What mortgage rate is TOO HIGH for Subject-to financing?

Question

Hey BP,

I want to wholesale using subject-to financing. The goal is to get the properties subject-to, then use a wrap mortgage to sell to a buyer (at a higher rate than the origninal mortgage being taken over subject-to) and make my money on the down payment, and monthly interest rate increase.

I was wondering, at what rate would the ORIGINAL LOAN have to be in order to make this type of wholesaling impractical.

Obviously, if you can acquire subject to for mortgages @ 4-5%, you can easily find a buyer who will agree to a wrap @ 6-7%. But if the subject-to mortgage is 10-15%...wouldn't that make using a wrap almost impossible?

Thanks BP!

Jordan

Account Closed · Answer

Just a perspective.  I'm not currently doing subject to deals, but I've done alot of them in the past.  In fact, I own a couple of subject to deals myself that I've owned about 15 years or so.  The interest rates on both of them are 9% and 9 1/2%.  I left the loans in place because I'm way down the amortization schedule....I have about 3 year to go until they're paid off.

In the past, most of the buyers for subject to deals were people with credit issues.  These days those people don't have a way to go...there essentially is no subprime market.  So one way to go is subject to if they really want a house.  If they really want a house, what do you think they would pay?

In some ways a worse problem is that some of these situations are underwater.  Meaning you can't refi the loan because the property won't appraise.  If it's just a question of the rate, your new buyer might be able to straighten their credit out in a couple of years and then refi and pay the subject to mortgage off.

It's all about knowing your market.  You don't have to wrap the loan and raise the rate. You can get a down payment, a second mortgage they make payments on, and have them take the 1st mortgage over subject to.  If the rates are high on the first, a really motivated buyer may want the deal anyway.  People are paying 18% on credit cards right now.

Just be careful with these deals.  There are alot of pitfalls.

Bill Gulley · Answer

Guess this junk never ends does it?

Do some searching, I'm not going through this every time someone get this idea or listens to that Kemp podcast, if that's what it was.

Much more involved and podcasts are not a place to get financing ideas, it's full of crap.

You'd have to re-amortize the principal allocations monthly as the interest rates will be different. no finance program I know of for investors, too sophisticated, but you can do it by hand, if you know how to use weighted average allocations on a per diem basis over the term of the loan. The underlying principal reduction must remain constant.

You can be in violation of federal law if you're off more than one tenth of one percent. You won't compute any interest rate disclosure correctly, you will miss the tax reporting requirements, basically, mistakes flow through where you'll end up with various issues.

I was under the impression that Kemp podcast was removed about selling with increased rates, among other issues mentioned. To my knowledge, he hasn't posted since I pointed out the legal aspects.

Sounds like a good idea, it's something done at higher levels of financing but beyond the scope of small deal investors. Just don't go there.

Sell subject to with one note and rate, you deduct your expenses. See an attorney.

Search for posts on that podcast

John Blackman · Answer

I'm sure it depends on your market, but most of the subject-to financing rates are around 7-9% in central Texas from the deals I have seen.  The underlying note is usually around 4-6%.  YMMV.

John Blackman · Answer

You should provide an amortization schedule to your subject-to buyer.  This should keep you out of hot water and clearly document when it will be paid off, so if you are ever in any doubt, just go to the amortization schedule you gave your buyer.

Jordan Archer · Answer

@John Blackman

Thanks for the help. I made sure my list included only homes with mortgages at %5 or less interest rates. Unfortunately, a large majority of them were adjustable loans, so that is a bit of a concern.

David Ward · Answer

@Jordan Redar  Here's a podcast with lots of valuable information on subject-to financing and wrap mortgage.

http://www.biggerpockets.com/renewsblog/2014/05/15...

What mortgage rate is TOO HIGH for Subject-to financing?

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