Input on first deal! Subject to -> 'rent to own'

25 Replies

So we are meeting with a potential seller on Tuesday for a house which we're hoping to get under contract subject to the mortgage.  Just looking for some input on our evaluation of it to make sure we aren't missing something glaring, these are the top level details, he has offered to sell the house for what he owes on the mortgage:

FMV: $130k-135k
Mortgage balance: $110k
Interest rate: 6% (did some digging and based on his purchase date, 5.5-6% is likely)
PITI payment: $900/month
House is in good condition and needs, at most, a coat of paint
Fair market rent: $1075

It's a 30 year amortization loan from 2008.

Our most likely route once under contract is to look for a tenant buyer through a lease option or seller financed sale.

One last question - what sort of interest rate have you all found you're able to charge for interest on seller financing?

hi in my opinion I don't feel there's enough room for subject to I will put under contract in a sign my lease with an option to purchase for substantial assignments see and be in and out with no risk...my 2 cents. Matt

My $.02: with safe act does any buyer have to go through mlo? & you say 5.5 to 6 most likely? You better find that out for sure direct from mortgage co.  So you'll have to get your own insurance policy right? So $175 for insurance & any repairs? Pretty slim but for $0 down the return is great.  Oh i think with safe you can only sell at market value (or very close, i think...) you cant just pick any number

@Matt Reed  thanks for the input, we will definitely look into that method as a possibility

@Pat McGrath  thank you for the thoughts, here's some follow-up.  We'll certainly be verifying the actual interest rate before taking over payments, the seller will have a mortgage statement when we meet and we will be taking it directly from that, 5.5-6% was our best estimate at this point.  That $900 payment includes the insurance payment, whether the current owner pays it or we pay it, the payment will be about the same.  So it should be $175 to cover big item maintenance (HVAC replacement, roof, etc.).  With the lease option buyer they will be expected to handle minor maintenance.  But I definitely agree, this deal will be fairly tight, but that's why I'm here for input!  Thanks!

Hi....still too tight for me :)......I suggest assigning contract to an ens buyer....huge down payment....or small down payment and cash flow....say 200/month for 5 years....no risk! :) Matt

@Daniel Lipetzky

@Matt Reed knows lease options and rehabs.

Warning - Just because you CAN buy it on sub2 does not mean you SHOULD.

You deal is too skinny for sub2.

PITI vs Rent is less than 200.

You may think you have 20K in equity but the costs to sell are 10% of 130K = 13K with commissions, closing costs, sellers concessions, etc.

Look at a lease option assignment $850 rent - $130K option exercise price and flip it for $5000 in 10 hours.

Be mindful that Dodd Frank probably applies when selling to an owner occupied buyer with seller financing terms when taking over an existing mortgage. Sub2 may be considered an extension of credit, as it's an installment sale to a consumer buyer. @Dion DePaoli   Is a straight sub2 (no wrap) between a seller and buyer is considered "seller financing" and subject to DF?

If it were me I'd skip any lease option or wrap ideas. I'd not want to stay in that deal. I'd get a straight option to buy, with an underlying purchase agreement that includes seller financing terms of taking over the existing mtg. Then I'd look for a qualified buyer and assign the option to the end buyer.  The end buyer pays you your assignment fee in cash.  They execute the sale between them and the seller. You are no longer in the deal and you did not extend seller financing to the buyer.  

Even being out of the deal doesn't protect you entirely if it goes south, IMO.  Say the buyer stops paying.  Or the seller collects payments and doesn't make them to the lender.  Or the loan gets called.  You're supposedly out the deal but you'll likely be named as a party if anyone sues anyone. Just my opinions, of course.

@Matt Reed   if we assign the contract to the buyer and just take a fee, how are we able to take cash flow if we're out of the deal?

@Brian Gibbons   just want to clarify a few things (still learning all the options here).  First why should we set the monthly payment down below the  monthly mortgage payment of $900, it seems unlikely the seller would agree to that? In addition if the seller is only looking to get the remaining balance on the house (~$110k), then why set the option price at $130k?

