I will request the divorce decree as well. I honestly think I'm overthinking it at this point and just need to lock it up under an option agreement with the broad terms he will accept. Worst case scenario is nothing happens. I'm unable to find a buyer of any kind and he does deed in lieu of foreclosure. Best case scenario, I find a buyer or tenant buyer and make money on an assignment or lease option fee. 

In a divorce, husbands hide things, and vice versa.

I always get deals signed by anyone on the deed and the mortgage, ALWAYS.

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