My first potential sub-2 deal...need input!

General Real Estate Investing
1

I came across what seems like the perfect Sub-2 deal.

Seller is retiring, losing money monthly, and wants out on a home with $100k mortgage remaining with Midland Mortgage. She’s willing to sell subject to the existing mortgage. House needs work but is worth about $200k fixed up. It’s in an urban area and NOT a potential fix-and-flip. End buyers in this area are not ideal candidates for conventional mortgages.

What do I do next?
How do I find out if this loan is assumable?
How can I get an end buyer to assume the mortgage, pay me an assignment fee,
but not disclose that assignment fee to the seller?

My goal is to find an end buyer who’s willing to put down $40k and assume the monthly payments of $1,600.

2

The loan won’t be assumable. That’s a non-starter. Forget the wackos that say there’s some obscure, unknown “law” that makes all loans “assumable.”

Read the seller’s loan docs, to confirm it’s not assumable.

Just because you ‘can’ buy a house subject to its loans, doesn’t mean you should…

You’re asking for a 20% down payment (based on the stated ARV), and someone to assume a loan, on a fixer?

This is not gonna happen.

I would add 25% to the price I paid, and market the property as a ‘sweat equity fixer.’ I would ask for 10% down (based on the sales price, not the ARV), and offer no-qualifying financing.

I would finance the buyer for 60-months, at 8% fixed, on a 30-year amortization. This way you’re likely to get a small spread on the payments, a spread on the equity, and cash up front.

Again, forget the assumption and getting 20% down. Who’s got 20% down AND the money to fix this dump? All of the sudden you’re looking for a buyer who’s got say 40% to put down on an ugly urban fixer.

I wouldn’t bet on it.

This deal is not going to be profitable because the loan is assumable. This deal will be profitable because you’re offering bargain financing on a fixer. Two different things.

That’s it for me.

3

javipa,

Great points, but let me add some additional info:

Yes it’s an urban area, but this is a 6bed/2ba colonial home. It’s a big house, in DECENT condition with current tenants occupying the home. My point being, it still a unique property although it’s in an urban area.

I’m asking for $40k for a buyer who otherwise doesn’t have an option to purchase a home due to not qualifying for a mortgage. This buyer makes good income, maybe owns a small business, may be a contractor, handyman, etc - and raising a family in an apartment and now he has the chance to move his family into a large home.

If I add 25% to the price like you suggested, I would have to buy the property. I’m not interested in purchasing the property at all or receiving 8% returns b/c I need my capital for flipping.

So it comes down to - can I find a buyer with $40k in available purchase money to assume this $1600/mo mortgage rather than paying rent. Once this buyer moves in, he would be willing to fix the ‘handyman’ repairs needed. This isn’t a junk home in a junk area.

Does that change your perspective on this deal at all?

4

Not really. It doesn’t change my mind.

The loan’s not assumable. That torpedoes the entire strategy from the get-go.

Just for giggles why do you call this a potential sub2 deal, and then talk about assigning an assumable mortgage?

It makes no sense.

There are no assumable mortgages.

If you want to offer to find a buyer for the seller, then offer to find a buyer for the seller.

There’s a couple ways to approach this…

  1. Tell the seller that you’ll find her a buyer to take over her debt, and pay her equity over time. Your fee for doing this is $40,000.

She either says “OK, deal!” or she says “You’re out of your mind!”

If she says, “OK, deal!” then YOU agree to work your butt off finding a buyer that will give you $40K, and relieve the seller of her negative cash flow.

You wrap the seller’s equity and loan balance(s) together into one note, and provide the documents to structure that deal, and then monitor the buyer, on behalf of the seller, until the buyer finally pays the seller off.

If the buyer defaults, you repossess the house on behalf of the seller, and find a second buyer with $40K to put down, and continue relieving the seller of her debt obligations. You agree to cover payments during the repossession. Why? Because you have $40,000 in profits off the first deal, so you can afford this service.

  1. (The way I would do it.) YOU buy the property for $x dollars, no down (at least 10% below retail), take over the seller’s first loan payments, create a second for the seller’s equity, and then resell the financing with “EZ” qualifying, on whatever terms you can achieve (ie: At least $40K more than you paid; asking $40k down; 8% interest; 30/yrs amortization; all due in 60/mos.

