Subject-to

8 Replies

Hi I'm a newbe in the investment side of real estate. So I have a seller wanting to make a deal for their home via subject-to. Needs no repairs. Comps put the house at $158,000. She ows $96,000 but wants $100,000 for the deal. Her monthly mortgage payments are $640 & $240. She already has tenants in the property that pay $1300 per month. What do you guy think about this deal. It would be my first subject-to and really wnat your guys feedback on this one. I'm a little nervous about this one. 

@Account Closed

I would check the title first to make sure there's no other liens against it

Remember when you buy "subject to" there is a due on sale clause so your exit should be either resale or fast lease to own; if you want to sell it with the tenants inside it, you could go down REIA meeting and try to sell it for 120K net tenants included to an investor

Steps

1. Buy it "subject to"for 100,000 with a $4000 note

2. Sell it for 120k net meaning  new buyer pays all closing costs

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Awsome! Great Feedback and Thank you so much! I do have a couple of questions though. The note means there is just a $4,000 difference right? And what exactly is a due on sale clause? Please break it down Barney stile for me please.

Subject To threads never cease to add some humor to the world.  Robert if you are looking into Subject To investing and you do not know what the arch nemesis, the Lex Luther to your Superman, is then you need to pause here and do some more research.  

Due on Sale (DOS) is a clause in most mortgages or deeds of trust which states any transfer of interest in the real property in whole or in part gives an option to the Mortgagee to accelerate the entire balance of the loan and call it due. There are many threads here on DOS. Search for them and read.

A crucial piece of information seems to be missing, what is your intention with this property?  Are you trying to keep this property or flip this property?

Another important piece of the puzzle that warrants mention is that it seems the property has two separate loans attached to it.  You mention payments with an "s" and have two of them.  It sounds like they have a collective balance of $96k.  It may be of value to understand those balances on their own.  

Let's talk about the two big elephants in the room.  This owner who is operating an investment property wants to walk away from her cash flowing property and leave $58k on the table and only take $4k?  

That sounds a bit suspicious.  That is a ton of cash to ignore.  Additionally, I get the impression she is the one pushing the Subject To idea and not the OP for some reason.  This warrants more information as with a property that cash flows and has equity it would be more logical to simply purchase the property in a normal manner with no Subject To structure.  Is there a defect in the property that prevents financing or is a barrier to it?

In creating a Sub2 structure here you would want to create an obligation around the existing debt not outside of it, if you are the Seller. So you would have to have a note which includes the $96k. The $4k is perhaps simply a down payment. I would not suggest financing the $4k nor does it seem like that is what the Seller would want.

I suppose before we get too far into any Sub2 we should give the OP a chance to fill in the missing gaps of information.  What's the deal with so much capital on the table?  How firm is your comp?  Is the property finance-able?  Are you trying to hold or flip?

Do you have money and or credit to actually pay the two loans off if they are called due? 

Like @Dion DePaoli said, there is alot of equity here, and it is not distressed, meaning not behind on payments.

Why would any sane person leave $50k plus on the table?

I remember a divorced seller many years ago, wanting to sell to me fast cheap, to piss off her ex husband, and once I looked at the divorce decree, it was plain she did not have sole rights to sell.

@Bill Gulley

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Sounds to me like Brian's recollections may apply, if she is pushing the sale, she may have a different exit strategy. 

How did you arrive at that $158K, with comps, the first assumption is that the valuation is correct, I'd question that if you are new to RE, it's not an averaging process. This would explain the seller being in her right mind, she knows what she paid and how long she has owned it. 

What are taxes and insurance? $300 a month? There goes the implied cash flow without reserves for maintenance or vacancy. 

Who is in title to the property? If she bought it Sub-2, she may not be able to sell Sub-2 or finance anything. 

 Two payments, I assume a 1st and 2nd, who holds these liens, what are the balances owed? 

What are your intentions with this property, hold it, flip it, wholesale it.......(BTW, you can't wholesale a financed sale or Sub-2 without the seller's specific consent accepting the real buyer.)  ?

I suspect reality to set in after you look closely at your comps and the valuation process. If the seller really is leaving money on the table, need to figure out why, an experienced landlord can't be that naive I don't think. :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

I want to know why someone would agree to do a subject to when they could sell the property for more money? It seems stupid of the seller to do the deal. What am I missing?

Thanks for all of the feedback. I could not have asked for more. I feel a so much prepared just being on this blog. Hopefully one day I will be as knowledgeable as you guys and I will be the one giving advice. Thank you so much!