Need help with first Sub 2 deal!

30 Replies

Hi Everyone, I have been Listening to podcasts and watching YouTube videos on real estate for over two months now, my wife says that I am obsessed and I can do nothing but think about real estate. I have been looking for creative ways to get financing as I don’t have much money to get started. I recently was approached by a motivated seller that is interested in selling her house to me on a sub 2. I don’t know which documents I need and after I obtain the house what is the best way of obtaining a buyer for the property? She has given the following info: She Has 110k left on Mortgage House maybe worth 105 to120k House in great condition, I saw it 4br/2bth Monthly note $890 includes tax and insurance She wants to move back home out of state, because of death in the family. She wants 3k to 4K to relocate She says everything in current on house, will let me buy it for amount left on house when I sell it. Rent In the area Is about $1300 Any Help will be very much appreciated. Thank you for your time, MJ Wilson

@Montray Wilson If you don't have the money and credit to buy the house I wouldn't recommend doing a sub2 in this particular situation. Although the chance that the lender would call the loan due is very low. If they did you would have no way out because there's no equity. You wouldn't be able to sell it and you wouldn't be able to bring a partner in.

If it was me I would get this under option and market it as a rent to own. Sell your option for 5% ($6k) and split that with the seller.

Just remember that Florida makes it nearly impossible to advertise a property (or a contract on a property) you don't own. Probably you best bet would be to hire a leasing agent for half to one month's rent to place the tenant.

I don;t see much of a deal here. Just because you can buy a property with little money down doesn't mean you should. With a rent of $1300 you are going to be about break even.  Paying full market price for a house that has break even cash flow is not a deal.

@Doug Pretorius Thank you for the input, it sounds like you are recommending Traditional Financing. I have been Researching Creative financing and it seems to me that “sub to” would allow me to have the title deeded to my land trust which is the only way to get the deed without setting off ”the due on sale” Then I would put it on Craiglist orZollow rent as a lease to own. Have you ever done any sub 2? Do you think a master lease is better? If so why?
@Ned Carey once I have control of the house, I would do a rent to own where I would receive a non refundable deposit for the for the option to buy (6k to 10k) they would pay $1300 for the rent until they can buy. That’s $410 per month, and I will have an agreement to buy house for $120k. Which is $10k on the sale. What do you think?

Too much risk, too little potential spread.

You’re buying at or above current value

You’re counting on someone buying from you for at least $10k over current value

Using a land trust does Not prevent a due on sale, it simply tries to mask it, and lenders are on to this

What do you do when the end buyer can’t make payments

What do you do if you can’t find a buyer for your terms

@Wayne Brooks thank you for the input, but Its really is not a lot of risk, this is why: The loan on the house stay in sellers name, only the deed transfer to me. I’m not Personally Liable for the loan, within the contact if I fail to make the monthly payments they just get the house back. End buyer is on a lease to buy which is a rental agreement with option to buy. If they don’t buy I still have non refundable deposit for option! Some of which I keep for possible Vacancies. And I can always put new buyer in house, while they continue to pay down the note until it sells. Does not matter if house sells fast are slow. Do you have Any Experience with Sub 2?

The “I have no liability because the loan is in the seller’s name” theory drew a lot of scumbags into the sub2 game with underwater owners. This led to laws governing Exactly what you are doing. 

It’s not a Scott free walk away when you default....there are also FL state required disclosures that must be executed, if you want to make sure you stay out of jail. 

Yeah, I know more about sub2’s in FL that most of the gurus advising it. 

I would Rarely recommend to seller to do this. 

@Montray Wilson It doesn't matter if you put the title into a land trust. The moment beneficial interest in that trust is transferred to you, the due on sale clause is immediately triggered and the lender can call the loan due any time they want. They probably won't, but they can.

A master lease/option is better because most mortgage documents do not consider renting the property to be a violation of the due on sale clause. A master lease also prevents you from screwing the seller's credit and possibly having the seller sue you if you can't make good on your promises.

Remember, with a sub2 you are PROMISING the seller that you will make their payments for them no matter what. You own the house. You can't just 'give it back' if things don't work out the way you hoped.

Experience? Yes I have been doing nothing but sub2 and lease options for nearly 20 years.

@Doug Pretorius Thank you so much for you time, you input is helping alot. so your saying a master lease is low risk for me because it wont triger the “due on sales “ Would I still be able to lease it rent to own and make money on the sell? In what case should I do a “sub to “over a master lease and Vice versa?

@Montray Wilson Yes if you have a lease and option you can do a sub-lease and option. It's safer for you and gives the seller more protection in case things don't work out.

If you don't have cash reserves though it would be a good idea to assign the option for a few thousand dollars instead of staying in the middle. Do a few of those to build up a reserve before staying in one.

@Wayne Brooks thanks for the input. “Sub to” are not Illegal, And you have scum bags in every field. I will do everything by the book , because I am a man of Integrity! Their is aways some risk in every investment. Thats why I asked for input. I need to know if it is a risk worth taking. I have talked to a lawyer that has told me I can do it. If I do it, i will close every deal with a lawyer to protect myself. But will study master lease option before I Proceed, thanks for your help.
@Doug Pretorius thanks I have found so stuff on YouTube about master lease. I really like your thought about build up more Reserves before I stay in the middle of a deal. I have a few thousand saved and all my credit cards has max available amounting on them. But I thInk I will do It your way! THANK YOU MJ
Originally posted by @Montray Wilson :
 they would pay $1300 for the rent until they can buy. That’s $410 per month,

 No it is NOT $410 a month. you have left out all expenses other than taxes and insurance. Typically operating expenses other than financing payments (P&I)will be about 50% of the rent. 

