Subject 2 On Narrow Margin Deals
I have an opportunity to pick up property subject 2. However the loan amount is pretty close to FMV. The PITI payments would pretty much be the top end of market rents, so holding the property is not really an option. Because of the narrow margin, I think that a LO would also be pretty difficult.
Has anyone worked in these scenarios where they have put such a property under contract and then assigned the contract? How easy/difficult is it to find buyers in this scenario? If I assign it there are no other costs, so as long as I have the appropriate escape clauses there is no risk, right?
If I am missing anything please let me know.
If you sell on a Contract for Deed you are becoming the financier for your buyer. because you are in essence offering no qualifying financing, you should be able to get an interest rate higher than market would be for someone with good credit. Tthe sale price could be increased slightly to bring it closer to the value when they get the property appraised in a couple of years to bring in their own financing and fulfill the terms of the CFD with you. You should be able to make a small monthly profit, and a nice profit on the back end when they cash you out. You should be able to make 10-15k on the deal depending on the property values in your area.
There is never "no risk". You can limit your risk, but never remove it completely.[ Edited by jeff12002 on Date 11/30/2004 ]
I believe that you've misunderstood me. Do a google search for "all inclusive deed of trust" and read up on that subject. There are also a few good courses available on "Subject 2" investing besides this forum. You should really understand the concept fairly well before you attempt any of this. Spend an hour or two a night for a fews days, and you'll gain alot of knowledge. Several of the questions you have will be answered by doing this. I realize that I'm avoiding giving you a direct answer, but I don't think that I can give you as thorough an answer as it would take to answer you properly. I will help clear things up when I can, but a course can do so much better a job of training you.
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On 2004-12-04 22:20, Marcher wrote:
Thanks for the response.
So, there is already a loan on the property. My thought was to simply assign the contract. Are you suggesting that I could give the lender the loan, have them pay me, and I pay the seller's loan. I could make a spread on the payments, so to speak?
That's not quite how subject to and seller financing works. You are getting confused, which could be dangerous. But, the idea is, you have a contract on the property. What kind of contract? An option to purchase at a later date? Do you have a contract to buy subject to the sellers loan at a future time? You don't ever give a lender a loan. They are the lender and by definition lend money. What the method subject to refers to is that you contract with the seller of a property to give you the deed to the title subject to any existing financing, or a fancy way to say that if they give you ownership of the property you will make the payments on their behalf to the lender. Then you sell the property to a buyer and you become the lender, setting up terms, downpayment, and a rate that are greater than what you are paying, keeping the spread as your profit. Or you may lease the property to a tenant with the option to purchase the property at some future date with payments that are greater than the PITI taxes and insurance that you are paying, and the future option price being greater than the actual payoff that you will owe on the property, the difference being your profit.
But if the current seller's loan, and my loan to the new buyer are essentially the same amount, that would mean that liens against the property would be 180% of FMV. That seems pretty strange, but I can't think of any reason why it would necessarily be a bad idea.
Not quite, The lender has a lien on the property, not you, you would be doing a wraparound or a cfd or a lease option.
The other idea that I had was to assign the contract, and if the buyer did not have much of a down payment I could take the assignment fee (or most of it) in the form of a second mortgage.
Why? Do you have any idea of the statistics of collectability or the actual percentage of default of this type of arrangement? Don't get too desperate to make a deal, you don't want to get into a hole before you even stop. There are plenty of deals out there. Just because a seller is motivated or even desperate does not mean the deal is good.
Good Luck, Shawn(OH)
As Jeff said, research a little bit about sub2 before trying this deal--here's my opinion why:
You were thinking of taking the property sub2, which means you are telling the seller you will pay his mortgage payments for him in exchange for the deed, but the loan is staying in his name.
Now you're thinking of assigning that contract to another buyer, which means you're putting your seller's house and credit in someone else's hands. Which means that, basically and not to offend, you lied to your seller--he may have trusted you, but he wouldn't know your buyer from a hole in the wall.
I guess as long as your buyer makes the payments (or brings cash/financing to the table to close the seller's original mortgage), this would work, but ethically it doesn't feel right to me.
Also, at least with my minimal RE training, assignments of contract are usually done between investors. Unless you can find another sub2 investor who will honor your contract with the seller, I don't think you'll find a buyer that quickly--rehabbers, flippers, etc. won't touch a low-/no-equity deal because the margin's too thin. As I said, another sub2'er may take you up on it, for a small assignment fee, as long as you didn't promise the seller a lot of cash.
You could take the deal sub2, then sell on contract for deed, rather than try to L/O, as Jeff suggested. You get the deed, the seller leaves, you sell the house with some downpayment and a 2-year balloon loan from you to your buyer with payments high enough to cover your obligation to your seller. After 2 years, your buyer refi's and pays you off, you pay off the original seller's mortgage and keep the difference. This is obviously a thumbnail sketch that hopefully will pique your interest enough to do some research on the whole sub2 process.
Good luck!
Andy
Andy, thank for your input. I will update everyone at a later date, but I wanted to address the ethics issue.
Firstly, the contract obviously had an assignment clause, which I distinctly pointed out to the seller. I did tell the seller that as an investor I would be looking to move the property, and may use the assignment clause to do so. They said that was fine, but I am sure that is based more on not wanting to lose the sale rather than actually thinking about the pros and cons.
I would personally feel a lot more comfortable doing a contract for deed (wrap around mortgage right? OK, I get it now), and will most likely take that route. Thanks for pointing out that option, it hadn't occurred to me.
Thanks for the input, I will update later on.