How to propose seller financing or a subject to?

[Megan Arzt]

I know just enough to be dangerous but not enough to not get myself into trouble. I have a lead on a place that the owner would consider some sort of alternate financing. He still owes about $250,000 on the property. What sort of alternate proposals could I offer up to him?  And then how do I go about setting that up? I've heard a lot about subject to an even looked into it a bit but I'm still very fuzzy on it. Thanks!

[Lee Smith]

Subject to would be you taking over the payments on the loan.

The loan would still be in the current owners name, which may affect his debt to earning ratio if he is trying to buy something else. Typically banks look at 70% of gross rents towards the payment. So if the rent was $1000 a month, the bank would only consider $700 a month of that as income. Thus if his current payment is $800 a month, then according to the bank he is losing $100 a month.. 

Several creative ways to take over the loan.. I sometimes will offer multiple options to owners.. Last week I had a guy I offered to take the home subject to, and he could make 8 more payments at $800 each, or give me $8000 at closing.. His house needed some work to make it rent/sale ready. It would rent for $1200 a month, so I would get that early cashflow to pay for the rehab up front if he went the 8 month route.  Otherwise, I would get the $8000 to pay for rehab.. 

As for actually taking the loan subject to.. There's several ways out there to do this. You have to be careful about the due on sale clause the banks could try to force. I personally like to move the property into a trust, with a trustee I appoint, and notify the bank and file paperwork with the city that we are doing this.. Then I notify the bank that I am the point of contact for all future correspondence as the property manager.. After the dust settles, I will switch the beneficiary of the trust to my name or LLC. In most states, you do not have to report when a beneficiary changes to anyone. If later down the road something goes south and you can't honor the deal, they can't continue to have the property in their name, etc... Then you can sign the beneficiary and the trustee back to the owner or someone he/she trusts. Hopefully you will have paid down their principle and not created a mess for them.

Once you have it taken over subject-to you can probably rent it out, or sell it via lease option  or however you deem to deal with it. Be aware that most lease options do not commit.. I have one property I have sold on lease option 4 times.. No one ever completes.. Now though the principle has been paid down to the point I am considering just selling it outright.