I am new here and also somewhat new to RE Investing. I have a question that probably most people already know the answer to: If you are doing a Sub2 deal where the owner has a substantial amount of equity, say $100K equity on $150K house, does the buyer make offer only for the existing mortgage, or the entire market value of the house? Many people with this kind of equity, might not want to do a deal just for the existing mortgage, so I need to know how to proceed. An owner that has little to no equity that wants out from his mortgage might do a deal much more quickly than the owner with substantial equity. Would appreciate any tips or suggestions.
Hi,
Subject 2 is the agreement to take over existing financing and price! So a property worth (FMV) $150k with an underlying $50k existing first would have a 2nd TD recorded for the difference between the existing 1st TD and the agreed sale price minus down payment!
Example:
$150,000 Fair Market Value
$15,000 Down Payment
$135,000 Agreed Purchase Price
$120,000 Carried in TD notes
$50,000 Existing 1st TD - Subject 2 existing terms and conditions!
$70,000 New Recorded 2nd TD in favor of seller @ x percent interest (Negotiated) due in x or xx years!
GR
The purchase price and the loan balance are technically two different things in any transaction, sub2, or not.
The final offer price you pay, depends on what you negotiate with the seller. This would include both the loan balance, and the balance of any equity you agree to pay.
The most common motivation for selling “subject to” is the speed, or timing of a closing.
You can pick a closing date, and there’s no possibility of a bank interfering. Another advantage is that the deal doesn’t depend on an agent’s involvement, or even a title company.
If you and the seller agree to terms, then that’s all you need to close. Yay for you!
Of course, that’s not all you need to administrate the transaction, but at least you can get to a closing without much else.
Besides the speed of a closing, you’re right that seller’s with little or no equity, are more likely to agree to a ‘sub2’ financing. After all, it costs money to sell conventionally, not every seller has that luxury at a given point.
Let me show you where and how it can be really profitable for a seller and buyer to do a ‘subject to’ deal…
Last year, we had a seller accept a note for 10% of his equity, and take a haircut on the balance, if we agreed to close before he had a full-on foreclosure action. We did, and so he did.
Meantime, the purchase price was $440, which included bringing the $390k loan balance current, which cost us $10k in back payments/fees, and a $40k seller-carried second.
That translated into a gross-equity profit of $60k. We flipped the deal for $550K, by offering ‘EZ’ qualifying financing, with $45k down payment. We created a gross equity profit of $110k with a front-end profit of $45k. No banks. Fast closing. No credit checks. No loan approvals.
That’s the true power of buying ‘subject to’ (and offering seller financing on nice homes). This does not work well on old, obsolete, say Nixon-administration era houses.
So, any deal needs to make sense on paper, ‘sub2’ or not. Taking over a loan, just because we can, could be stupid. It depends on the exit strategy, and back-end upside potential. Just saying
Anyway, that’s my 2¢.