Subject To

26 Replies

Hello BP,

I am currently learning a new strategy called "SUBJECT TO". I am understanding how it works but my main concern is will I be able to sell the home for a retail price and use that money to pay off the sellers mortgage. Example:

Original 1st Owner: 

ORIGINAL BUY PRICE: 400,500

MORTGAGE: 258,000

EQUITY: 142,500

SALE PRICE TO INVESTOR: 278,000

CASH TO SELLER: 20,000

AMOUNT LEFT ON MORTGAGE: 258,000

ESTIMATED ARV/MARKET VALUE: 410,000

Once the seller gives me the deed  may I sell the property retail price and use the new buyer's money to pay of the original's seller mortgage and keep the profit?

INVESTOR SALE PRICE: 410,000

ORIGINAL MORTGAGE: 258,000

PROFIT AFTER PAYING ORIGINAL OWNER'S MORTGAGE +HIS 20,000 : 172,000 

Absolutely!

@Brian Moncada

I'm not sure why an investor would pay full Retail....  There's no profit left in it for them.

However if you replaced your end buyer with an Owner Occupant then I would say that the scenario looks very accurate.

Playing Devils Advocate here...

What is your exit strategy if the property doesn't sell at FMV or sits for 6 months? Will you be able to make the payments during the hold period?

What is your exit strategy if the due on sale clause is executed and the lender calls the loan due?  Do you have the ability to re-finance the property to pay off the existing debt?

These are all rhetorical questions to get you thinking of exit strategies, just in case your primary Retail Sale strategy doesn't go as planned.

Just be prepared for the worst and hope for the best!

Jeff V

@Jeff V. I would purchase the property at $278,000. He owes $258,000 meaning he wants $20,000. 

ARV is around 400,000-410,000

Great community with great schools. I (think) I can sell the property at retail price (around 400,000) within 3 months. The property needs no work. 

I don't want to go with a lease option or rent it out. I would like to just sell the property and make an easy profit.  My main concern is would it be possible to do this "deal" without a lease option or renting the property. 

I would like the new "retail buyer" to pay off the old mortgage. Leaving me with a nice profit after we pay off old mortgage. 

Thanks Jeff! 

Yes but you may have seasoning issues with your retail buyers but at those numbers I would definitely do the deal.

Just check your math.  410,000 - 278,000 = 132,000 and that's just TV show math for investors.  You also need to account for holding costs and transaction costs.  You need insurance, utilities, and unless you plan to sell it yourself, you will have to pay commissions as the seller.  Are concessions (seller paid closing costs) normally expected by buyers in your market?  Do you know what the taxes will be on such a transaction in CA?

I'm not saying you don't have a deal on your hands.  Just keep your expectations realistic and avoid seeing things through those rose colored glasses.

@Robert Leonard

Okay I see what your saying and if I am correct, it would look a bit like this:

410,000 - 278,000 = 132,000

132,000 - 5,000 (touch ups/ repairs) = 127,000

127,000 - 12,300 (closing costs) = 114,700

114,700 - 16,400 (4% agent fee) = 98,300

98,300 - 8,000 (holding costs for 3 months) = 90,300 

$90,300 Profit, but not including taxes, and I will have to open escrow for my retail buyer and pay closing cost as well.

 Now if I want to sell the property faster can I offer a discount and ask 400,000 for the property? Now my holding costs would be cheaper and I will lower my risk of having to hold the property for more than 3 months correct?

Maybe selling FSBO can also save me the 4% agent fee.

Thank you everyone for your input, I sincerely appreciate it! Getting closer to closing my first deal!

Originally posted by @Brian Gibbons :

It costs 10 to 12% to sell

@Robert Leonard is spot on knowing real transaction numbers

I know I'm late on this but is there a way to structure the deal with a title company to do a simultaneous close? Structure the deal to take the property under contract subject to finding a buyer within 30-60 days maybe and be the sandwich in the transaction? @brian gibbons?

@Charles Moore

No, you'll have hard time doing a double closing using your buyer's money. 

No, doing a bub-to is a financing arrangement, you can't assign that to someone else without them approving the buyer. 

This is an old thread, it has issues as well, but irrelevant as it's not really a deal. Best to start a new thread for off topic questions from old threads.

I see you're new to BP, might read some of the more recent wholesale threads to see if you really want to go down this path. Hope you'll learn real estate basics before trying to learn guru junk. Good luck :) 

Originally posted by @Charles Moore :
Originally posted by @Brian Gibbons:

It costs 10 to 12% to sell

@Robert Leonard is spot on knowing real transaction numbers

I know I'm late on this but is there a way to structure the deal with a title company to do a simultaneous close? Structure the deal to take the property under contract subject to finding a buyer within 30-60 days maybe and be the sandwich in the transaction? @brian gibbons?

