I am not the typical Sub2 investor I guess. Here is the situation. I have a close friend who is willing to sell me his house in the town I recently took a job in. Right now my credit scores are not in proper tiers to get a good rate. His rate is pretty good and here are the terms we have decided on.
His original purchase price: $127,350.00
Amount left on the loan: $121,900. His loan includes insurance and taxes of course.
He wants $2000.00 down payment + the monthly mortgage payment. He is willing to keep the loan in his name as long as needed until I can refinance, though we are both hoping for no more than 2 years and hopefully within 1 year.
He is in no financial difficulties whatsoever. He simply needs to move closer to his child and is willing to make a deal with me.
I guess the biggest questions I have are this: Is Sub2 the best and only option while the loan remains in his name? What is the difference between someone selling on contract and a Sub2 sale?
How difficult will insurance be? Right now his insurance is part of the loan, and I understand that the policy would be no good for me. Can I simply be added to the insurance? If not, would the policy in the loan still have to be paid + an additional policy in my name?
A couple things you stated above do not make sense. If your plan is to refinance in 2 years or less, than it’s not a sub2. A sub2 is if your friend were to keep the loan in his name, but you pay it. Then not to throw up any flags, you can have two different insurance policies. What you want sounds like a lease option. You lease it from him for 2 years, and then exercise the option to buy the place, and upon doing so get your own financing. You could also do a land contract, where you would purchase it after a couple years.
I assumed it would still be considered a sub2 since for 2 years it will be subject to his financing. He only wants his mortgage paid. When I can assume the loan with a decent rate, I will then refi and have it in my name. He will still have the mortgage…I will pay him…he pays the mortgage.
It’s a way for him to get out from under the house and a way for me to get into one. I guess you could call it a lease, but as far as I can tell, everything is the same with sub2?
sub2 is purchasing subject to the existing note, u r correct. However, that is on the other side when the investor takes it over from a seller needing out.
You buying on contract is not sub 2, however. It’s more like a lease/option but not the same. If u buy it on contract, it gives you equitable interest so u can, in essence ‘refinance’ into your own loan later. U will not assume his at that point. THis gives you 2 yrs to fix your credit, or just build 24 pmnts, on time every month. It should be paid thru a 3rd party however, such as a loan servicing company as they can verify pmnts when u need a letter for your new mortgage co, and they can compile the tax info for your taxes at year end. Since he is holding the note, and it is in his name, the insurance is fine. You need to get contents coverage.
This is what they call an executory contract. That is, the deed will not transfer until some future event. In this case, the completion of the contract. Depending on the state, it’s called a Contract for Deed, Contract of Sale or Land Contract. AKA Owner financing.
Essentially he wants a total of $3000 down. In most cases, most investors would want about 10% down so this does not seem like a bad deal from the outside. What will your pmt be? Will the purchase price be the loan balance as of now? If so, final price in 2 yrs will be lower and the market will hopefully be a little better so it sounds pretty good. Give more numbers info though.
Now, if you do this deal, you are not buying it sub-2, you are buying it on a contract (see above) If you bought it sub-to, the deed will be in your name at that point. You have the control. In your situation, he would have the control. If you are ok with that, then do it. Hope this helps.
So would he need to switch to a landlord insurance policy and then I get a rental policy?
His original purchase price: $127,350.00
Amount left on the loan: $121,900. His loan includes insurance and taxes of course.
What he wants down is $2000.00 only. I said 2000+mortgage payment, but I might have typed it in a confusing manner. I met 2000.00 + the mortgage every month. Not 2000 + a one time mortgage payment.
The payment total with taxes and insurance is around 1100 right now, which is within reason for what I am looking for.
I just want to make sure that all of of our i’s are dotted and t’s crossed. We aren’t using a realtor, so what would be the proper way to do this? Let me see if I can break this down.
Establish a contract. State in the contract the price per month(which is his monthy payment)
Have an inspector look at the house.
Have the contract notorized or whatever is needed once agreed upon
Get insurance in order
Pay the down payment
Is anything else needed if on contract? The insurance is my only big concern, but if it’s easy, I don’t see a problem.
Will the bank have a problem if selling on contract with a DOSC?
This is a simple Sub2 deal… If you need the agreement let me know… whether you need a contract or a trust either one I have. I would use a contract over a trust however there are those that wouldn’t.
