How would you structure this Subject To deal in Houston, Tx?
Houston, TX · Member since 2015 · 57 posts · 9 votes
I have this Subject to off market deal in Houston, tx:
Seller's Motivation: Needs to move to smaller house close to work place.
ARV: $185,000
Repair: $5,000
pending Mortgage: $135,000
Seller currently lives in property and willing to vacate ASAP.
All payments are current and no lien on property.
How would you best structure this deal? Whats the most suitable planned exit?
@Sandra Gibson am not talking about the purchase price at this point. Lets assume the deal has that much equity; I am looking at the way to structure this deal without the seller's attorney turning down the offer. Have you done a similar subject to deal with so much equity?
I have done sub2 deals with such equity. IMO you're unlikely to be able to negotiate a sub2 deal with an attorney involved. The seller would have to have circumstances that couldn't be solved by an immediate sale. The seller has plenty of equity and no extenuating circumstances. Any attorney doing their job is going to steer their client away from a subject to transaction.
IMO sub2 works best when it solves the seller's selling problem, not the buyer's buying problem. No cash to buy is a buyer's problem.
What would it rent for? Are taxes and insurance inline with 185K? Is the home energy efficient? Is it in a flood zone? Have you talked to the neighbors? Does it have galvanized plumbing? How much has the property appreciated since 2010? Is there room for soft or declining rent? Why would he give it up to subject to if he has equity in the property?
@Sandra Gibson I was just been conservative, ARV is actually $215 and Rent: $1,700, yes taxes and insurance are inline. Its actually a high end area on 77095 zipcode so all amenities are up to standard. It is also on high ground. Property appreciated by 10% since 2010; am not very sure about the rent....need to do more research on that.
The primary motivation for him is to be able to relocate without having to worry about the mortgage. He needs to move to a smaller house ASAP and doesn't need the proceed from sale in order to relocate. I suggested Subject to to the seller because I need to enter with little or no cash down.
Or do you think of any challenges?
If you can be in it at $140k and rent it for $1700 you will be cash flowing
@Sandra Gibson am not talking about the purchase price at this point. Lets assume the deal has that much equity; I am looking at the way to structure this deal without the seller's attorney turning down the offer. Have you done a similar subject to deal with so much equity?
No, however I went to a subject to close where the sellers sighed over there house with mortgage up to date and money in escrow, just to get out of it. They inherited a house in another state and needed carpet paint and appliances and didn't want to put the time and money into it. I think your the one who needs the good subject to attorney. If it cost you a $1000.00 for paperwork it would be more than worth it. If it has that much equity why wouldn't you want to partner with an experienced subject to buyer who has the knowledge and contacts to get the deal done.
Don't over complicate.
Take purchase price, say $150,000
$1,000 Down payment
$9,000 Purchase Money Note (secured by Trust Deed or Mortgage) payable X for Y years
$140,000 - Subject to existing 1st mortgage (approx balance, terms per lender's Note)
You could offer another few lines concerning progressive release of funds on certain events like possession, etc.
Also, you could offset seller's/attorney's concern about your payment of sub-2 loan by you giving performance trust deed that you will pay 1st or AITD Wrap of 1st and purchase money note to given them more control.
@Sandra Gibson am not talking about the purchase price at this point. Lets assume the deal has that much equity; I am looking at the way to structure this deal without the seller's attorney turning down the offer. Have you done a similar subject to deal with so much equity?
I have done sub2 deals with such equity. IMO you're unlikely to be able to negotiate a sub2 deal with an attorney involved. The seller would have to have circumstances that couldn't be solved by an immediate sale. The seller has plenty of equity and no extenuating circumstances. Any attorney doing their job is going to steer their client away from a subject to transaction.
IMO sub2 works best when it solves the seller's selling problem, not the buyer's buying problem. No cash to buy is a buyer's problem.
Don't over complicate.
Take purchase price, say $150,000
$1,000 Down payment
$9,000 Purchase Money Note (secured by Trust Deed or Mortgage) payable X for Y years
$140,000 - Subject to existing 1st mortgage (approx balance, terms per lender's Note)
You could offer another few lines concerning progressive release of funds on certain events like possession, etc.