What about repairs, I don't care what you lease says, as a landlord you are legally responsible for repairs. What about vacancy rate, turnover cost management costs, licenses, taxes and accounting for the business, capital expenses for significant repairs etc. 

Are you aware most Lease options do not work out?  How long is it going to take to get the first lease option tenant? Can you cover the costs for that month or two? What happens if that tenant doesn't work out and you have a vacancy?  A sandwich lease option, which is what this is, is one of the most risky strategies in real estate. 

PS

I will have an agreement to buy house for $120k. Which is $10k on the sale. What do you think?

You are leaving out transaction costs. There are a lot of costs in real estate that are not obvious but are non the less very real and kill a lot of deals.

@Ned Carey I have studied the deal from different view points, I didn’t explain every little detail out in this post. But here is more alIttle more info: The seller will continue to pay note until we have new buyer in house. A part of the non refundable deposit of 6k to 10k will be set aside for emergencies. New buyer will be responsible for repairs under $500. This is Typical in rent to own deals. The seller has been thier 2yrs, hot water heater and Appliances are still under warrantee, roof Is new also. If we have to get new buyer Its ok, we take another non refundable deposit and start again. The house Is nice I could aways just move In myself. I have Thought about It, but want to Invest fIrst. It Is an exit strategy.

I know very little about sub2 in FL, but it seems there are a lot of people with real world experience in this market, using this type of financing who are trying to save you some heartache.  

Youtube and podcasts are great, but having someone who has done it help out is the most powerful educational tool at your disposal.  It can be tempting to want force deals on occasion when the market is so competitive, but patience and good fundamentals will provide the best results.

Great work getting your first deal set up.  It sounds like you have all of the pieces and just need to find something with a little more meat on the bone.

Originally posted by @Wayne Brooks :

The “I have no liability because the loan is in the seller’s name” theory drew a lot of scumbags into the sub2 game with underwater owners. This led to laws governing Exactly what you are doing. 

It’s not a Scott free walk away when you default....there are also FL state required disclosures that must be executed, if you want to make sure you stay out of jail. 

Yeah, I know more about sub2’s in FL that most of the gurus advising it. 

I would Rarely recommend to seller to do this. 

its this exact attitude that sub too is so dangerous..  no equity  buyer with no compunction to just walk  seller gets screwed.

its not so easy to just give it back.. LOL.. you could have renter or lease squatting that takes money and time.. I have seen people do this model and totally fubar sellers one guy was really bad and got 3 years in prison..   I just cringe at this..   geesh.  

Originally posted by @Ned Carey :
Originally posted by @Montray Wilson:
 they would pay $1300 for the rent until they can buy. That’s $410 per month,

 No it is NOT $410 a month. you have left out all expenses other than taxes and insurance. Typically operating expenses other than financing payments (P&I)will be about 50% of the rent. 

What about repairs, I don't care what you lease says, as a landlord you are legally responsible for repairs. What about vacancy rate, turnover cost management costs, licenses, taxes and accounting for the business, capital expenses for significant repairs etc. 

Are you aware most Lease options do not work out?  How long is it going to take to get the first lease option tenant? Can you cover the costs for that month or two? What happens if that tenant doesn't work out and you have a vacancy?  A sandwich lease option, which is what this is, is one of the most risky strategies in real estate. 

PS

I will have an agreement to buy house for $120k. Which is $10k on the sale. What do you think?

You are leaving out transaction costs. There are a lot of costs in real estate that are not obvious but are non the less very real and kill a lot of deals.

YUp I did a bunch of these over the years lease to purchase probably over 100 to 150 of them its a glorified rental.. I can count on one hand the amount of folks that actually bought..  I just cringe when I see people think they can set this up like they are going to create a win for the buyer.. the buyer simply never executes if they can buy they go buy a new construction house that is all nice and new not some old rental.

@Jay Hinrichs I understand what your saying , but if your a buy and hold investor you can have the same thing happen. But here I have 6k to 10k upfront to help with what concerns you. And once again Sub 2’s are not Illegal! The deed and the note are two different things. I can’t understand why people want to take all the risk, if they don’t have to. In the contract we give the seller the option to have the house deeded back to them if we don’t deliver. ( which is just deed the house back to them from the trust.) but we will deliver! we are not cercern if House sale fast or slow, because we have money on the front of the deal and cashflow until house sells or note payed off by renters.
@Nelson Del Castillo thank you for the support, I’m working with someone who has done a lot of these, but wanted to get some feedback on BP. It’s good to hear from different views points. So far we have an answer for every question. But maybe someone will bring something up that I can’t answer. Or haven’t thought about before. I just want to thank everyone for their input! It’s been great!
@Daniel Kurkowski I don’t have much experience with them either, but I’m working with someone who does. I just wanted some feedback from my BP family. So far I havent heard anything that scares me. But im not done listening yet. I’m patient .
Originally posted by @Montray Wilson :
@Daniel Kurkowski I don’t have much experience with them either, but I’m working with someone who does.

I just wanted some feedback from my BP family. So far I havent heard anything that scares me. But im not done listening yet. I’m patient .

 Awesome, I'm glad to hear you have some help on that front.  I am definitely not trying to be a hater, I just wanted to help provide any perspective that I can to set up a BPer as well as possible for future success.  I wish you the best on this endeavor and hope to hear the success story later!