Purchasing "subject to" in Texas

8 Replies

Hi BP,

My father @Tom Knodt and I potentially have a motivated seller in Brenham, Texas (near College Station, between Houston and Austin) who we think would be a good candidate for a "subject to" purchase for a buy and hold rental.  (At first we looked into assuming the loan but have learned that these days it's not usually an option.) We have been trying to learn exactly how this would work, but there are still a few specifics we are unsure of so I wanted to post our plan here and see if anyone has any feedback.

Step 1: Talk to our attorney, we have a list of questions for him

  1. Make sure he doesn’t advise against it in general
  2. Should we have the seller put the house into a land trust before we buy it to avoid due-on-sale clause? 
  3. Confirm that we can use the usual offer-to-purchase contract, but with “subject to" existing financing specified
  4. Can we use the attorney / escrow as an intermediary for the payments, to protect the seller?
  5. Do we also need to talk to a title company to make sure they will do it?
  6. Do we need to talk to the bank at all? I don’t think so

Step 2: Fully inform seller of how it works, have them sign OTP contract if agree

Step 3: Do an inspection and get rehab estimates (we already have some estimates, need to finalize so will probably include a contingency for this in OTP)

Step 4: Finalize amount and purchase property     

  1. We will offer the seller a down payment in addition to taking over mortgage payments
  2. We will now just be paying the bank directly, instead of the seller paying the bank, correct? (the mortgage is with Chase bank)
  3. In lieu of a down payment, we are considering offering the seller monthly payments over 5 years, for a greater total amount. I think this would be considered a wrap?  Would we cut one check to the bank, and one to the seller then?

Step 5: Rehab and rent out 

Step 6: Cash out refi after stabilized, pay off loan & hopefully pull some cash out

  1. How long do we have to wait for that?  Based on this thread I'm thinking it might be 12-24 months?



Any advice or feedback is greatly appreciated, thanks!

I can not attempt to answer each question directly. You basically have the idea. I must tell you that most attorneys will tell you that the transaction is illegal or at least not recommended. They may tell you to do a wrap around mortgage. That works, but I never want to pay the seller on the hopes that they pay the underlying mortgage. I want to do that myself. I Would pay them off over several years with a 2nd on the house at a VERY low interest rate. 

Remember the purchase price should still be lower than retail price. In this situation it does not need to be 70% minus repairs which is the formula for purchasing properties cash. I am usually good at about 85% or maybe even 90% of retail price. You have a little cushion if the economy starts to slip a little.

I always give the sellers a max of 5 year balloon so that they know the loan in their name will go away at a certain point. By then you should have plenty of equity(if you bought it right to begin with AND gave them some money) to be able to refinance. I would NOT take cash out. After all, dont you want to get the property paid off so that your cash flow will explode!!!

Thanks for your input, @Rick Pozos !

Re the numbers on this one, we actually do think we can get it for ~70% minus repairs - purchase price is $65k ($55k loan balance + $10k down payment to seller), our conservative rehab estimate is $40k, and ARV is around $150k.

Does your strategy of giving the sellers a 5 year balloon mean that you are paying their mortgage for 5 years, and then you pay that off, presumably with a new loan just for the balance at that point? I can see how that would be appealing to the seller. The motivation behind our cash out refinance idea is mainly to get back the potentially large amount of cash we will have in the house for the rehab (could be $40k), making it kind of a hybrid "subject to" / BRRRR deal. Perhaps we could offer the seller just a 1 year balloon, where we get a new loan in a year after the place is rehabbed and rented - at 70% LTV we should be able to pay off the seller's original loan and pull out all of our initial cash investment.

Thanks again!

Originally posted by @Annchen Knodt :

Hi BP,

My father @Tom Knodt and I potentially have a motivated seller in Brenham, Texas (near College Station, between Houston and Austin) who we think would be a good candidate for a "subject to" purchase for a buy and hold rental.  (At first we looked into assuming the loan but have learned that these days it's not usually an option.) We have been trying to learn exactly how this would work, but there are still a few specifics we are unsure of so I wanted to post our plan here and see if anyone has any feedback.