Also, you could offset seller's/attorney's concern about your payment of sub-2 loan by you giving performance trust deed that you will pay 1st or AITD Wrap of 1st and purchase money note to given them more control.
Pretty hard to convince an attorney that sub2 and/or seller carry back is good for their client with a $1K DP. It looks like what it is, a buyer that has no cash. Without some major title, debt or repair issues (or a clueless attorney), this offer wouldn't fly.
The seller's only problem is not wanting to make any more payments. Negotiate an immediate cash sale price leaving sufficient equity to cover holding costs, resale costs and the rehab. Find a money partner, and close on it. Rehab and market and sell.
What I noticed being mentioned was "attorney turning down the offer".
I'd say your chasing a snipe here. Attorney has the power to accept or advise to have an offer accepted.
Every seller that is motivated wants out, doesn't mean at any price and you haven't tied down any price, so you're speculating on a hunch and speculating that the attorney will accept a deal that keeps his client's credit and finances at risk after he moves on.
That's a pretty big assumption to begin with.
I really don't think the seller's attorney would advise him on taking a 50K hit or taking a bath on the property, especially if it's in a nice area and is marketable. I just give attorneys more credit than that.
I've also know attorneys to buy houses, if the seller is willing to go there the attorney could just give him a better deal!
I've also found that attorneys, like Realtors like to "qualify" a buyer before going into contract........can you show the ability to put up a down payment and get a loan? You said you don't have the money, would it be prudent practice for an attorney to advise his client to sell to someone who doesn't have money? I don't think so.
I've also known attorneys and Realtors to make a small loan to put a property in top market condition, 10K on a 70K equity isn't a stretch.
I'm not saying this is impossible, but highly improbable in reality. So improbable that you're probably chasing a snipe and with no flashlight.
Texas doesn't use a specific "AITD" per se but a deed of trust written to wrap the underlying obligation just the same. If not done properly, a wrap mortgage can violate finance laws as the seller is extending financing and the amortization, if not matched, provides a different rate of interest than the wrap mortgage indicates as the note rate. Why many attorneys with finance expertise stay away from such deals. They can be done, but as simply as most think. But this concern is more on the seller's side and if that attorney is aware, the chances of then blessing a wrap deal just dropped some more.
I suggest you partner with a money guy since you might get some equity, or, partner with the seller, you make the repairs if you're qualified and then sell. Or, use transactional funds and flip to a real buyer. These strategies put a cash offer on the table that attorney can look at, the attorney might go along with repairs being made to increase the value and marketability.
My point is, in reality, an attorney will represent their client's best interests, not yours, asking for no money in, finance me and take a chance on a mortgage being called due or their credit being placed at risk is a little beyond prudent representation for any attorney.
Now, if you controlled the transaction, talked to the seller at the kitchen table to get your contract, things could be different, but this situation isn't in that reality. :)
@Sandra Gibson thx ...yes yes I need a good attorney and an experienced partner for this deal. I approached my investor friends and they all recommended owner financing instead. I will also consider that as PLAN B. Do you know any experienced investor in Houston that can partner with me to close this deal?
@Rick H. if equity were just $10k, I would rather pay the seller cash for the equity and take over the mortgage......considering the context, the $50k equity is non negotiable. Do you think you can convince the seller's attorney with $5k DP and $45k purchase money note?
I have done sub2 deals with such equity. IMO you're unlikely to be able to negotiate a sub2 deal with an attorney involved. The seller would have to have circumstances that couldn't be solved by an immediate sale. The seller has plenty of equity and no extenuating circumstances. Any attorney doing their job is going to steer their client away from a subject to transaction.
IMO sub2 works best when it solves the seller's selling problem, not the buyer's buying problem. No cash to buy is a buyer's problem.
I totally agree with you, this was my concern so I decided to see how other investors would structure this kind of deal. Are you suggesting that the best option is to not use an attorney for this transaction?
We might be unsuccessful with getting deeply discounted cash offer from the seller because he is a “make me move” seller. He doesn’t have any immediate need for the funds but he is ok with getting his FULL $50k equity now or later when we refinance.