Kristine Marie Poe just to be sure, you are saying to get an option to buy subject to existing mortgage, find someone to take the deal and get our assignment fee, and then be 'done' with the deal? (except for those situations you listed at the end)

Would that work out like the following?

Get it under contract with an option to buy subject to existing mortgage of $110k, find a buyer for say $120k who needs seller financing, and take that extra $10k as our assignment fee and that 'acts' as downpayment for them?

Lease Option Choices

You can,

  • Lease Option then Assign, take the option fee and be done with it.
  • Sandwich Lease Option, stay in the middle, get spreads on option fee, rent and the sales price.  You are on the hook to pay seller if the Tenant Buyer you are subleasing to defaults.
  • Master Lease: sub lease only, no option to buy.

You are serving the seller's needs here.  It depends on the seller.

PM me on negotiating the deal, lease option vs sub2 vs wrap.

Hi...say 8k assignment fee...buyer has 4k at closing.....you give buyer TERMS on balance...say 200/mo for 20/months...or 400/mo for 10/months...this works...We do it all the time....use ESCROW company for all payments...Go GET -UM!

Originally posted by @Daniel Lipetzky:

@K. Marie Poe   just to be sure, you are saying to get an option to buy subject to existing mortgage, find someone to take the deal and get our assignment fee, and then be 'done' with the deal? (except for those situations you listed at the end)

Would that work out like the following?

Get it under contract with an option to buy subject to existing mortgage of $110k, find a buyer for say $120k who needs seller financing, and take that extra $10k as our assignment fee and that 'acts' as downpayment for them?

Your buyer won't likely have $10K, so I wouldn't count on making $10K on this deal.  But anything could happen.  Maybe you'll find a cash buyer so that both you and the seller get cashed out.

In my suggested scenario, the option fee would NOT act as a downpayment.  You are not offering financing, so there is no downpayment.  You would be selling/assigning your option to buy, which includes the terms of the purchase agreement attached to that option. The buyer pays you and steps into your shoes in the option and purchase agreement.

Just the thought of trying to collect "cash flow" on a deal that doesn't have any makes me nauseous.  There is virtually no spread.  The seller's loan is at 6%, hardly anything to write home about.  The only thing this deal does have is a seller willing to walk away as long as someone takes over the mortgage.  That does not make the property worth more.  I suggest using the opportunity you have right in front of you -- a motivated seller willing to consider sub2 -- and not try to create something exotic. 

Originally posted by @Matt Reed :

Hi...say 8k assignment fee...buyer has 4k at closing.....you give buyer TERMS on balance...say 200/mo for 20/months...or 400/mo for 10/months...this works...We do it all the time....use ESCROW company for all payments...Go GET -UM!

Matt: when letting the buyer pay your option fee, or a portion of the option fee, with installment payments....what kind of agreement are you using?  Just a promissory note, which would make the debt unsecured? I don't like wraps and think options are a better way to go, so this idea appeals to me.  But an unsecured promissory seems like no security at all.  Especially one for $4K.....where it would cost more to get a judgement than go unpaid.

This deal is not very attractive.  Lot's of holes in the plan.  

Kristine Marie Poe yes.  Seller financing.  

Some concept rebuttals:

"That $900 payment includes the insurance payment, whether the current owner pays it or we pay it, the payment will be about the same."

Currently the insurance policy is for a home owner.  If you sell to a tenant through a lease option, that means the insurance policy would need to change over to a landlord since the title owner is not the tenant.  Not changing that policy is insurance fraud.  Implying that the insurance policy can stay the same speaks to some misunderstandings of how this all has to work.  Further, often times Landlord policies cost more than Home Owner policies.  Further, further - that escrow account held by the Mortgagee is not something that can be assumed.  It is not property of the Borrower.  

"With the lease option buyer they will be expected to handle minor maintenance."

In most states that I can think of this does not fly.  A tenant can not be made liable for the property maintenance as the owner enjoys the equity and tax incentives.  A tenant does not.  This is a no, no.

