Sub 2 Calculator needed

7 Replies

Hello BP,

First off thank you for the help, this is a great forum to ask questions in. First I love the calculators that BP has for it's pro members they are great. However, I was wondering if anyone has a calculator for a Sub 2 deal. Or guidelines on what they consider a great deal for a sub 2 deal. I just need some rules to follow so I can move forward. 

Let me inform you of what I have worked out with the seller.

I have a seller that owns 49k on a house that is worth 65k. And he is going to do a sub 2 deal with me if:

1. I take over his payments

2. Pay him a one time fee of 2k

3. Pay all the closing cost and refi costs in the future. 

I'm in the process of turning into a rental property and already have someone to put in the property at rental market value $800. After I pay for vac, repairs, cap, and management I'm looking at cash flowing $150 a month for a property that costs me 8k in (fee, light rehab and closing closes). 

Am I wrong to think that this is a great deal? 

Sub-to purchase is little different then buying a rental with financing.  I do sub-tos...

Net between the mortgage payment and rent for me has to be $300 or more.  I'm ok at break even for the balance + rehab approx equaling market value, even under water.  IF the area / house will appreciate.

Your $150/mo will have you negative cash flow when the tenants disappear middle of the night and take the appliances with them.  Or AC breaks (unless window units at that price)..   This is not a good deal unless this house will appreciate well.

But sounds like you already bought it.  Thats ok, I bought many bad deals which caused us to write strict buying rules so our deals got more and more profitable as we grew our portfolio because we said "no" more often and focused on more profitable deals.  :)   So its good you're doing this deal.  You'll learn more from this deal then from a wildly profitable deal.  LOL   Hoping it works out for you.   

Hello Michael, I wouldn't say its a bad deal but I also wouldn't call it a great deal.  With the risk in real estate investing and especially Subject 2 deals I personally would have to have a lot more than $150 per month.

With Sub 2 deals you want to ideally get a bigger profit margin especially for renters considering repairs, upkeep, and even vacancy issues.

Also I would owner finance a Sub 2 deal to eliminate many of the expenses and headaches that come with rental tenants.  With an owner finance strategy the cost and upkeep of the property is on the tenants, plus you are still receiving long term payments just without all the expenses which increases your profit margin.

I hope this helps.   

For our buying rules, learned the hard way and some insite, go to my profile and find the file linked in the first paragraph, how to buy a bullet proof rental portfolio.

Hi Michael,

First off let me say the other two people responding were spot on as for cash flow. in a lower end property like that, your vacancy and repair rates will be higher than if you were in a higher quality rental range, but there are sometimes other reasons to do a particular deal.  

How far into the mortgage is the seller?

What is the interest rate?

Is there PMI on the mortgage that could go away soon and increase your cash flow?

Other things to consider when doing a Sub2:

Did you verify that the mortgage is a 30 year fixed rate?

Are you closing the property in to a trust?  If not beware you're likely to get the mortgage called.

Do you know the right sequence to follow in closing the transaction so you don't open yourself to a future claim of possible insurance fraud or lawsuits because you have two policies and each point the finger at the other to pay a claim and in the meantime the bank finds out about the sub2 because of the claim and then they exercise their due on sale clause on you.

Sub 2's are a great tool to buy properties IF you know what to do and how to do to minimize risk.  Unfortunately, a large majority of people out there telling people how to do them know the basics but not all the in's and out's and legalities.  

I'm not trying to scare you off from them but I do want to emphasize they are possibly the riskiest way to purchase properties if you don't fully understand them. 

49k for a 65k property isn't a bad deal, do you have solid comps to show the 65k value?

Confirm it's a 30 year term loan and the intrest rate is fixed.

Selling the property lease option to buy would be a good deal, you just have to get the seler you're buying from to sign a lease option agreement that makes you the Prime and that keeps you leagal.  If you're keeping it make sure you put it in a Land Trust to fall under Garn-St. Germaine act of 1982 "Owner of record may transfer their intrest in their property from a given name to a trust (without) triggering the Due on Sale Clause in most mortgage contracts"  

I agree with @David Roe in respect to the due on sale clause. 

A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.

This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. This is considered a strategy for asset protection which you may want to look into as you grow. @Michael Mullins  The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the Trust has been established. It means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. All the while, you always have control and nobody else, not even your attorney, can manage or sell your property except for you.

If you need to prove ownership for financing or any other reason, you simple produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.

Please feel free to connect with me if you’d like to know more.