Step 1: Talk to our attorney, we have a list of questions for him

  1. Make sure he doesn’t advise against it in general
  2. Should we have the seller put the house into a land trust before we buy it to avoid due-on-sale clause? 
  3. Confirm that we can use the usual offer-to-purchase contract, but with “subject to" existing financing specified
  4. Can we use the attorney / escrow as an intermediary for the payments, to protect the seller?
  5. Do we also need to talk to a title company to make sure they will do it?
  6. Do we need to talk to the bank at all? I don’t think so

Step 2: Fully inform seller of how it works, have them sign OTP contract if agree

Step 3: Do an inspection and get rehab estimates (we already have some estimates, need to finalize so will probably include a contingency for this in OTP)

Step 4: Finalize amount and purchase property     

  1. We will offer the seller a down payment in addition to taking over mortgage payments
  2. We will now just be paying the bank directly, instead of the seller paying the bank, correct? (the mortgage is with Chase bank)
  3. In lieu of a down payment, we are considering offering the seller monthly payments over 5 years, for a greater total amount. I think this would be considered a wrap?  Would we cut one check to the bank, and one to the seller then?

Step 5: Rehab and rent out 

Step 6: Cash out refi after stabilized, pay off loan & hopefully pull some cash out

  1. How long do we have to wait for that?  Based on this thread I'm thinking it might be 12-24 months?



Any advice or feedback is greatly appreciated, thanks!

 Is your attorney in Texas? We handle a lot of these transactions and it appears this one is straight forward. We do provide escrow services, it often helps the Seller feel comfortable if 3 months are deposited, but not always necessary. Can you confirm the loan details of your seller? Want to be sure its a good loan candidate. I don't really see enough information if this is a good candidate vs. buying outright.

I saw something about a trust, not necessary based on what I see.

I would pay the seller off as much as possible because they probably need the money. If they dont need it bad, pay them a little now and a little every month for a year or up to 5 years.

If you are keeping the property I would give them the balloon for the underlying mortgage. In 5 years (or less) the rehab will have been done, you will have probably gone through 2 or 3 tenants. You have tax records to show the rental history and you can refinance no problem. The seller being on the hook for the loan is the biggest issue with doing sub to for the seller. I try to get them out as soon as possible. 

@Annchen Knodt

Earlier this year, I completed the sale of a rental in Houston using a wrap-mortgage. In Texas, I learned a Title company can handle such a transaction. However, I hired an attorney to ensure my interests were covered (as the Seller). The attorney had me use the Texas 1-4 Family Residential Contract. Here's a link to forms authorized by Texas Real Estate Commission to familiarize yourself. Your attorney will have appropriate forms as well.

https://www.trec.texas.gov/forms-and-contracts

After doing additional research, I identified terms and provisions important to me to further mitigate my risk than whats in usual docs like Deed of Trust, etc. This list went to my attorney to ensure they were either not needed or added into final docs. My attorney dealt with the Title company attorneys in finalizing all appropriate documents. 

For me, a proven and skilled real estate attorney plus a professional and proven Title company for this specific type of transaction was a must. In Texas, these kind of transactions are not as common as NC. So find the right professionals to assist you in Closing the deal out.

Secondly, be wary about when and how much you will be able to receive your investment funds back in a cash-out re-fi. I have an investment in North Carolina that I purchased and rehabbed, all cash. Initial conversations with BP'ers and some lenders shared that, in general, the lending community will only cash-out to finance 70% or so of the original purchase price within first year of ownership. More research is necessary.

And third, Brenham is far from NC. Are there better options available closer that can be managed easier? Just wondering out loud. I have family nearby so I'm in Brenham once or twice a year. A great town that is growing. 

Best of success to you!

@Ronald Rohde Thanks for your response!  Yes, we have started a relationship with an attorney in College Station (I live in NC but my father lives there in TX).  Good to know that you provide escrow services - the 3 months up front is a good tip and hopefully we can offer that to the seller.  The loan is a conventional 30-year fixed from Chase with ~23 years left (at a low rate), but other than that I don't know too many details yet.  Subject to appeals to us because the rate on the loan is lower than what we can get now, and we have a good amount of our cash tied up in other properties at the moment. Are there other features of a loan that would make it a poor candidate for subject to?

Thanks so much for your detailed response, @David Patchett !  I will definitely check out those forms, that's super helpful.

70% LTV for a refi is about what we are expecting, good to hear that that's what you found in your research also. We don't want to over-leverage in general, so at least as we understand it now, those numbers should work for us.

And, I should have mentioned in my post that my father lives right there in Brenham, and that's where I grew up :-)  We also have some confidence in the town's growth, hence why we went ahead and pulled the trigger on a direct mail campaign to find motivated sellers there and hopefully get some deals on buy-and-holds.  Cool that you have family there and get to visit - we're in the same boat then!  I hope you get to enjoy some Blue Bell ice cream when you go :-)

Thanks again!