Subject To and Owner Equity Deal Structuring

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  • Hello Folks,

    I’m in the process of closing a sub-to deal and I’m a little worried that I may have structured it wrong. I wanted to reach out for feedback and ideas.

    I have a property under contract with a seller with the following details.
    Purchase Price: $113,700
    1st Lien UPB on House: $80,000 @ 4.75%
    ARV: $199,900
    Repairs: $30,000 to bring to full retail
    Monthly PITI: $652

    Seller has agreed to allow me to take over payments on the underlying loan and I’ll be giving him a $16,000 down payment due to him at closing. Our contract reads that I’ll be making a Note/DOT for his remaining equity balance ($97,000 – Loan UPB). After reading up on sub-to seller finance wraps, I’m beginning to wonder if he should be receiving an all inclusive trust deed and note for $97,000? We also agreed to a 1 year balloon payment due for his equity and bank loan

    Are there better/more creative ideas with which this could have been structured?


    Are you buying subject to an $80k mortgage plus giving him $16,000 cash at closing? And that’s it.
    Or have you agreed to give him additional equity within a year?

    I always prefer to wrap the underlying loan. But you can buy subject to also.

    Either way, the one year balloon kills the deal. At the very least, you need a clause that you could pay him an extra $500 for an extra two years. Don’t lock yourself into a one year balloon with the current unstable economic conditions.

    What’s your exit strategy? Hopefully, you do not plan to spend the $30,000 to fix it up. It would be better to sell it as-is to an investor or owner occupant. You could provide short term seller financing that wraps your underlying loan. Of course, if you have a balloon on the original deal, you will need a shorter balloon on the wrap.

    Always avoid balloons.

    Hey Jackie – thank you for the detailed response. This is exactly why I posted this one – to get feedback at this level.

    The contract has the buyer taking over payments of $652/mo on the $80k loan.
    The seller will receive $16k down at closing, and another $17k on the back end when the balloon is due. There is no interest due on the $17k.

    The wording in my contract is a mix of taking over subject to and providing the seller with an AITD. I need to improve my understanding of both scenarios.

    My goal with the deal structure and balloon was to create a low dollar entry into the property with low holding costs because I knew the rehab was going to be expensive. The owner wanted the underlying loan pay off time frame spelled out in the contract and did not want to leave it open ended.

    The exit strategy is A. Wholesale the deal to another investor. B. Take title and list on the MLS as-is or C. take title and complete the rehab/resell at market value. There is approximately $35k to be made net before income taxes when I complete a the rehab calculations.


    Hi Jay

    It is very risky the way you have this structured. A $35,000 profit potential assumes that the market does not change and you don’t have any hidden repairs that could drive the costs up. You also need to factor in holding costs including insurance, electricity, gas, permits, etc.

    A better way to structure this would be to get an option for $96,000 subject to the $80,000 mortgage.

    Then sell for $120,000 with a highest bidder sale for the highest down payment offering seller financing for not more than 12 months. The seller gets the first $16,000, you get everything over that. Because the house needs so much in repairs, you might not be able to get $16,000 upfront for a down payment.

    The buyer is most likely to be an investor who will fix it up then sell it or refinance it to keep it as a rental. You need to leave enough equity in the deal for your buyer to be interested. You would wrap the underlying loan. Charge an interest rate that is high enough so you’d get cash flow while they are doing the repairs.

    With so many repairs needed, there is not enough skin in this one to pay the seller an additional $17,000 later. You need to renegotiate the price.

    Always try to minimize risks. You can do that by getting an option instead of buying the house.

    READ THIS ARTICLE — it is a similar situation

    Thanks Jackie – I’m trying to recondition my brain to stop only thinking in terms of debt-leverage!

    I have been listening and studying Jack’s Options seminar. I’m grasping the concepts but I still struggle with the mechanics. I get the concept, but would love to find/read/listen to something with a few more details

    I read the article you posted and it confused me- did your daughter take title to the property and wrap the seller financed 2nd around the initial seller’s 1st?

    I’m brainstorming here and would like your feedback –
    If we were to wipe the slate clean on the deal I have going, what could have been done different?

    1. Negotiate a pure option with a lower strike price. Sell my option to another investor.
    My interpretation of this is exactly like wholesaling a contract.

    2. Obtain an option on the property for X price subject to the existing $80k loan, like you mentioned. There is verbiage in the option containing that the seller gets the first X dollars over the existing loan UPB, and I keep everything after that.

    3. Structure the deal as I have, but without the 12 month balloon. Minimum 3 years and a best case of no recorded documentation on when the first lien would be paid off. (Seller was adamant about a timeframe for pay off). Would an all inclusive trust deed to the seller be a better way to wrap the 1st lien in this case or just a note/DOT for his remaining equity?

    4. The seller wants to back out of the deal. I have offered him 2 choices. Pay me $1000 and I’ll void the contract or pay me nothing and grant me an option for 1st right of refusal to buy the house for the next 15 years.

    Thanks so much for the fast replies and detailed responses. I’m learning a lot in this.

    The $35k profit mentioned was after accounting for all expenses – Cost of capital, Repairs, Taxes/Insurance during hold period, holding costs, Broker commission on the sale end, Legal/Closing costs, and an 8% fudge factor for unforeseen and market moves. There is also an adjacent lot that I have planned to split off and sell on terms and this is outside the $35k/Numbers I have mentioned. My thinking was a $35k profit for a $46k investment was a pretty good return, but again, that is using debt as leverage and not thinking in terms of Options/Minimal Risk.



    A couple of quick thoughts:

    1. When doing your FIRST S2 deal, partner with a VERY experienced investor who you know and trust. Yes, you’ll give up part of the profits and/or cash flow, but you gain all their years of experience and know how. What you gain is of far greater value than what you are giving up.

    I get 1 to 3 calls a month from investors whose S2 is blowing up on them. As Jackie pointed out, it’s usually because the investor over promised (balloon) and under delivered (didn’t make on-time payments or pay off the S2 mortgage when promised).

    2. Kim and I – and this us just our way, there is no “THE” way – never sell our S2 deals via a wrap. We choose to stay in control of the deed.

    We’ll lease and give an option or a purchase agreement, but we will not wrap the underlying.

    3. Master S2s. When we have a down turn, knowing how to buy a property S2 a 3.5% S2 will be very valuable knowledge.

    4. Most inexperienced investors who attempt to do their first S2 on their own mess it up: Insurance, deed, balloon, etc. This often leads to many headaches.

    Bill Cook

    Thanks Bill !

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