How to Structure a "Subject-to" Offer
Ok, let's say you have located a seller who is highly motivated to sell a particular property.
Using your "Check List for Leads" form, you ask the seller focused, specific questions about the most essential criteria of the deal. After questions are answered, you see the following scenario.
3 Bedroom 2.5 Bath
After Repair Value $260,000
Purchase Price: $195,000
(6.5% int, 30 yr fixed - price is sellers payoff on existing loan)
Repairs Zero Seller had it fixed up already.
Existing Mortgage Payment: $1232.53 (existing payment P&I)
Taxes $2500
Insurance $900
PITI $1515.86 (your actual cost per month with Principal, Interest, Taxes and Insurance)
Keep property location in mind, when thinking of your exit strategy. If property is on astreet that is predominantly rental, it may not be wise to plan to retail the property to anowner occupant. When you have a deadline such as a balloon or a note that will haveto be paid off at some future point, like in 24 months, your exit strategy must be realistic.The seller is motivated and said that he would consider any offer that would get thesepayments off his back. He has a dead beat tenant in another property and can't make two payments.In this case, as with many "subject-to" offers, we are only offering the payoff, which is $195K.
The potential advantage of making an offer "subject-to" the existing mortgage is financial. You will not have to qualify for a new loan. You will save thousands in loan origination fees, points, etc. that you could have to pay in conjunction with a new loan. This improves your potential profit margin.
We decide we are willing to offer the seller his payoff, if he is willing to agree to sell,subject-to his existing loan. If the seller is truly motivated, the fact that you can close a "subject-to" very quickly can be a big selling point.
In our example, the seller agrees to the "subject-to" arrangement, but saysthat he wants this loan off his credit within 24 months. At that point, the buyer must cash the seller out by getting new financing or selling the property.
Some sellers will be smart enough to ask for "perks", like a cash down payment. Other sellers will be too motivated or won't think to ask for anything down. You have to go with the flow of each deal.
When we write a "subject-to" offer, we want to be as specific about our agreement and terms as possible.
The contract form that I use for writing offers has plenty of space on page one, near the blank where you enter the purchase price.
The form used is not important. To be binding, any offer to purchase real estate must be in writing. But there is no standard form. Contracts range from the generic variety that you can buy at the office supply store, to the official forms approved for use by sales agents in your state.
The form that licensed sales agents use, has a "stipulations" section. You can put the terms of your offer in the stipulations section of your contract, or on page one if space permits. It does not matter, as long as the correct terms are spelled out somewhere. The seller could decide to counter-offer, mark out your stipulations, change them, or add new ones.
Below are some clauses that I would write into this offer:
Purchase Price: $195,000 "Subject-to existing mortgage of $195,000, with payments of $1232.53 per month, principal and interest. Buyer agrees to pay off existing mortgage anytime in a period not to exceed 24 months from date of closing of this agreement."(these are the basic terms of our agreement)
"Buyer to purchase adequate insurance protection valued at or above the purchase price of property."
(you want to have insurance anyway, but I like to put this in to make the seller feel more comfortable)
You want to be clear about any and all terms of your agreement with seller. It may be very simple, as in the example above, or there could be other terms that you and the seller will negotiate and agree to.
When negotiating, you will not always be able to discuss terms with a seller prior to making an offer that is "subject-to" their existing mortgage. But, if the seller is not willing to discuss the situation and is not forthcoming with information, then chances are you are talking to the wrong seller. Those who are truly motivated, or have a problem they need to solve, will usually be willing to get into a meaningful discussion of the details. If a seller is difficult to deal with, chances are they are not that motivated.
I don't waste a lot of time in such cases. I explain to sellers that I need certain information in order to determine if there is a way that I can help them. Otherwise, I move on.
Your most likely source for creative deals are those who really need to achieve a specific, sometimes urgent objective, like getting out of debt, or avoiding foreclosure. But there are many reasons for doing a creative deal.
There is nothing really complicated about writing "subject-to" offers. You just need to be clear. It is essential that the language is not confusing. Your objective in writing the offer is to dictate the terms of the existing mortgage. In so doing, you are stating how much you are willing to pay, and how you intend to pay it, and when. Think of the "who", "what", "when", "where", guide to writing, when documenting the offer.
I have also done "subject-to" deals with sellers who were not in financial trouble, but just the opposite. There are sellers who will consider "subject-to" offers because of the tax benefits for them. I have had sellers who did not want to collect a large chunk of cash all at once. Or, a seller who does not want to collect the funds in a particular tax year. "Subject-to" offers can be used to address many different kinds of issues.
We tend to associate creative financing with desperation. And in many cases, sellers are desperate. But in some cases, a "subject-to" deal is merely the most beneficial means to an end for both parties.
Every situation and offer are different.Writing creative offers is a skill that you will develop with time and experience.***
NOTE: This article is intended only for general information purposes, and should not be construed as legal advice.If you need help filling out a real contract, please see your favorite real estate attorney first!
The Departed