by: William Tingle

Today’s topic is deal structure. I have had numerous questions about it so in the interest of giving you guys the information you need to get some deeds we are covering it today.

So…how do you structure a sub2 deal?

First, let me say that when you talk about deal structure you can be talking about a lot of different things. Deal structure can mean a step by step of how you put the deal together…this means from the time you pick up the phone when the seller calls you to what contracts are best to use, how to handle insurance, taxes, how best to deal with the bank to get information, do you need to use a title company or close it yourself, right down to handling negotiations with the seller.

Deal structure can also mean evaluating the numbers and the actual property itself. Things like location, condition, number of bedrooms and baths…to make a decision on how, and even IF, the property can be utilized in your overall investment strategy. For example, if the interest rate is too high to make sense for cash flow but the property has good equity, maybe it should be a get the deed then retail flip deal. If there is not a tremendous amount of equity but the property condition is good and the interest rate on the loan is really good and it is in a great neighborhood where families want to live, maybe a get the deed, sell it with seller financing is in order. Or you could even rent it out or lease option it if that is your thing.

For our purposes of talking deal structure today, we are going to be talking about the latter and how to figure your best exit strategy based on the numbers and the property.

I am also going to be sharing with you the thought process I use in determining if I am even going to take the deal at all…or not. No, I don’t take every deed that is offered to me and you shouldn’t either. Don’t make someone else’s problem your problem.

If you have been following me for a while, you already know I am not interested in a rental, a rehab, or a lease option (buying or selling) at all. I am only interested in deals that will allow me to add another home run down payment, grand slam cash flow, monster backend profit seller financed property to my portfolio. Period. This is a change I made in my business about 9 years ago and it is all I do today.

Several years ago I made a decision to simplify my business and that is exactly what I did. When you simplify it makes your life much less complicated and I have found it to be much more profitable. Today my business conforms to my lifestyle and not the other way around.

So…on to deal structure.

First, let’s briefly touch on the basics of subject to…

When you buy a property subject to the existing loan, what you’re doing is asking the seller who has a property with a mortgage on that property to transfer the title or deed the property to you. They sign over the deed…you take over the property and you start making payments on their existing loan. You’re not going to qualify for that loan, you’re going to take over the loan payments, taxes and insurance for the property.

Now, if you are like me, you’re plan will most likely be to go out and find someone to buy that property from you with seller financing. They will give you a down payment and make payments to you every month. At some point, we like the 3 year plan, they will refinance at which time the seller’s original loan will be paid off and you will receive your backend profit on the deal so in this scenario you would make money up front in the form of a down payment, monthly payments as cash flow and on the backend as a payoff.

Of course, you could also rent it out, lease option it, sell it for retail or even live in it yourself. You own it so you can do whatever you want.

So let’s say you find a seller who is agreeable with a subject to sale (maybe he has to move for a job transfer or is getting a divorce) and he has a property that has got a $150,000 mortgage on it with an interest rate of 4% and let’s say it’s worth 170k and we can sell it for 179k. Those are fairly common scenarios where the seller’s equity would barely cover a realtors fee to sell and selling to you will give them a much faster, more certain outcome. These deals are found every day. This house is in good shape and needs no repairs.

Based on the interest rate on the sellers loan, 4%…the equity spread I will have between my buy and sell price, 29k…the monthly cash flow I can get from this deal, $450 per month…and the condition of the house, excellent…my first choice is, of course, to seller finance.

But let’s look at all of our options.

As covered earlier, you can sell this deal with seller financing. You find a buyer and sell it for 179k and your buyer gives you 15k as a downpayment. Your monthly payment on the seller’s loan is $950 and your buyer’s payment to you on the loan you make to him is $1400 so you are making $450 a month in cash flow.

The interest rate on your seller’s loan is 4% and the rate you gave your buyer is 7%.

When your buyer refinances in a few years, you will receive a payoff of around 20k giving you a total profit on this deal of over 50k.

As you can see, a 50k profit on a relatively low equity deal is why I absolutely love buying subject to and selling with seller financing but as I said, you have other options with this property.

