Creative Sub2 Deal

8 Replies

Alright so I'm on the precipice of taking on a Sub2 deal that is just tricky enough for me to question if I'm able to pull it off...

Lis Pendis has been filed already.  The home is in arrears by about 11k, and has a total payoff around 196k.  It's worth about 196 as well, so little to no equity.  Mortgage is $1140, and market rent is around 1300-1400.  Ocwen is the lienholder and is willing to restore the loan to good standing if it is brought current.  I'm in Okaloosa County, FL.

The seller wants to stay in the home, so we disqualified short-sale as an option. But the 11k in arrears makes it too thin for work for a sub2 (at least for me) and too risky if the bank calls it DOS or continues foreclosure. But the father is willing to help.

I'd like to front the 11k in arrears, and recover it as a note personally guaranteed by the father, secured by a second position lien on the father's home. I'd then take the delinquent home Sub2 the Ocwen loan, and rent it back to the current owner at slightly above mortgage payment (1250). The father could co-sign on the lease to give me an alternate method to collect payment. The seller wants to buy the home back down the road, so the tenant situation is fairly ideal as long as his income doesn't tank again (divorce and job loss are the initial hardship reasons).

I'd also like to incorporate into my financing agreement something that states that non-payment of rent by the seller would result in non-payment of the mortgage, mitigating my risk in the mortgage. If the seller chose to move-on, I'd just put a new tenant in.  The home is in fantastic shape.

What concerns should I have here? Should I worry about originating a 11k loan to the father? Is there more risk of the bank triggering DOS if the loan is in foreclosure? I'm not an agent, but one of my team members is a licensed realtor. What foreclosure protection law concerns do I face? I plan on having a lawyer review my paperwork and process prior to closing.

Am I just making this too complicated for the limited benefit?

@Bill Gulley curious to your thoughts on originating a loan like this .  I don't think I'm triggering any red flags, but I've never acted as a lender before.

Well, you are funding a consumer loan, taking a secured position in an owner occupied property, so the first question to your attorney should be to your compliance requirement under Dodd-Frank.

You also have issues with a buy-sell arrangement being viewed as another financing arrangement with the occupant of the subject property. And, the IRS may not buy your claim as to buying an investment property for depreciation and expenses with a buy-sell.

If you actually have the cash to bring the loan current, I don't see the bank barking about getting involved with their foreclosure process, but......that property is now on their radar screen and they won't be going with a Sub-To, slim chance IMO. If you did not have that financial ability to perform, getting involved with an on going foreclosure should not be undertaken by anyone who does not hold proper licenses or extreme RE experience.

There is no up side as to the purchase price. Long term appreciation is about it as well as the principal reduction and that is going to take time to be worth the brain damage and risks.

All you might have is rental income. While you may think you can raise rents to that occupant, keep in mind, they are the folks who couldn't pay the mortgage at a lower amount. I'd bet daddy was there then too, so his guarantee may not really mean much.

Without more specific details. this isn't an investor deal, more like charity with risks of getting nailed in financing and tax matters. I'd pass! :)

Thanks for the input, it is a whole lot of risks in an area I'm unfamiliar, without a whole lot of upside. You're right, it's become more and more a charity service to keep this guy in his home, which adds additional problems in itself.   If the owner concedes to leaving, then maybe this is viable, but probably not. 

@Brian Gibbons

@Bill Gulley

The only sub2's with arrears I have done (a while ago) had at least 3x equity vs arrears and the seller moved out. Not even counting the legal and DOS problems @Bill Gulley !

@Christopher Morin Completing this transaction will provide you inspiration to write a book entitled, 'The Lazy Man's Way to Poverty'.

Minuscule upside, lots of risk, exposure to consumer fraud and slim chance of owner-turned-tenant performing. 

Can you make mortgage payments while you are evicting tenant? While he delays via serial BK's? 

At least you have loan servicer OCWEN to rely on their legendary friendly, helpful assistance.

What else you got?

@Brian Gibbons

@Bill Gulley

  As for the why you would do this... I understand you get into  property with little out of pocket and get to get in the game so to speak..

however reality is no equity sub too is not a great investment unless your in high appreciation type markets  big metro areas of the West coast etc.

this I have a ton of experience at pre equity skimming laws.. Sub too owner rescue I am going to buy the house back one day.. NEVER works... these folks have not paid mortgages for a long time usually and its a pattern of bad behavior that just does not get solved with a second chance.. you will very often be evicting them shortly.

If all of the above is legal and can work out and your just thinking hey I can break even and have my tenant pay this house off for me over the years.. then I get that.. But be prepared to fight with the current owner tenant down the road... And usually much quicker than later.

I have had them work out but I would say less than 10% of the time and I did well over a hundred of these in the early 2000 and I can count two that actually bought it back and only because a relative gave them the cash to buy it back.. the rest defaulted over time as I stated..

@Rick H.

  you made me laugh !!!  your statement about Ocwen and of course your drilling down to the reality of the transaction.

when the mortgage crisis hit and short sale teams were being put together I thought I might do one... Well my first transaction was with Ocwen... and it was my last.. they are the WORST...  LOL  put me right of doing short sales....

@Rick H.  You are right, it is a pipe dream thinking this guy could make higher-than-mortgage payments.  He has resolved his issues, but not to the point where it would work.  He only makes 2500/ mo or so working a government job, so 1250 in rent would be half of that, not ideal. 

You all are right, I was looking to see if I could get into it with little to no-risk and at a minimum capitol investment and make some equity gains from principle pay down and potential sale back to the owner.  Problem is, the cards are stacked against things being profitable here.

There are significant risks here, mostly stemming from the fact that this is just not a great deal to get into.  Thanks for your inputs everyone.