My only concern is how to handle his attorney; I dont wanna do anything illegal and I dont want to be seen as taking advantage of his client.
@Sandra Gibson am not talking about the purchase price at this point. Lets assume the deal has that much equity; I am looking at the way to structure this deal without the seller's attorney turning down the offer. Have you done a similar subject to deal with so much equity?
I have done sub2 deals with such equity. IMO you're unlikely to be able to negotiate a sub2 deal with an attorney involved. The seller would have to have circumstances that couldn't be solved by an immediate sale. The seller has plenty of equity and no extenuating circumstances. Any attorney doing their job is going to steer their client away from a subject to transaction.
IMO sub2 works best when it solves the seller's selling problem, not the buyer's buying problem. No cash to buy is a buyer's problem.
I totally agree with you, this was my concern so I decided to see how other investors would structure this kind of deal. Are you suggesting that the best option is to not use an attorney for this transaction?
We might be unsuccessful with getting deeply discounted cash offer from the seller because he is a “make me move” seller. He doesn’t have any immediate need for the funds but he is ok with getting his FULL $50k equity now or later when we refinance.
Well, if the seller wants his $50K equity, regardless of when, that means you're paying market. No deal there.
@Sandra Gibson am not talking about the purchase price at this point. Lets assume the deal has that much equity; I am looking at the way to structure this deal without the seller's attorney turning down the offer. Have you done a similar subject to deal with so much equity?
I have done sub2 deals with such equity. IMO you're unlikely to be able to negotiate a sub2 deal with an attorney involved. The seller would have to have circumstances that couldn't be solved by an immediate sale. The seller has plenty of equity and no extenuating circumstances. Any attorney doing their job is going to steer their client away from a subject to transaction.
IMO sub2 works best when it solves the seller's selling problem, not the buyer's buying problem. No cash to buy is a buyer's problem.
I totally agree with you, this was my concern so I decided to see how other investors would structure this kind of deal. Are you suggesting that the best option is to not use an attorney for this transaction?
We might be unsuccessful with getting deeply discounted cash offer from the seller because he is a “make me move” seller. He doesn’t have any immediate need for the funds but he is ok with getting his FULL $50k equity now or later when we refinance.
Well, if the seller wants his $50K equity, regardless of when, that means you're paying market. No deal there.
Now you understand, why am seriously considering no money down....The property is in a highly desirable area so I intend to hold it and make it rental for 1yr; then refinance to pay the seller his equity. What do you think of this exit strategy?
So all in for $185K plus $5K repairs plus closing costs with rents maybe at $1700/mo? Not my kind of deal.
Texas is a special place for seller financing and you better have a great attorney: brainstorming offers here without talking to the attorney first is an absolute waste of time
If you're broke and can't afford an attorney then borrow some money to be able to get your LLC and sub 2 plus notes and wrap agreements that will work for you as a buyer
Excellent resources for seller financing and wraps in TX
Texas is a special place for seller financing and you better have a great attorney: brainstorming offers here without talking to the attorney first is an absolute waste of time
If you're broke and can't afford an attorney then borrow some money to be able to get your LLC and sub 2 plus notes and wrap agreements that will work for you as a buyer
Excellent resources for seller financing and wraps in TX
This is a forum to share your experiences, it doesnt mean they will be taken...how does your comment answer the question?: "How would you structure this Subject To deal in Houston, Tx?"
Read the comments very well, there is a difference between entering a deal with little or no money and been broke...I never said I was broke.
I think you missed the point of my post. You asked how to structure, not 'what to offer'
@Bill Gulley Is more familiar with TX law. I have all I can handle in Republic of California.
As seller who breaks the law to finance a sale is only at risk if the buyer is dissatisfied.
I thought you said the purchase price was $135,000 with $5000 in repairs that could rent for $1700, which is the numbers that would work. If you get involved with any deal its needs to be legal and profitable. Yes I do know an experience investor that could help you. It is easier to get in a deal than to get out. You need to foresee the future and prepare for the invevatable.
I think you missed the point of my post. You asked how to structure, not 'what to offer'
@Bill Gulley Is more familiar with TX law. I have all I can handle in Republic of California.
As seller who breaks the law to finance a sale is only at risk if the buyer is dissatisfied.
