Does Sub2 Only Work With No Seller Equity?
Does a subject to deal only work if the seller has little or no equity in the house and is just willing to walk away from it?
How would it work if the seller wants cash? When/how would they get paid?
When/how does the seller get paid on a split equity arangement?
Thanks for any responses,
Adam
You can give the seller a mortgage/note on the property and pay in any manner that you agree.
Are you asking to the effect that you want to split the potential profit made in the transaction? If yes, I don't think that SUB2 would be your best plan of action, although I'm sure it is possible.
If the seller wants cash pay them. If it is a cash purchase then it is not a sub2 but a total cash sale where you pay off their mortgage. If you are paying a down payment in cash then it is a down payment with you buying the property subject to the mortgage. The only thing here is that you are buying the house or ? and not doing an assumption or paying off the mortgage, the seller is laeving the loan in their name and you agree to make payments. If seller has equity they can finance it with a wrap or second mortgage or you can pay cash. You are making it harder than it is.
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
"Does a subject to deal only work if the seller has little or no equity in the house and is just willing to walk away from it? "
You're pretty close. It works if for some reason the seller does not object to leaving his loan on the property. Most people don't want to do that for a number of obvious reasons. One situation where someone is willing to do that is where they are going to lose all they have in the property otherwise. This situation is typically one where the seller has very little equity and has fallen behind on his payments. His options are to leave losing his equity and having a foreclosure on his record, or go away losing his equity but with a little cash, not having a foreclosure, but having his name on the loan.
So if the seller has little/no equity and I buy the property subject to existing mortgage, now I have little/no equity, right?
I understand that I've bought a house potentially with nothing down and didn't have to get a loan or pay closing costs, etc, which is all good, but don't I inherit the same problem the previous owner had - a property that is worth X and a bank that is also owed X? I know that RE investors stress making profit on the buy - what am I missing with this strategy?
Yes - I think you've got it. If the prior owner had more than maybe 10 percent in it and was liquid enough to carry a few months payments, he would have been logical to sell through an agent.
It's not quite as bad as it seems. The prior owner is in toruble because he got laid off or something like that. He was living paycheck to paycheck and cant make his payments. You get to take the property subject to an "owner occupied" loan - which is a lower interest rate loan and didn't require a lot of downpayment. If you are in a rising market you got the house with no investment, and in a few years it will be worth more, all of which is profit if the rent covers the payments.
All of this is related to the old statement about a free lunch.
solarskier,
I hope your not confused up until this point because after reading some of the comments, I'm confused. I hope your not discouraged.
Anyway, lets say the people bought the house 6 months ago for 100k, and they owe 98k, payments are $600 a month.
worth: 100K
owe: 98K
you give them $200 for their equity.
You turn around and resell the property for 110K. Yes, you are raising the price of the property and selling for more than what it is worth. How can this be? The value of a house is determined between by an agreeing buyer and seller. Also, since you would be offering a non qualifying loan on the property, you are in fact, increasing the value of the property. Trust me on this one, it works.
So, you sell for: 110K
you get the following:
$6k from a down payment
$200 monthly spread because you charge $800 a month for the property.
and then, 24 months or so later, you get the difference between what the buyer owes you and the payoff on the orginal note....in this case, say it's another $7k.
Remember, there are 3 profit centers in a sub to deal, the down payment, the monthly spread, and the back end.
You got:
$6K from the down
$4800 from the monthly spread payments, $200 x 24 months = $4800
$7K from the back end when they got a new loan 24 months later.
Total profit off of this little equity deal:
$6K + $4800 + $7K = 17,800
If you charged an additional $50 a month, your profit goes up $1200 more bucks. These are the profit centers, play with them, figure out what you can get, and go after it.
nebulousd,
Absolutely correct!
Most of the time a person can average $25K on a no or little equity deal, when you know how to do it.
John $Cash$ Locke[ Edited by JohnLocke on Date 12/06/2003 ]
if you can get the seller to take a note on whatever equity they have, then cool. pay 'em off down the road, you refi or sell it.
Great Postings follow them to glory. Most of which are based on a rising market. Which may be occuring.
But hesitate a moment, listen to the other rider on the back of the Chariot.
Go back to the Seller, shake your head, and try to increase your position. Try to reduce any payment out in cash or creation of a note for future payment. Read the Seller with great care. I would feel a lot better if you increased your edge. Close is good and the three profit centers tinkle like magic bells and yes you can increase future worth by finding a highly motivated future buyer. But at this instant press a little more.
Understudy for Joe Bifsteak. Lucius
Here is the problem we are having is that the houses are not appreciating as fast as the closings. So we go to close using the above example:
110K sell price
4,800 down
105200
104000 appraised
how do you cover the 1200 difference? and explain the difference to the buyer?
Sire
good question sire.
& what if the t/b you put in the home looses their job & is unable to pay for a few months?
Quote:
On 2003-12-06 23:35, sire wrote:
Here is the problem we are having is that the houses are not appreciating as fast as the closings. So we go to close using the above example:
110K sell price
4,800 down
105200
104000 appraised
how do you cover the 1200 difference? and explain the difference to the buyer?
Sire
If I was the Seller I would just reduce my selling price by $1,200.00. I'm not going to lose my cashout over $1,200.00. So I only make only $16,600 vs. $17,800 in this deal...please don't cry for me..(haha)
sire,
When you are selling a property to a credit challenged buyer, then the risk factor is applied, example...
You are buying a new car, the advertisement reads "0% interest on all new vehicles" small print "for qualified buyers". Qualified buyers usaually means a FICO of 720, not always but this seems to be a guideline.
Now what happens is the new car buyer with less than acceptable credit pays thousands more for the same vehicle that the 0% percent buyer does. The risk factor is applied here also.
The question here is does the credit challenged person who winds up paying 21% interest and thousands of dollars more pass on purchasing the new vehicle, not likely ask any car salesman.
How do I explain the difference in price to a home buyer, I don't usually, they already know the answer themselves. If they wanted the current low interest rate they would be seeing the bank for financing not me.
Your house, your deal, bottom line. Always remember the risk factor.
John $Cash$ Locke
Let me clairify:
I am speaking of the closing where my t/b get there own financing. We have now have a few that did not appraise for original sales price. For the most part we just drop the difference. If we keep the differance in a second how do we explain this?
Sire
Hey John - you brought up something I have a question about: sales price to my buyer.
If I advertize a price for the house (acquired under a Sub To purchase), do I calculate it based on the 'No Qual, Poor credit OK" buyer who knows he has to pay more because I will sell to him in the first place? If a buyer with better credit comes along and wants to get a bank loan right out of the gate, then I am starting high and could tolerate a little downside negotiating to move up my back end payday. Does that sum it up?
I suppose negotiating the terms is always an option, even if the price stays the same. I think I read that in a book somewhere
Molotov
This is all great! sounds to me this would all work in a rising market. What about a deflating market where lots of houses are sitting and for rent signs are everywhere. the houses in my area are selling for 92-97% of asking price according to www.alamotitle-austin.com with 6000 houses listed[ Edited by WheelerDealer on Date 12/10/2003 ]