subject-to and subprime ARMs

Hi all,

I would like to know what are the experienced investors doing with motivated sellers that are good candidates for a subject-to but they have one of these sub-prime ARMs that has either just adjusted or will be adjusting pretty soon and therefore the monthly PITI is too high to be able to cash-flow.

Are they just letting those go?

Any creative strategies to be able to profit with these type of seller?

I have been contacted by a couple of sellers with these types of mortgages but I have not followed up because of the high monthly payments.

Any advise/feedback will be appreciated.


I don’t see how they are good sub2 candidates. They most likely have no equity or are even upside down on their loan. Their interest rates are also skyrocketing and adjusting upward with great frequency. Other than the fact that they would sign it over without thought what else makes them good sub2 opportunities?

Hi Rich,

Thanks for the reply.

I should’ve said “willing to do a subject-to” instead of “good candidates for a subject-to”. I guess you are saying just move on to the next and forget about these ones.

Not saying to necessarily skip them based on being subprime borrowers but definitely weigh the major points of the deal and decide based on them, not the fact that they are simply willing to sign it over to you. 99% of the time you’ll find these deals to have no equity and high interest rates so this will tank most deals but look at them on a deal by deal basis.

I found a similar property that I just walked away from because the sellers wanted to stay in the property. It only seems to work when there’s equity and the sellers are willing to walk away, then you can just sell it.

It’s been a long time since I’ve posted or read this forum.
Seems to be active as ever, Tim’s doing a great job.

I read this thread, and wanted to mention something, perhaps others are not thinking about.

At the moment, as we all know, lenders are having issues, major issues.
Everyone is telling them, ‘work something out with your barrowers’.
Some are listening, many are not.

The thing is, you never know til you ask.

I do a few subject to deals here and there…:slight_smile: as a result of my marketing, we get leads all the time from folks who ‘just want out’.
Naturally, not all are good candidates to buy, as they have no equity, are not what I’m looking for etc.
Some are what you describe, have equity, are nice properties I’d not mind owning, but have high, or adjustable (usually high too) interest rates on their loans.
The thing is, some lenders seem to be willing to do workouts, and are open to suggestions.
All you have to do is ask, and frankly, what’s there to lose, aside from some time on the phone?

Let me give you an example:
I’m buying a house this week, (we took title yesterday, sellers move out this weekend).
Sellers were behind, as of October 1st, it will be 3 months, on two notes.
Interest rate on each is high, and adjustable…payments going up in November.
THE LENDER suggested to the sellers that they (the lender) might be willing to work with them.
The loans are 2-3 years old, and this lender has not been fun for the sellers…they still want to walk from the house.
BUT, if they can walk, AND avoid having a foreclosure filed against them, they are all for it.

So, with POA and auth. to release forms in hand, last week, the lender and I had a talk.
End result…
ALL arrears are being placed on the back of the loan, as a balloon payment, fees being waved, and, they are lowering the interest rate 2 points on the second, and 1.5 on the first, fixed.
Basically, a new loan agreement.
IF a payment is received by October 31st, 2007. (it will be, just not from me, I have buyers lined up as soon as the sellers are out, to buy on a lease option).

Sellers are happy, Lender is happy, I’m happy, and my buyers are happy.

All because I asked the lender, “what can we do to work this out?”
To which they responded with, “They can pay slightly more per month to catch up?”
And we said, “nope, come take the house then, or, you can give me other ideas”.

The lender by the way, or servicer, is Wilshire, they took over these loans from Argent apparently.

So, don’t throw those leads away, if there is equity, and the only deal killer is the loan terms, then try to change them.
Never hurts, and more and more, lenders are working with us.

I’ve got a local finance company that is sending me 60 day lates where the barrowers want to deed in lieu…and the lender does not want them.
So, I get the deed on the ones I like, the lender forgives arrears, and we resume payments as soon as renters are in place.
So far, he’s helped me buy 4 this way.

Keep your mind open, times are changin, and it ain’t all bad.