And a good point Rick, but not to pick but I can't let go of that last sentence.
Dodd-Frank also includes anyone "making" a loan, borrowers "make" loans when the execute the note, lenders provide loans, we also, by slang refer to a lender making a loan but it is the maker who makes it.
If you, the wheeler dealer, pro RE investor type convinces a seller to enter into a loan agreement you devised, make no mistake, your tail is flapping in the wind too.
People can agree to all sorts of things, they may or may not be legal, if the parties reach the conclusion desired, no muss or fuss, everyone is happy.....okay.
However, individuals unlike corporate entities suffer from what is called "life events" these are events that happen to individuals, they die, the go into a hospital or nursing home, they get divorced, they take bankruptcy, they get sued, they go to prison or they might even talk to someone like their attorney about something else and mention an arrangement.
These life events usually cause other eyes to begin looking at financial dealings, any life event can cause a financial matter. It's at this point when you can have two agreeable parties but someone else preys into what went on and discovers that their client got into a mess or in their opinion, messed over. That's when contracts and financial dealings unravel!
I've had to deal with all kinds of life events and usually someone else inquires about the loan and the deal. You better be right.
Problem is, you never know what can or will happen, just do it right the first time. :)
Are you confusing 'making' with "maker"?
If pushed, I'd argue the making of a loan is, in sprit, referring to the extension of credit. As in a seller who extends credit to a buyer via an installment sale.
Of course, attorneys who argue in Federal appeals court. Don't care to find out, tho'
I thought you said the purchase price was $135,000 with $5000 in repairs that could rent for $1700, which is the numbers that would work. If you get involved with any deal its needs to be legal and profitable. Yes I do know an experience investor that could help you. It is easier to get in a deal than to get out. You need to foresee the future and prepare for the invevatable.
It was easy to assume that's what the OP meant, given that we were told the loan value first. However, it's now revealed that the seller isn't motivated to take any less than $185K as his final payoff, regardless of when. The OP also indicates that the seller is looking for a "make me move" offer. Could the seller be less motivated?
The OP wants to get in with minimal cash and is looking for deal/offer structuring advice, but it's hard to get past the limited deal aspect here. All in at $190K plus closing costs on a $200K property just isn't that exciting to me.
Rules of the road in REI
Cash - no repairs needed- no more than 80% of good comps or FHA appraisal (think like a car dealer reselling car)
Cash - repairs needed - 65% ARV - repairs
Terms - no repairs - sub2- no more than 90% ARV
Terms - needs work - seller has equity - sub 2 - plus note, no payments on note, single payment due at maturity
Terms - pretty house, no equity - most of the time, lease with option to buy then assign for fee
@Account Closed
Are you confusing 'making' with "maker"?
If pushed, I'd argue the making of a loan is, in sprit, referring to the extension of credit. As in a seller who extends credit to a buyer via an installment sale.
Of course, attorneys who argue in Federal appeals court. Don't care to find out, tho'
Yes, I know it sure sounds like it. Dodd-Frank definitions; anyone who executes or makes......any maker of an obligation, they also refer to any lender in the same breath, that gives us a distinction between a lender and a maker. They aren't the same in that context.
IMO, the spirit of the law will fall to the wise guy who created the financial agreement, whose idea was this type of thing, who wrote this, the intentions, who devised and presented this financing agreement. They may not crush Harry Homeowner, they may go after the slick investor guy getting creative beyond his scope of understanding.
And I do agree Rick, even lenders say they made a loan today, common usage slang, depends on what you're really trying to describe. :)
I think you missed the point of my post. You asked how to structure, not 'what to offer'
@Bill Gulley Is more familiar with TX law. I have all I can handle in Republic of California.
As seller who breaks the law to finance a sale is only at risk if the buyer is dissatisfied.
Exactly, how to structure and not what to offer. My concern is how to structure a sub2 deal with that much equity without taking advantage of the seller. My question was: would you use the same structure that you used for the deal with $10k equity, for another deal with $50k equity? And no one is trying to break laws, I just wanted to know how investors would structure similar deals. Of course my attorney reviews all our contracts and he is opened to new ideas as long as they are in the book.