I have been approached by a friend with a deal (He has been doing mailouts and was contacted about it. Waiting to hear back on why he is not interested in the deal, but is most likely due to him having several other deals in the works that are tying up his cash…but I am not sure yet). I do not know much about the sub2 process so I have some questions:
So the deal: Agent/Owner/Investor facing foreclosure (on Sept 5) on renovated 1920’s Galveston House (on Seawall side) with Garage Apartment. Behind around $6k-8k - currently getting final numbers together. Main house comes already rented to owner’s friend for $600/month and owner estimates it could rent for $750/month and estimates $400/month for garage apt. (I am not sure what the payments are yet) I intend to lease these as vacation rentals (walking distance from beach) and expect to average more than that throughout the year. The current loan is an ARM and she is 5 years into a 30 year note at 6.75%. Principal is $97k and seller(/agent) estimates value at $115k-120k. I am unsure of the square footage and have only seen pictures of the property. Not sure how extensive the updates are (wiring, plumbing, etc) but cosmetically it is decent.
I don’t even know where to start on this. I expect to get some help from the friend who is passing along the deal, as he’s done several sub2’s. I just want to go into it knowing a little more about how they work.
What upfront costs can I expect besides getting owner current (in this case around $8k)? I plan on having the property inspected so that would be $500-$1000. What about a title search or something to protect me against unknown liens, etc? Is that necessary? Any other “closing costs”? I assume I begin making payments directly to the bank? That will include taxes and insurance? Any issues receiving insurance payouts when I do not “own” the property? How does an ARM work? When and how often does the rate increase? How can I get out from under the ARM with less than 20% equity in it when I can’t refi because I don’t own it?
Check the title yourself at the country recorder’s office right before you record your deed. ***See what I wrote at the bottom.
You ARE the owner of record when you record the deed, so refinancing will be based on your credit, and the value in the house, not the fact that you are not the original borrower.
Don’t make payments directly to the bank. Use a note servicing company.
Have note servicer pay monthly mortgage payment, insurance, HOA, and taxes directly to each respective party. Since you are not reselling the property, you’ll need to get coupons from the note servicer and make your p.i.t.i.hoa payments directly to the note servicer.
Meantime, maintain the original borrower’s insurance policy, add your name as additional insured, but convert it (if not already converted) to a landlord’s policy.
Then, obtain a new ‘landlord’s’ insurance policy in your name (trustee’s name, etc.) alone, and maintain both policies until you refinance or otherwise pay off the original loan.
Get all the personal loan information from the seller, so that you can administrate the loan without involvement from the seller in the future. Go through sub2 forum here for more posts on this issue. ss #, pin #, maiden name, loan #, copy of loan docs, etc.
You’re agreeing to take the seller’s position regarding responsibility for the repayment of the note, including making sure it’s paid ON TIME every single month, without any exceptions, E.V.E.R.
Putting a couple of payments in escrow with the note servicing company is a sure way to make sure there are zero hiccups on this regard as long as you instruct the note servicer to make the payments regardless of what receipts they get that month. The LAST thing you want to do is ding the seller’s credit with a late payment, AFTER you take responsibility for the loan repayment. BTW, the seller needs to have access to your note servicing account, too.
You’ll need to provide a HUD1 statement to the seller, so that he can prove sale of the property and qualify for another loan in the future. The seller may need to shop around for a bank willing to accept the HUD1 statement as proof of sale. Otherwise, be prepared to give the seller whatever docs the bank wants to prove a sale.
Lastly, I’m doubtful that the agent can (or will) participate with a naked ‘sub2’ deal.
***As far as title searches are concerned, if you are using a title company to close, they will do this automatically. However, they are also gong to charge you for title insurance. Most title companies I know won’t close you unless you are insuring the title also. However, I say ‘most’ not all.
I check the title myself usually, and simply get my deeds and docs notarized by the title officer without insuring the title. Then before I actually record the deed, I do a thorough check at the county recorder’s office. If anything shows up after I record the deed, it doesn’t count (other than tax liens). Be sure to ask the seller if there’s anything that is going to show up on the title, like liens, or judgments. Most sellers will be honest about this. Some won’t have a clue. Others will lie. The ones that lie, usually there’s something ‘small’. Don’t say no to a deal until after you’ve personally checked the title. Sometimes BIG stuff doesn’t get recorded like it should… Just saying. Even mortgages don’t always get recorded, believe it or not.
This deal is not going to happen, but that is very helpful because I do plan on tracking down and pursuing sub2’s. This one was just overvalued and due to the neighborhood has trouble as a vacation rental. It would work well as a monthly rental, but there are a hundred properties closer than 2 hrs away that would make good monthly rentals.