How Would You Structure a Subject-To or owner finance deal with $22k Arrears?

Question

Looking for creative finance advice on a distressed FHA situation

I’m looking for input from investors experienced with subject-to, seller financing, or other creative finance strategies.

I’m reviewing a situation where the homeowner is in a difficult position:

Mortgage balance/payoff is approximately $288k

FHA loan at around 6% interest

Payment is about $2,200/month

Owner is approximately 10 months behind (around $22k in arrears)

Property needs repairs and has been difficult to sell

Traditional buyers are concerned about condition, and current offers are not enough to cover the mortgage obligations

The goal is to find a solution that avoids foreclosure and allows the owner to move on, while creating a win-win for a qualified investor if possible.

I’m trying to understand how experienced investors would approach structuring something like this:

Would a subject-to make sense if an investor brought the loan current and took over payments?

Would seller financing with a note and servicing company ever work in a situation like this?

How are arrears, repairs, commissions, and risk typically handled?

What would need to happen first : contacting the servicer, finding the investor, attorney/title review, etc.?

I’m trying to understand the best structure and learn from people who have handled similar distressed situations.

Appreciate any insight from those with  experience

Disclaimer I’m a licensed real estate agent looking for input from other investors experienced with creative finance. I’m trying to better understand possible structures for a distressed situation and learn from those who have handled similar scenarios. I’m not posting this as an advertisement or solicitation.

Vijay Friedman · Answer

@Tara MontgomeryTara, it sounds like the first priority is determining whether the numbers still work after curing the arrears, accounting for repairs, and reviewing title and payoff details. If an investor can make the deal pencil out, the financing strategy often depends on whether the plan is to renovate and resell or hold as a rental. Having the servicer, title company, and attorney involved early usually helps avoid surprises. Hope you're able to find a structure that benefits both the seller and the buyer.

Jay Hinrichs · Answer

I have done many many of these in SW Washington and Portland Oregon market .

first and foremost as stated any equity what's it worth if the current balance and the arrears and transaction costs ( your commish) exceed value then the only thing to do is a short sale.

If there is equity then its simply a math problem and one would very simply contact the foreclosure trustee if its in foreclosure and ask for a reinstatement figure being FHA I doubt there is a balloon.  Or if its not in foreclosure you contact the servicer and ask for the same info. Now they wont give you the info unless you have written permission from the owner. Or have the owner contact them and get the reinstatement figures in writing.

Then if the owners just want to bail and dont care about having their mortgage still active but they do not own the propery then you just negotiate how much they want to sign the property over you / or your client pays the arrearage to bring it current and off you go.

Now keep in mind there will be an alienation clause in the Deed of Trust or Deed to secure debt if your in GA.  as long as payments are made lenders rarely invoke their right to call the note but it is a risk none the less.

NO equity  short sale  or a hard pass.  equity figure out a number for them to walk and follow my insturction above.

Ryan Thomson · Answer

The $22k arrears is the part that kills the math for most investors.

To do sub-to, you're curing those arrears out of pocket on day one. That's not equity you're getting, it's just stopping the bleeding. Then you're taking title while the loan stays in the seller's name, with a servicer that can call the loan due the moment they figure out what happened. That's a lot of exposure for someone else's missed payments.

Owner finance with arrears is even messier. If there's an underlying mortgage, that lender has first position and they're not going to cooperate with a wrap structure. You'd need them to be paid off or you're stacking legal risk on top of financial risk.

The only scenario where touching this makes sense is if the existing loan has a rate worth keeping. If that loan is sitting at 2.75-3.5% from 2020 or 2021, curing $22k might pencil. A $300k loan at 3% is about $1,265/month. Same balance at 6.8% new is $1,960/month. That $695/month gap recoups the arrears cure in about 31 months. That's actually a decent trade.

But if the rate isn't compelling, there's no real prize here. You're inheriting someone else's problem without getting paid enough to own it. Pass and find a deal where the structure makes sense from the start.

Minna Reid · Answer

It doesn’t sound to me like there’s any equity in the deal or the seller could have sold this on the open market. The terms of the note don’t even sound attractive. Why would you want to buy this subject to, even if you could? I don’t see what’s in it for you? You would just be the new owner of the owner’s negative equity position.  Unless there is some outrageous margin between the owners payment and what you could get for rent I see no reason to pursue this. This guy needs a short sale.

Andrew Caranto · Answer

You're absolutely in the right ball park and these are the kind of situations that make seller finance structures, attractive. How much equity does the homeowner currently hold? That's a big piece that would change the terms you put together and generally get me thinking seller finance (more equity) vs subject to (less equity). You also say the property needs repairs. How big is the job and have you gotten estimates?

I can help you sanity check the deal with more of those missing numbers

Mike Grudzien · Answer

I don't have an answer, but I wish you success!

Stephen Quesinberry · Answer

Tara, I would only touch this if the after-repair rent still covers the $2,200 payment, the arrears catch-up, the repairs, and a vacancy. Sub-to with $22k already behind is a workout, not a bargain, and the 6% FHA note only helps if the property can actually carry that load.

Get the servicer’s reinstatement figure in writing before you structure anything, and price the repairs like a grown-up, not a best-case bid. If the deal only works if everything goes right, I would walk. Seller financing can be cleaner than sub-to here if they will actually paper the arrears and repairs in a way that survives closing.

Tara Montgomery · Answer

Thank you

Tara Montgomery · Answer

Thank you for your honesty I really appreciate it

How Would You Structure a Subject-To or owner finance deal with $22k Arrears?

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