How We Structured That Subject-to Deal

Two weeks ago, our column was about a lady who, because of a divorce, was being forced to move back home to Mississippi.  Problem was, she owed a lot more on her house than it was worth.

In that column, I briefly described the seller’s situation and touched on the creative deal structure I used to construct my offer.  Since that column ran, I’ve gotten a bunch of phone calls and emails asking for more details about my offer and whether it was accepted by the seller.  

Today, let’s tie up these loose ends.

The creative deal structure I used is known as a Subject-to Deal.  This is where you buy the seller’s property, but instead of getting a new mortgage, the seller leaves her mortgage in place.  You agree to make the seller’s mortgage payments on the seller’s mortgage for the seller.  Think of it as a form of owner financing.

There are four things to know.  First, Subject-to Deals are legal – look at lines 203 and 503 on any HUD-1 and there it sits.  Second, in doing a Sub2 Deal, the borrower usually violates the Due On Sale clause in his security deed.  This means that the lender has the right to call the mortgage due.  Third, Kim and I have been doing Sub2 Deals since 1998 – and have never had a mortgage called due.  Fourth, don’t do a Sub2 Deal unless you know what you are doing.  Otherwise, expect a fiery crash!

This seller was $25,000 upside-down on her mortgage.  In addition, because her monthly mortgage payment was $200 too high, we couldn’t make it cash flow as a rental property.

Did we throw up our hands and walk away?  No way!  Remember, ALL deals are possible!  This doesn’t mean you have to DO every deal – just know that they are possible!  An investor’s job is to creatively structure the offer so it gets the other side to – or closer to – where they need to be. 

Another thought: When a seller is in trouble, picture the seller in a pit of quicksand.  I don’t mind helping someone out of the quicksand, but I won’t take their place in the pit!

Here is our offer to the seller: 1) She brings $20,000 to closing which would be immediately applied to her mortgage balance.  2) She pays all closing costs – including title insurance.  3) Each month, she is to send us a Postal Money Order for $200.  We’d combine her $200 with our check for the balance of her mortgage payment and send it to her mortgage company.  We would not send the payment until we received her $200.

In the end, the seller agreed to the Subject-to Deal, and to send us $200 per month.  Problem was, she didn’t have the $20k – or anywhere close to it – to bring to closing.  The deal died.

Here are the important things to learn: 1) We were out there putting shoe leather to pavement and meeting with sellers.  This is the Alpha and Omega of real estate investing.  2) After getting the facts, we didn’t throw up our hands and walk away. Instead, we put together an offer that would help the seller get into a better position and allow us to buy an investment property that will cash flow.

Hope this helps you to become a better creative deal structurer.

Bill & Kim Cook are a husband and wife real estate investing team. They live in Adairsville, Georgia and have been investing in real estate since 1995. They specialize in buying single-family homes, mobile homes and mobile home parks. They also run North Georgia REIA and teach folks how to successfully invest in real estate.