The general sales numbers being kicked around seem to be void of closing costs.  I don't see how there is a deal here worth pursuing once net numbers get factored in aside from other issues with the plan.

The loan is 6 years in.  We can't determine the amortization from the post but that $175 will erode from increased insurance costs and a need to match principal pay down.  

Further in very generic terms it looks like that $900 is only covering insurance and not taxes.  There doesn't look (could be wrong) like there is a TI payment that would coincide with a $135k home.  It is possible that the impound does not cover both taxes and insurance and only covers one of the items.  If that is the case, this deal seems like it is almost upside down.  

Financing provided that is unsecured has issues as the financing may not fall under exemptions with regulations.  I am not sure you could get any type of judgement on a assignment fee installment contract in general.  

These types of deals I think are playing with fire.  There has not been enough time for the CFPB to really address these and that is being looked at as if they will not.  There are explicitly restrictions with "steering" consumers into loans which grant higher compensation for the promoter.  I do not think that is too much of a stretch to see some application of that rule in many of these SF type deals.  In theory, to give example not pick on OP, here we have an OP looking to ensure they receive monthly cash flow.  What if a Buyer came forward and simply wanted to purchase the property outright, say with cash at $135k.  It would be dangerous ground I think to deny that request and then turn around and SF the deal to a buyer for say $130k just to ensure the OP get's to clip some cash flow.  That is not too far from a steering definition.  

Further, I can also see how a Wholesaler steps in the middle to earn a fee and then removes their interests as being construed as operating without a license.  Not just RE license but RMLO license as well.  The argument I could see going something in the direction of who is 'really' providing the financing here - the underlying titled owner or the wholesaler?  That would be looked to as who has risk of loss.  Generally, that real risk is on the underlying titled owner not the wholesaler.  So, put as much lipstick on the deal as you want, it is brokering financing without a license to a consumer for their primary residence.  An action that requires license in all states.  

To just mention it as caution, I disagree with attempting to justify these types of activities as "providing a service".  (No offense Brian)  To a large extent you are not allowed to provide certain services to the public unless you are duly licensed.  

 

Yes, it's financing. An existing loan where the agreement to pay an underlying mortgage is not an assumption given by the mortgage holder, the seller is making an agreement extending credit sufficient to pay that underlying mortgage, the seller is financing it.

Maintenance may not be sluffed off on a residential tenant in any state, the reason is in IRS code, tax deductions and depreciation requirements for property owners, you'll have false tax returns or tax fraud involved. Commercial leases are different as the tenant may make repairs and depreciate and/or expense such items.

Option prices must be paid as a lump sum, accepting any payments over time is financing the option, the option reduces the price so you're accepting payments that in the end reduce the price, that is financing in all states.

If you accept chickens for the option, there will be a value to the chickens and that's fine.

If you allow an additional credit for the eggs to be received in the future, that too has a value, a value received over time that is applied to the purchase price is financing and that too goes to all barn yards.

It's a pretty simple application of consideration given over time that reduces the agreed price or cost of acquisition to a buyer.

A wholesaler financing his fee is also financing the transaction, it reduces the total purchase price and cost of acquisition paid by that buyer.

If the title agent financed the settlement costs, it is a financed sale transaction to that buyer, but, no, they don't finance their fees.

The sale price is also goes to the cost of acquisition for a buyer, that is their cost to obtain title. No part of that cost may be financed by anyone unless they hold a license appropriate to finance that amount unless you are the owner financing equity which is covered as seller financing. :)

Thanks for all the input, this is fantastic!

@Matt Reed  any follow up thoughts to @Account Closed 's question?

@Dion DePaoli  some follow up thoughts from my end:

From these responses we have since been convinced not to try to pursue any sort of cash flow in this deal.  Our current strategy is to get it under contract with a option to buy subject to the mortgage and assign that contract for a fee.  From our understanding this is a general strategy that's used quite frequently/successfully by others on BP?