These are the only two options I see on this deal, where you could possibly conceive of getting $40,000 from a buyer and not have to take out new financing.

The key with either of these strategies is NOT giving the seller a down payment. Why do that? She’s losing money. You’re solving her problem. She’s getting her ‘net’ equity anyway, at some point, too. So, “no down” for you. :biggrin

5

javipa…you are a brilliant man :biggrin

First off, need to correct myself - I said ‘assumable’ but what I meant was taking title subject-to the existing mortgage (I realize now ‘assuming the mortgage’ isn’t proper).

Secondly, your option #1 is exactly what I meant to describe, but obviously I did a poor job. :banghead

Option #2 is a no-go. Mortgage (5.5%) + property taxes are $1,600/month and I’m just not interested in purchasing this lien for $100k.

So back to option #1 - ‘repossessing’ the house in NJ would require evictions, court, and a lengthy process that I’d have to monitor until the equity is paid off. How would I monitor it? How would I know if the buyer defaults? Would the eviction rules change for a ‘buyer’ who put down $40k and fell behind on payments vs. a normal tenant? Is this a common structure that I can bring to an ‘investor-friendly’ attorney and put together?

And lastly, is there a method of doing this without the seller knowing that I’m being paid $40k to put this deal together? I haven’t confirmed that I can attain $40k for this house, but it’s a reasonable estimate.

6

What is the price you’re willing to pay?

How much money are you giving the seller?

7

I’m willing to pay…nothing.

This deal is worth nothing unless I can find the right buyer to agree to the right terms. I’m aiming for $40k, but it may just be $5k or nothing at all.

They’ve agreed to have someone take over the mortgage payments and IF I find a fee for myself, I don’t want it disclosed to them.

8

OK, put another way…

Give us a schematic of the deal. Right now, the bottom line numbers aren’t clear.

  • What does the seller still owe? $100k?
  • When is the seller’s loan scheduled to be paid off? In 2020?
  • What is the property worth in it’s current condition?
  • How much equity does the seller have today?
  • What is the end/user buyer’s effective purchase price, including his $40k down payment?
  • Is the seller wrapping his equity and existing loan balance into one note, and ‘assigning’ that to the end/user buyer?
9

Seller owes $97k

Purchased in 1997 for $150k. Approximate pay off…30 years…in 2027.
(I haven’t confirmed details, it’s not easy getting seller to dig up info)

It’s tough to say, I don’t know. This isn’t a typical market with qualified buyers and the house needs work. And there are almost no comparables. There’s a similar home on the same block listed for $199k that just went under contract after 150 days on market. However, I dont know the interior condition of the house and I’m not willing to wait 150 days to sell a home.

Therefore, maybe this house I have is worth $140k, but who will buy it via mortgage in its current condition? Probably no one. Therefore, it’s worth the amount I can sell it for. And I’m aiming for $140k to the ideal buyer who has cash/income/credit but won’t qualify for a mortgage.

Equity in an urban market is hard to measure. I don’t have an answer to this. I’d assume this house has $40k equity, because at $140k it’s a fair price for a large home in this area.

Take property subject to existing $100k mortgage + $40k = $140k purchase price

Seller is open to any suggestions I have. My goal is to find a financing option that works.

I realize these aren’t the answers you may be looking for. I’m usually very accurate with my comparables and equity estimations, but in an urban area, there are other factors that make it difficult to evaluate equity in a property.

10

OK, that’s a clearer picture.

First off, asking $40K down is a non-starter …unless…

…the house is actually worth $200k and the buyer is capturing a $60K discount.

Shoot, I’d buy this deal for cash. Forget the down payment crap.

Meantime, if this house is worth closer to $200K, then it would be much wiser to sell it the following way, which a repeat of what I’ve stated earlier:

Sale Price: $220K
Down Payment: $22K
Balance Financed $198K
6%, 60/mos, over 30yrs, all due in 60/mos.

This way, you’ve captured $60k at time of purchase and created another $20k as a financing premium on the resale, totaling $80K in equity profits; all realized within five years. And all just for financing somebody.