My two cents, keep the change,
Jim FL

I think it’s a GREAT question! My first thought is how high is to high on the payment? Lets say market rent is 900.00m for that area, but the payment is adjusting to 1300.00. That leaves 400.00 a month negative cash flow, but there is 25k-45K in equity. Do the subject to, get the deed and then turn around and do a lease option for 7500.00 down. Take the 7500.00 and keep it in a separate account, now every time they pay the lease option payment dep. Into this account and pay the whole mortgage payment from there. Now you break even, and you have 2700.00 to make the 1st payment yourself and 2 extra payments- just incase. When all is said and done you close and have 25k-45K in equity. You don’t have to really worry that the “tenants” wont pay because who would put 7500.00 dn to just sit there and not pay?

Jim, you’re a smart guy. Very good advice.

Most lenders will bend over backwards to keep receiving payments vs. foreclose. I hope you (the poster) can put his advice into action.

PS: Chase and Litton are also very agressive loss mitigators

How do you get that $900 rent minus a $1300 payment is equal to a $400 negative cashflow?


you are right, $1300/month payments, going out, and $900/month in rent coming in, does mean a $400 difference, or negative cashflow.
The thing is, the negative cash flow is actually higher, due to expenses etc, with relation to holding a property.

The simple way to look at the response, is this:

Monthly payments are $1300, minus rental income of $900/month = -$400.

Jim FL

Every house is a candidate for a sub2 purchase even with ARMs. I usually look for either high equity, or low interest. A combination is better of course.

If a house has high PITI but has lots of equity, I would still pick it up and retail it rather than sell it on owner financing. If it has little equity, then I would want low payments to at least pay for itself.

I understand the math part…I don’t understand why someone would make a post that the only thing that you need to worry about in relation to a rental property is PITI!


JIM…GREAT info !!! I’ve helped with loan modifications for people who wanted to stay in their homes, but never thought of trying it with those home owner who" just want out,"… but have the adj mtgs.

Most of us probably just look at the mtg bal, interest rate, when it adjusts,payments, arears, arv etc…if there isn’t a significant amount of equity, and it will not cash flow, we would probably pass.

In your experience, I see the bank was willing to reduce the interest rate by 2 %, and 1.5%, FIXED
Was the new loan agreement for the same term (30 yr )
Were you able to reduce the monthly payments so that the property would cashflow with your tenant buyer??

Yes, the length of the mortgage did not change, it was just a loan modification.
And yes, it cashflows with the tenant buyer in it now.
There are three profit centers in the deal, the upfront money, monthly cashflow, and the backend when it sells.

I’m working on a few like this at the moment, and one, where if the lender agrees to the terms we offered, the sellers will remain in the home, and keep it.
However, because I am helping them, they are passing out marketing items for me on weekends…which has brought two new deals in already.

There’s opportunity around EVERY corner, it’s just a matter of being able to recognize it.

Take care,
Jim FL

GREAT information! Thank you. One question… in the example you gave, did the lender know you were acquiring the property subject to? What about the due on sale clause? Any concerns/consequences?


No, the lender did not know I was taking the property subject to.
They knew I was now responsible for managing the mortgage account, and had full authority (in writing) from the barrowers to obtain a work out/MOD.

As for the due on sale clause, it’s not an issue, and never has been, the way I buy subject to.
The other thing, in this market, the lender rep told me on the phone ‘we will figure out something that makes sense and work with you, because WE DO NOT WANT THE HOUSE!’
Something I knew, and have heard before…just not as often as we are these days, direct from the lender.

Also, should for some CRAZY unforseen reason, the lender call the note due, there is equity, and it will sell for a profit…before the lender could get it back at F/C auction.
Tons of foreclosures are happening now, and thanks to this, F/C’s are moving slower thru the court system than ever before.

We are working a short sale now, seller is behind 8 months, and NOTHING has even been filed yet.
This was unheard of previously…usually, at 3 months arrears, the lender files L.P. and moves ahead with foreclosure…but not anymore.

Take care,
Jim FL