Thoughts and experiences with subject to deals?

Question

Hey BP family!

I’ve been watching a lot of videos/ podcast and reading a lot about “Subject to” a lot of it has been Pace Morby and others. It has sorta caught my eye and want to start getting into that type of strategy!

Also With everything going on in the world right now I’ve been noticing a lot more people talking about it. Was curious to see what more people think?

If you have any thoughts or have any experience with doing deals “Subject to” I would love to hear your thoughts and stories! How’d you get started?

Does it have to be in Pre-Forclusure? What kind of contract do you use? Etc..

Thank you! :)

Paul Fagot · Answer

So my thoughts on it and the idea of everything go like this please let me know if I got anything wrong.

I get a property with little to a lot of equity, all numbers make sense, and get it under contract (A contract that's approved by my attorney), go to the title company have them do what they do, I pay the owner some money/ expenses plus pay off the default amount (if there's a default amount) and have them move out, remodel it (if needed), if not then move someone in for a year or two, build more equity and collect the cash flow. (payments would not be missed because that's my responsibility and a promise I made the seller in the first place) I could either do a lease option as you said with a downpayment or sell it in the future? Are you even able to sell it? I don't think it would be a problem since, in the end, the lender would get their money back is that sound right or the general idea?

Paul Fagot · Answer

@Barry Pekin thank you for your input and help!

James Wise · Answer

Paul give this thread a read - "Subject To" Real Estate Investing is Slimy. Prove me Wrong.

Barry Pekin · Answer

@Paul Fagot,

That sounds pretty good.  Each deal's likely to have some nuances that are different.

You said "a little to a lot" of equity.  Subject-To is usually going to make sense where there's only a little equity.  If there were a lot, you'd have to take on the mortgage and also pay the seller a lot more, or ask them to carry a note where you would be paying that monthly, too.  Certainly a possibility based on what works for the seller.

As for being able to sell it, absolutely.  When you bought it from the seller, you got the title, so you own it outright.  Of course, the bank still has a lien on it due to the mortgage, so when do sell it, you're going to have to pay that off.

Barry Pekin · Answer

@Paul Fagot,

Banks are not fond of Subject-To deals.  In fact, the typical financing contract has a "due on sale" clause that says when the property is sold, the entire loan comes due.  In practice, however, I've never heard of (1) a bank realizing that the property was sold, (2) caring, since they're getting paid, or (3) exercising that clause.

Some people only do Subject-To for a short time while they work out another exit clause.  Some use it as a longer-term solution.

I think a bank would care if interest rates started to really climb.  If rates were up 5% over what most of their loans are out at, it would be worth a lot of money to them to seek out properties that have been sold and call the loan due.  Right now, the rates have been going the other way (down), so there would have to be a drastic reversal on rates for that to happen.

Paul Fagot · Answer

Thanks, @Barry Pekin Yeah I'm trying to figure out if the best way is to contact the lender of the motivated seller if they're interested in that type of deal structure and talk with them first to see if they're okay with that before getting it under contract or not. Or if that's even an approach to take.

Barry Pekin · Answer

@Paul Fagot,

I haven't done much with Subject-To other than kinda watching it.  I do know a number of people who use it quite a bit.  One guy who runs a local REI meetup does this almost exclusively.  Another person considers it to be one of the tools in her toolkit, and uses it when it makes sense.

The property definitely doesn't have to be in pre-foreclosure.  It's more a tool that can be used when there's not too much equity in the property.  You can get the property, rent it out, and have that rent cover your expenses, including the seller's mortgage, and make a nice little profit each month.  That rent can be a lease option where the tenant pays a deposit for the option to buy it outright in a few years.  It's a nice creative solution where a standard wholesale flip doesn't make sense.