Frankly, not knowing the comps is an amateur’s mistake. You’re effectively shooting from the hip, when you don’t better know the comps. That’s a gambler’s approach.

Meanwhile, you can bet that your buyers will know the comps. And professional investors will certainly understand the comps, or at least make informed valuation judgements, based on other criteria …including demand in the area.

And that’s somewhat to your advantage in that if you get an option, to find a buyer, or take over the payments, or otherwise, get in between the seller and end/user buyer to make some money, the length of time to find a buyer, and the feedback from your buyer’s themselves will give you an excellent indication of which way you need to adjust.

But you kind of have to pick the buyer to market to:

  1. Investor, or 2) Business owner

P.S. The current piti doesn’t seem out of line with a house that’s worth $200K, but it doesn’t seem atrocious for a house that’s only worth $100K.

Frankly, if this place was worth $150, in the mid-to-late nineties, it’s worth at least that much today, regardless if it’s tired looking or not.

Again, you don’t know your farm well enough to make solid, sure decisions. And this is tripping you up.

P.S.S. …If you were to finance a buyer, as an owner, and not as an ‘assignor’, and that first is scheduled to be paid off in less than 13 years, the principle reduction will go to your bottom line, not the original seller, or the end/user buyer. Why?

Because you now own the house, and the existing financing is now yours, and the end/user buyer’s amortization schedule is twice what yours is. So, you get to keep the accelerated equity pay-down.

So, if you simply decided to finance your buyer for 10 years (not making the original seller any promises of when they would be paid off), you get to keep/capture the accelerated equity pay-down. Why not?

You may have to lower the interest rate, or add a pre-payment penalty to the loan, to discourage the buyer from refinancing earlier. I don’t know.

OK, if I say more it’ll be too complicated sounding.

11

I don’t understand what you mean by “60/months, over 30yrs, all due in 60/mo”. What’s due in 5 years? and how?

So this is what you meant by wrapping equity + loan balance. I don’t see a clean way to do this. I’d have to find a buyer who would be OK with this complex method of financing, along with his attorney not killing the deal, along with the seller being okay after everything is disclosed. It’s not happening. Not to mention, if this buyer with $20k downpayment defaults,
I’d have to go through the eviction process which is no cake-walk in New Jersey and will take months. And I’ll get sued in the process, by the seller, for ‘scamming’ her into this complex ordeal.

It’s not that I don’t know the comps, it’s that I don’t trust an urban market where everyone will be an FHA buyer. There’s a similar house on the same block under contract for $200k. I just spoke to the agent and he said to buy it at $100k easy. Fix it and sell it for a deal at $175k. But I don’t want do to tie up my funds in an urban area.

End buyer is definitely a business owner / owner occupied type of person. Not an investor. I agree 100% that it should be worth $150k today based on its price in the 90s.

I like your overall methods. However, it seems far too complex for me to maneuver for one deal. And I’ll get sued along the way. NJ laws are very pro-tenant.

I’d only be able to do this deal if it’s a quick in and a quick out with no money tied up.

I think taking the property subject to it’s existing mortgage + giving me a $40k fee is ONE option. Second option is to whole sale this deal for a smaller finders fee ~$10. Third and last option is to buy it cash, clean it out, spend maybe $20k on cosmetics and resale for ~$160-175k.

I’m interested in doing a sub-2 deal, but not if it means I’d have to monitor the note for the next few years and risk being sued if the new ‘owner/tenant’ defaults and refused to vacate the place.

12

I may have been repeating myself on th 60/mos deal

I mean finance a buyer using a 30yr mortgage, with a five year balloon.

You’ve got to get “tenant/buyer” out of your mind when thinking of what I’m talking about. You’re NOT renting out a house. You’re SELLER FINANCING it to a buyer who is treated as an OWNER. Why?

Because you’re seller financing a buyer using a Land Contract, not a lease/option.

No tenant/buyer will give you 10% down, as option consideration, much less $40K down.

What I’m talking about works in NJ. It doesn’t work, however, if you don’t believe it will work. Just saying.

I do this type of deal regularly, but on houses more than twice this price point. The reason sellers and buyers don’t react the way you’re afraid they will, is because I am confident in what offering them.