The original loan value was $120K, amoritized over 30 years at a pessimistic assumption of 6% = ~$720/month. With a tax rate of 0.89%, estimated non-owner-occupant insurance quote at $775/year, and estimated PMI is another ~$200/month we arrive at a PITI of ~$920/month. That insurance value is an actual quote obtained through our insurance's website, and is not an estimate. So we definitely won't be pursuing cash flow on this, but a general assignment of the contract where we for example get it under contract with an option for $110K, find a buyer at $120K and assign the contract and take that $10K fee less our costs (just throwing that number out there currently as an example)

@Bill Gulley   - couldn't get the tag to work properly up at top

Originally posted by @Daniel Lipetzky :

@Bill G. big thanks for those thoughts, so in summary you're suggesting if we do an assignment fee that we do it lump sum and do not attempt splitting it lump sum and payments correct?  And the lease that is figured between the current owner and the buyer is fine because it's owner financed?

Again I suggest staying away from any lease option on this deal.  I'd get an option to buy with an underlying purchase agreement.  The PA states the buy price (mortgage balance) and the terms are taking over the existing financing.  Sell your option to a buyer.  The buyer  exercises their option and performs per the terms of the purchase agreement.  The seller deeds the property to the buyer.  The buyer makes the mortgage payments. No "tenant buyer", no lease.  

@K. Marie Poe thanks for the clarification on terminology, what you're describing is how we intend to go at it (still working on saying everything correctly myself)

 @Daniel Lipetzky  I'm trying to understand why you would find a buyer at $120k to assign the option to, if I'm not mistaken the $10k spread in equity would not be where you profit on an assignment because the option fee does not get applied to the purchase price of the house. Would it not be easier to just sell the house for what you have it under contract for and charge a fee for the assignment?

So you'd buy it subject-to with option to buy at $110k, find a tenant/buyer at $110k then charge the tenant/buyer an option fee of X amount. 

Those are just my thoughts and I am not yet an expert when it comes to this so take what I said with a grain of salt. I, too, am here looking to be steered in the right direction so any feedback will be appreciated. 

@Brian Gibbons  

@Bill Gulley

@Omid A.  thanks for the input, to clarify that is what we'll be doing in that we won't actually buy it we will get an option to buy subject to for the $110k, and then assign that contract with the $10K assignment fee so to the buyer it's a total of $120K

Originally posted by @Omid A. :

 @Daniel Lipetzky  I'm trying to understand why you would find a buyer at $120k to assign the option to, if I'm not mistaken the $10k spread in equity would not be where you profit on an assignment because the option fee does not get applied to the purchase price of the house. Would it not be easier to just sell the house for what you have it under contract for and charge a fee for the assignment?

So you'd buy it subject-to with option to buy at $110k, find a tenant/buyer at $110k then charge the tenant/buyer an option fee of X amount. 

Those are just my thoughts and I am not yet an expert when it comes to this so take what I said with a grain of salt. I, too, am here looking to be steered in the right direction so any feedback will be appreciated. 

@Brian Gibbons  

@Bill Gulley

The OP wouldn't be selling the house for $120K. The option to buy is for $110K.  He sells his option for $10K.  The buyer buys the property for $110K.  The buyer is going to be all in for $120K:  $10K option fee and $110K existing lien.  So OP needs a buyer who wants in at that price and those terms.

That's exactly right

Just as a thought experiment/learning opportunity, with everything else on the deal staying the same -> how low would the seller's existing mortgage rate/total monthly payment need to be for you to want to stay in the deal and do some sort of wrap/lease option?

Kristine Marie Poe 

This is a bit like explaining something to a row of fence posts.

I though the previous post was pretty clear.

Sale Price + Other Expenses =  Cost of acquisition to a "BUYER".

I'll sell you this bag of stuff for $100.00 but before you can do that you must buy this agreement to buy that bag for another $10.00. What did the bag cost you? What was the effective sale price of the entire transaction that allowed you to walk about with that bag?