Charles

Get an option to buy and sell the option.

Get on title and resell.

Many ways to get on title.

From what I have been reading about subject to once you sell the property via traditional sale,wrap, or lease option, the profits are yours. If you sell it traditionally and have satisfied all loans then anything above that is yours. Something to remember though unless that property stays in your name for at least a year than it is taxable as income and not capital gains.

@Tiffany Howard

Sub2s are NOT for all situations.

Consider:

  • You buy a house sub2 from Harry, Harry keeps the loan in his name.
  • You sell on a wrap for 5 years to Suzie.
  • The Bank calls the loan due in 2 years.
  • Suzie sues you.
  • Harry sues you.
  • Bank sues you.

Sub2 is GREAT for fast buy and resell in 6 months, existing loan is paid off in full.

@Bill Gulley

Originally posted by @Tiffany Howard :

From what I have been reading about subject to once you sell the property via traditional sale,wrap, or lease option, the profits are yours. If you sell it traditionally and have satisfied all loans then anything above that is yours. Something to remember though unless that property stays in your name for at least a year than it is taxable as income and not capital gains.

 Might read my posts on Sub-To deals Tiffany, I can assure you selling on a wrap after you buy that way you'll be in violation of financing laws, especially to an owner occupant with you being a dealer in RE. Forget what you read in public investor forums and learn the basics, what and how interests are conveyed and financed. Gurus will take you down the wrong road every time. Might read my blog, your "BS Meter". Good luck :) 

@Doris Logan

 Anyone can get sued for anything. Creative transactions like subject to end lease options and wraparound mortgage purchases need really good attorneys, not just some guru contract. I use a written sellers acknowledgment regarding the due on sale clause and other issues, and also have a video recording of the sellers acknowledgment read by the sellers, almost like a deposition.

I do not advise people doing a subject transaction unless they have the ability to buy the property or refinance the property. And I always use title holding trusts w subject to.

@Brian Gibbons

I actually have been trying to find information everywhere discussing refinancing a subject to deal. Not really finding any luck on how to clearly go about doing so. I have found that many people just sublease to tenants but I am a more so a buy and hold investor but conventional loans take a long time and get pretty expensive. 

So my question to you, is how does the refinance process work after 12 months. Will I have to do a 20% down, qualify for conventional financing, etc?

Also, if i refinance into a new loan and pay off the hold loan, can the old lien holder sue me?Even if I have paid them off?

Thanks in advance!

You're in GA and sub 2 is popular, I would buy the property was with equity of min 20%, so if you had $100,000 appraisal, you would buy at an existing financing of $80,000 or less, this will assist you with traditional financing later

You have the deed and a legal sales contract,  so being sued by the previous seller is not the most worrisome issue

The bank calling the loan due is a possibility, but if you keep the insurance in place and make the payments on time or early on time, that is not a great danger, especially if you use a title holding trust. especially if you use a title building trust 

One of the things every investor needs is either private lenders that will lend 80% of value or portfolio lender that will lend 80% of value regardless of down payment.

Sub2 should be used with caution,

I always want the property with Equity and a Property that's very popular in a great neighborhood that can be sold quickly

@Brian Moncada , If you're struggling on your very first Sub To deal I highly recommend contacting Michael Quarles! He 's very insightful and had been in the Real Estate business for a while. He can explain any scenario clearly! I found he has a bunch of Podcasts about all things real estate, as well as a good chunk of Subject To Podcasts! 

Originally posted by @Brian Gibbons :

You're in GA and sub 2 is popular, I would buy the property was with equity of min 20%, so if you had $100,000 appraisal, you would buy at an existing financing of $80,000 or less, this will assist you with traditional financing later

You have the deed and a legal sales contract,  so being sued by the previous seller is not the most worrisome issue

The bank calling the loan due is a possibility, but if you keep the insurance in place and make the payments on time or early on time, that is not a great danger, especially if you use a title holding trust. especially if you use a title building trust 

One of the things every investor needs is either private lenders that will lend 80% of value or portfolio lender that will lend 80% of value regardless of down payment.

Sub2 should be used with caution,

I always want the property with Equity and a Property that's very popular in a great neighborhood that can be sold quickly

 Hey, Brian you mentioned trust. Are you referring to a land trust or is there other trust to hold property in,

;Also are they hard to set up? and how do you find those private and portfolio lenders you mentioned? Thanks

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