And please don’t buy as a land contract or lease option… That’s wimpy…wimpy wimpy…
Get the deed transferred into your name and become the owner…
BTW be prepared to kill off a friend in the process… Not saying you will but just be prepared for the friendship to go south…
As for the home inspection… Will the result of it change your mind? if not why waste the money… As for insurance just go get your normal insurance policy. You may want to leave the existing in place or you may not…
And I have to say this as nicely as I know how which isn’t that nice…
With the simple questions youre asking and the fact that you are still confused either means we dont know how to answer the questions correctly or that this is way over your head.
I am thinking the latter and if so I would be concerned if I were the seller… Dont start investing in a method that you dont either know or have someone help you with.
Michael is right and don’t be offended by it - he’s trying ot keep you out of trouble and steer you right.
The bottomline is that you need to know and UNDERSTAND these procedures/methods completely and entirely or you will, (1) Scare the seller off or, (2) Get into legal/financial troubles.
That’s why I came here with the questions, because I don’t have all of the answers. I thought I made it pretty clear when I first started asking them.
To say any of this is way over my head is probably the truth, but so far, nothing has been laid out black and white. I am a network administrator for a very successful company, so my learning capacity is fine, trust me. I stated earlier that I don’t understand the ins and outs of the insurance side of all of this. So far I have not been given an explanation as to why I would choose one way or the other. First I am told my situation is not sub2…and that it’s a contract. next I am told it’s a very simple sub2. I don’t care what it boils down to in regards to the term we use. I laid it out pretty well I think. I just want to make sure I am covered if I were to have to make an insurance claim due to weather, injury, or whatever.
The seller and I have laid out some very blanket terms. He wants out…I want in. We agreed on the financial aspect as well. The next step is finding the best way to do it. I came here expecting to get a few answers, which so far has been helpful. I apologize if I am asking the wrong questions or not up to speed as well as you would like. Again I stress that I am just wanting to make sure I do things correctly and that neither I nor the seller get screwed.
After re-reading all of the posts in this thread I have determined that we will do the following:
I will purchase on contract for the price owed on the home + a $2000 down payment.
Payments will be made through a 3rd party to verify payment.(any suggestions here?)
After 2 years(or sooner if able) I will refinance the home in my name.
Insurance will remain in his name and I will pick up a contents policy which I expect to be 30-50 per month?
I understand that there is a little more risk involved simply because his name and not mine will be on the home.
Do you recommend getting a lawyer to draw up a contract, or is this a situation that can be accomplished with a notarized contract that we put together. Any contract examples you might suggest I use? MQ has something from what I understand.
Well heck I wouldn’t suggest you do any of those things…
Don’t mistake a agreement to purchase and deposit receipt for a land contract. And don’t waste your money on a 3rd party payment system. And get your own insurance. Record the deed for heavens sake. And I am not certain you’ll find an attorney who understands Sub2…
I would suggest you buy John Locke’s Subject 2 course for a grand or so and ask him to help you…
I just want to fill in here. Just to be honest I am new to this business as well but thought I might pass on this point of observation. Michael is trying to stress the fact that a true sub2 deal is one where the deed (ie… title) transfers to your name… and you are the owner. What you are talking about is far closer to renting for 2 years then getting a mortgage. The methods of insurance are going to be different in both of these scenarios.
You may think the terminology is almost one in the same but its quite different and the type of insurance to get is also different. I have not done sub2 yet but in my experience with lease / purchase / option the owner obtains a landlord policy. Just leaving it in his name may be very risky for both of you. I’ve been told that some insurance policy’s won’t cover you if you misrepresent. The seller’s current policy is an owner occ and if he’s not the owner occ it could be a violation of the terms… and you may not be covered if a tornado rips the roof off the home.
Anyway it sounds like if you proceed with your plan… then have the seller obtain a landlord policy and you can get a renter policy to protect your things in the home.
what MQ is advising you do is take the investor’s role in a typical S2, that is by buying it S2, getting the deed, having control of the deal and living happily ever after. If you do the other way, as I was explaining in my earlier post, you will be taking the ‘buyers’ route and your freind is the ‘investor’ so to speak. Which is not a bad thing, just not what an investor would do in a sub 2 transaction.
if u still want to go the way of buying on a contract, i would find an attorney that can handle an ‘owner finance’ transaction as that is what this boils down to. you need to get into a contract for deed or whatever your state calls it.
Get a purchase agreement signed indicating you’re taking it over sub2 at the price you and him agree upon
Send the purchase agreement to a real estate attorney who knows about creative real estate investing and tell him to set up a closing
The attorney will ensure everything needed is in place and is done properly (insurance, payment escrowing, etc). You don’t need to know all the details, and if your friend asks too many questions tell him “let me ask the attorney and find out.”