Owner occupied? What does TILA say......"ALL COSTS ASSOCIATED WITH" the cost of acquisition and expenses associated with that transaction.

What does the IRS require? An accounting of ALL costs and expenses in the costs of acquisition.

What is an "OPTION"? IRS says it's a contract that is to be added to the basis of the cost to acquire any "ASSET".

The option contract is an affiliate contract to the sale contract, it is tied to the sale contract by the "ASSIGNMENT" made on the sale contract, just as an addendum extends the rights and obligations or both or one party to that sale contract. 

Financing "ANY" expense or cost to acquire a property which was necessary to obtain a loan or property that is treated as the cost of acquisition, is financing in connection with "THAT PROPERTY".

Saying you are selling something else to obtain a lower sale price is semantics reducing a price from it's market value in order to call part of that value something else attempting to evade the intent of several laws, not just Dodd-Frank or TILA or the Tax Code.

A buyer who fails to disclose an option price paid in a loan application is submitting a fraudulent application. Not disclosing the option price to an appraiser also will be a lending violation, failure to disclose an option price paid is also a violation of ALTA requirements and the settlement agent will fail to properly account for settlements.  Being the party paid an option price that is undisclosed, especially if that party advises or is active in any attempt to hide or ensure the option price is not disclosed is then in conspiracy of those violations.

Not one person in this thread advocating anything contrary to what I explained above is formally educated in accounting or allocations of accounts, or formally educated in law, or has been trained as a settlement agent nor do they hold any degree or certification of any kind in taxation, I have, do and have been.  My comments are intended to keep other willing to operate properly from getting bad information and making mistakes, they are not intended to change minds or convince someone of doing what they do they shouldn't, that probably won't happen. Nor are my comments to fuel arguments to those who want to publically justify what they do after they just stepped in it publically which is just human nature to argue their point. You are wrong.

And, please note, the words and phases capitalized in quotes are not screaming at you but for emphasis only, as my tool bar doesn't display to provide highlighted words.

That said, go do what ever you want to dream up, at some point you're likely to be exposed and you can suffer the consequences with a smile on my face since you were told.  There is no way to inform those not willing to be informed and just engage in forum chatter.  :)

@Bill Gulley  thank you for the time, that's what I am attempting to do here -> become informed so that I can move on and actually get into this business past the forum chatter.

So I apologize if I'm misunderstanding the entirety of your post, and definitely appreciate all efforts to clear it up and set me on the straight path.  You are basing what you're saying on the idea that we would be not fully disclosing our fees correct?  Our plan again is to get the house under contract with an option to buy subject to the existing mortgage ($110K) and then to assign that to a buyer for ~$120K with absolute clear disclosure that that price includes the house subject to and our assignment fee for the contract.  We certainly aren't planning/intending to be shady about this.

Thanks for taking the time to educate this fence post!

Daniel, that's is fine, your sale price of the property is 120 an option given for 10 is fine, high but fine, sub-2 assumption at 110 with credit of the option of 10 is your sale price at 120. You can also say, sale price of 110 with a option contract price of 10 giving the settlement agent 120 as the cost of acquisition. You can't finance the option price, it needs to be paid by a lump sum, another lump sum could be paid at settlement which would not be considered financing if that was stated that funds are to go to escrow.

You're fine, my comments of further explanation were directed more to the convoluted aspects of the thread, not your inquiry at all. Certainly appreciate your attitude to learn and stay clear of issues. :) 

By getting an option to purchase and selling said option (for cash), you are not offering financing.  You step out of the deal and the seller and buyer complete the deed and terms of the purchase agreement. You leave the Dodd Frank and CFPB compliance regs when extending credit to consumers to the seller to deal with.  Lord help the seller though, as they are now responsible for something they likely know nothing about. They are optioning to an investor buyer but will end up selling to and financing an owner occupant consumer buyer.  

Seems like there should be some kind of disclosure there, to at least advise the seller to get legal advice.  And that the option may be sold or assigned to an owner occupant buyer.  

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