You could rent it out. The great condition of the house and no back payments to make up mean that if the rents in this area were say $1200 a month, you could get in with nothing out of pocket and immediately start collecting what appears to be a $250 a month positive cash flow. Remember though, as a landlord, you are responsible for repairs and one big repair in a year such as AC or water heater replacement and that 3k in positive cash flow for the year is gone.

You could also lease option this deal. Someone should be able to give you 5k as option consideration and you should be able to collect slightly higher than market rent so let’s say $1300 a month from your buyer. Now you have 5k in your pocket up front and have $350 a month in positive cash flow coming in.

Contrary what some people will tell you, passing off repairs onto a tenant/optionee isn’t always legal and while they may agree to do them, I always found when I got a lease option property back,  without fail there was deferred maintenance to deal with. Expect that to eat into your 5k up front and $350 a month you collected not to mention paying for any repairs that may happen while your tenant/optionee occupies the property. Still, this option is better than a straight rental in my opinion.

Selling retail would not be a good option with this one. Even though it is in good shape needing no repairs and has a great interest rate, there simply is not enough equity to sell retail.

Even if you were able to sell it FSBO, if you had to hold it for a few months before you sold and the seller needed any closing cost assistance, the cost to sell could be substantial,  leaving you with as little as a 5k or even less in profit.

That is just too much financial risk for such a small reward in my opinion.

Now, if this property had a horrible interest rate but considerable equity and even needed some repairs, it might be a candidate for a retail flip.

Let me give you an actual example of one of my deals from several years ago…

* I was driving around in a neighborhood one Saturday morning and had gotten a little lost so I was turning around in the driveway of a home in one of the nicer subdivisions in town when a gentleman yelled at me from the garage.

Just when I thought he was going to fuss me out for using his driveway to turn around he said, “Hey…you buy houses?”

He had seen the magnetics on my truck and my obvious response to his question was…uhhh, yeah.

He told me he needed to sell his house so I took a look. The carpets were stained and it needed interior paint but otherwise was in pretty good shape. I figured the houses in that area were worth around 140k in top shape but this one would need 10k or so to be in that condition.

He said he knew the house needed work and just wanted out of it. His wife had gotten a job transfer several months ago and left him to sell the house. He had spoken to a couple of realtors but they all wanted him to replace the carpet and paint the inside and he just didn’t have the money to do it. He only owed 88k to Bank of America but his interest rate was 13% and his payment was too high to use as a rental or make any money either on the front end with seller financing due to the repairs needed or monthly due to the high payment. The house did have equity but the only payday with this one would be the backend payoff and I just ain’t into delayed gratification when it comes to getting paid.

The higher equity and great location let me take the deed on this one and do a quick retail flip. I put a sign in the yard and within 1 week had a contract with a newly married couple for 105k. They were pre-approved for a home loan and because the repairs needed were all cosmetic the closing sailed through.

They got a 140k house for 105k and doing the repairs themselves for only 5k or so meant they got 30k in instant equity. I got a check for over 15k in just a couple of weeks and my seller sold his house. Win, win, win.

Remember, you can do anything with a sub2 deal that you can do with any other property. Subject to is simply a form of financing. A very, very good form of financing. You must look at the property and the numbers to learn how to effectively and profitably structure the deal.

Buying a property by getting the deed is an incredible tool to acquire real estate. When you buy subject to, you own the house but you are not on the loan. You do not have to qualify for a loan, you don’t have to have a down payment, you don’t have to have good credit but you still have total control of the property with actual ownership…

…and the great thing about these deals is it is so incredibly simple to pick up several of them a year.

I hope this has helped you better understand subject to and deal structure as it relates to planning your exit by evaluating the property and the numbers.

Would you like to learn how to buy houses subject to? Take a look at our affordable Group Coaching Program!

Join my private Facebook Group Coaching for a fraction of the cost of one on one coaching and benefit from a mastermind format with other investors!

William Tingle
www.Sub2Deals.com
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