A Sub2 Purchase with the Banks Blessing!


By: Steve MaGuire

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I’m not sure if this has been discussed before, but I thought it useful to document a recent transaction I completed.

An out of state homeowner contacted me about a property they owned in Atlanta. Essentially they just wanted out of the house which they had owned for the last 10 years. Originally from CA, they moved back there in 2005 and found a tenant for the property. He’d been paying $1,400 per month with an option to buy the house at the end of last year. Well he did not take the option because his divorce was not finalized and apparently he didn’t want to own any property just in case his ex started to cause problems. Not sure if she could, but I guess he’s not taking any chances.

The property owners wife contacted me asking if I’d be interested in buying the house as they were going through a divorce themselves, had not paid the property taxes for last year, and were having difficulty making the mortgage payment. So of course I captured all the information and told her I’d get back to her. At the end of the conversation she said that she’ll call the bank for the payoff, which I thought was no big deal as she’d get it through the automated system.

I went to visit the property, met the tenant, who incidentally, had furnished the house beautifully. There were definitely some repairs required due to deferred maintenance which I estimated to be around $1,500. The tenant explained what was going on in his life and let me know he wanted to buy the house as soon as possible and would I work with him.

After completing my due diligence, this was definitely a property worth pursuing, so I called her back a couple of days later telling her I’d buy the house for $149,000 and make up the property taxes of $5,000, but I have to just take over your payments to make this work, to which she agreed. At that time she had yet to find out the payoff amount, but thought it was in the mid $140’s. In addition the owners were holding a $1,200 rental deposit which of course I expected them to send to me.

A few days later she called and informed me that she had spoken to someone at the bank, had the exact payoff and then stated, “The bank will consider you taking over the loan, but they need a few days for management review”. Oh my God, what have you done, this deal is going down the toilet! I thought to myself. She gave me a contact person at the bank and so I thought I’ve got nothing to lose and immediately called the person. She was very friendly and essentially said the same thing, “Management will review the situation. In the meantime get us a contract for your offer”. She also told me the payoff was $146,000 plus three back payments and the taxes. So I faxed my offer to the owners, they signed and faxed it to the bank. We’re moving forward!

I didn’t hear anything for about a week and then my contact person called and said everything is go. At this time I also found out the bank had placed forced insurance on the property as the owners had let their insurance lapse. This of course had increased the mortgage payment by almost $200 per month! Well as soon as I had control of the property I would place my own insurance on the house. Regarding the back payments I negotiated to make up two of the payments at closing and the balance at the end of August.

Approximately two weeks later I received news that the bank had agreed to my offer, so I started to put the wheels in motion with my attorney to close the deal. Also at this time the tax note was due and there was no way we could close prior to the tax note been delinquent. So I suggested to the bank that they pay the taxes and add that to the monthly payment, to which they agreed.

Prior to closing I met with the tenant again to discuss his situation and for him to sign the lease/option paperwork. I agreed to sell the house to him in 12 months for $205,000 with a $5000 non-refundable option deposit and $50 rental deposit. Each month he prolongs the lease the purchase price will increase 0.333%. His monthly rent is $1600 with $100 going towards the purchase price if I receive the rent on time.

So there you have it. You can do a sub 2 deal with the banks blessing!

There were many lessons learned with this one, regarding control of the homeowner, but on the other hand if I had gone down a different path, the deal might not have closed. Another option initally considered was a short sale, but I don't belive I could have shorted it for much less than the payoff amount, plus I would have had to secure another loan.

A final thought... If he pays on time for the next 12 months I might consider holding a mortgage on the property for 7 or so years, until he's ready to refi. (Thank you William)

Cheers,

Steve


     
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