I also show sellers what I’ve done. I also know how to present a house to the ‘right’ buyer, so that I can sift out the bargain hunters, and the low-down default victims in the making.

Let me just say that 95% of (it could be more!) of lease/optionees don’t close. Why? Because they’re not real deals that are just disguised long escrows.

With a long-term Land Contract (installment note), where a buyer gives me a 10% (or bigger) down payments, the buyer’s rarely default. They just don’t. Why? 1) Because they’ve got too much to lose. 2) If they can’t refinance me in time, I just continue financing them, until they can. 3) Default is MY choice, not theirs. I can be a flexible as I need to be, in order to salvage a given buyer.

It also helps to have a legal sledge hammer at my disposal, and that I’m not escalating a given situation to the point that we end up in different corners of a ring…

I’ll pm you the resource I use to do what I’m telling you is possible.

Meantime, if the seller is already telling you that they’re interested in letting someone take over their loan, why can’t that person be YOU? I don’t understand?

Of course, you’re not just taking over their loan without actually getting the title. Otherwise, you can’t administrate the loan. And you can’t seller finance what you don’t own (or control the title of). So, a title transfer is just standard operating procedure, if the seller wants out of her debt obligation, and negative cash flow.

You asked some comprehensive questions. I’ll shoot you a link to the answer I have.

13

javipa, thank you again for your detailed, expertise replies.

I think anything too creative on this deal will…get me sued.

So, as you stated, I’m working to take over the payments myself.

I’ll take over the $1,600/mo payments. Fix up the place for maybe $20,000 then sell the property for $200k or so, within 6 months ideally.

I’ll post updates here as they come.

14

this deal works as a subject to if that is how you want to run it.
you get to slice and dice this deal anyway you want it.

if you want to take it as subject to then that just means you are committing to seller you will make those payments and stay in control of making those payments.

now how to exit? you can sell lease option or owner finance. both allow you to ask for down payments. I found if i had the right property in the right area i could get the down payment i wanted.
i alway prefer lease option because it give the would be buyer the feeling that they are in control as owner but if they stop paying you you simply go to eviction court. with owner finance you actually have to go through full forfeiture which is a real pain.

you have a good deal on your hands not just a normal crappy subject to that is worth a 100% of what is also owed on it.
your exit strategies seem endless on this one.

15

Well just updating - I closed on this house last week.

I’m responsible for the payments now.

I have a dumpster this thurs to empty the house and rip out the carpets.

Then I’ll just relist on the MLS and see who bites as-is.

It’s walking distance to a synagogue, so I may find a buyer quick, and
if that buyer needs to update the house to qualify for a mortgage, then
I won’t mind doing the work.

Hoping it’ll be a quick flip!

16

Would it not be a consideration to transfer the property into a private trust, where the only asset in the trust is the property, subject to the mortgage, and then have a written contract for terms on the acquisition of that private trust?

Banks do not necessarily see ‘red flags’ on an existing mortgage when property is transferred into a trust; that is a normal financial planning tool.

Herein might be a format to pursue a ‘subject to’ transaction.

Hope this helps.

Rob

17

If the investor continues to make pmts to the bank there should be NO reason they want to exercise the DOS clause. A trust can actually hinder a Sub 2 since it hides the transaction of sorts.

Any updates though, OP?

18

how does a trust hinder the sub2 transaction? placing the property into a trust is fairly common, and provided its done correctly, i don’t see how that hinders it. all my sub2 deals are done using a trust, never had a problem. maybe i’m missing something though, i dunno. :rolleyes

inve$t: is the seller current on all the payments for the house? you say the house needs work, how much work is needed to bring the value to 200k?

i’m going to give you the same advice i gave another dude recently on another post who took the advice and made some nice money. go the path of least resistance and don’t complicate the deal. asking for 20% down and expecting to sell quickly and make some money is delusional. not gonna happen.

don’t get greedy, work the numbers, and if everything is current, and repairs to house aren’t too much, offer it to the public at discount for cash, make your money, move on and go celebrate.

don’t over complicate the deal homie.

19

I am doing a sub to now. How are you doing your closing through a title company or on the table?