'Subject To' or Not to?

8 Replies

Dear BP readers,

Could use your creative minds to see what the best course of action is for this prospective client. Here is the situation...

Motivated seller came to me through my website. They are moving. They asked for $208K for a 3 bd/1ba home in the Springfield, MA metro area. ARV for a house like theirs in their area is $125K. Some details...
- they bought home for $169K
- mortgage is now at $199K
- conventional loan: 30yr fixed at 5%

What would you do? Almost seems like a bridge to far for a short sale. Is foreclosure their only option? Could this be a good candidate for a 'subject to' deal? Any other thoughts/strategies?


Bob Couture, Real Estate Agent in MA (#9534609)

Mrk rent? Payment? Enough spread? Then I would take it sub2 with sellers covering cc and 3 more payments.

Hi bob,

So here are my thoughts, one you are correct in your estimation of it being a bridge to far for a short sale. While they can try they are 75k underwater from what you have said. Second you mentioned the ARV in the area is 125k? Please don't tell me with those numbers they actually need to make repairs to the house?? A couple things you might want to ask your prospective clients. One do they have any cash to bring to the table, with them so far underwater that may be there only option. Perhaps listing for a shortsale at 125 then bringing 25 to the table also? These ideas seem far fetched to me but you did ask lol. My advise just walk away.....there will be better offers with more equity or heck any equity that you can pursue in the future. I hope this was helpful say hey back or shoot me a vote :)


Mrk rent? Payment? Enough spread? Then I would take it sub2 with sellers covering cc and 3 more payments.

The more you pay/basis for a rental that will cash flow, the more tax shelter it creates. If you are ok with just holding it, and you don't have an initial investment, then having no equity is not all bad. It may have zero cash flow and still be a winner as long as you have income to write off.

The Seller's options are not just foreclosure.  They can deed in lieu of foreclosure if the Mortgagee will accept.  An increased balance indicates they have been modified.  Might need to see how recent that took place as they could be restricted to live there still by that modification.  

The borrowers can still apply for relief in the form of a principal reduction through short sale.  That is not a quick process as well all know.  That said, a "bridge too far" is only so far if you do not try and navigate across.  Asking and being told "No" doesn't hurt.  If they can prove they have to move out of the area or can not afford the payments, the Mortgagee may be obligated to react within reason.  

Does that mean you get the property?  Maybe not, but you could be the first in line offer in a short sale.  So it gives you a chance.  

There is no mention of what market rent is.  Looks like P&I is likely around $1,070 per month.  Add Tax and Insurance on that and will market rents cover that?  

As mentioned, the seller/borrowers have options besides foreclosure.  

But I'm curious why you are asking if it's a good candidate for subject-to.  Do you want a $125K house with a $200K loan balance?  And if so, why and what's your plan?  Are the rents so high you could cash flow for years before it comes back up in value?  Is the area appreciating at a super rate? Do you want to live in it?  

Agreed, it makes no sense as a sub2. Who wants a $125k property that's $75 under water? There's no such thing as "a bridge too far" when it comes to a short sale. The bank is looking for something close to FMV, it doesn't matter if that's 90% or 40% of UPB.

This is a dog of a deal.

As pointed out do you think that rents even cover PITI? I'd guess not. If it is only worth $125K it isn't likely in a really crappy town, but not a nicer area of one of the nicer ones out there either. I guess unless it needs a decent amount of repairs and that is the "As Is" condition before doing 5 figures in work.

The only way I can see you being able to make something out of it (as opposed to some of the other things that can just get the seller out of it) is to get them to list it and try a short sale if they are able and willing to do that.

If they are get an agent that is familiar with them and get a negotiating company in line (I can recommend some based in MA, though you can have someone any place call and say "No I sent you that 4 times already" when the bank loses the file bi-weekly).  Start by listing it at like $209K and drop it $10K every 1-2 weeks until it is down to like $129K (still above market) then put in your offer of whatever you feel it is worth and let the games begin!

Only "risks" are that someone comes in before that point with a higher offer in which case good for the seller since there is a better chance of it going through.  The other is of course the offer gets denied which just costs everyone time if the seller is basically going to get foreclosed on at some point.

Shaun Reilly, Real Estate Agent in MA (#9517670)

Thank you all for your responses and solutions. I concur. It is a dog of a deal and not one to pursue. Remarkably the rents in the area are about $1200-1400, but still not enough margin to make anything work. Ultimately they need to sit down with a bank and get a loan modification and rent this place out.

Bob Couture, Real Estate Agent in MA (#9534609)