Help with "Subject To" Offer - Posted by Novice Seller

Posted by Craig (IL) on February 04, 2002 at 07:07:40:

I am not an expert, but let me try. I?ll assume you don?t have a lot of experience with this, so I’ll give details. Subject-to purchases are an advantage to buyers because they don?t have to qualify with a lender and because closing costs are usually lower. The advantage for sellers is the speed of the sale; subject-to purchases can be done post haste. You as the seller, can help a qualified buyer because a year?s worth of timely payments to you, when property documented, goes a long way to showing lenders, who would give them a loan and cash you out, they can qualify for a loan.

At a minimum, you would want to check references and credit. Where has this buyer lived the past five years? Moved a lot? Why? Owned? Rented? Ever evicted? Bankruptcy? Late on payments of any kind? Work history. How have they maintained property in the past? You want to know the reason they want such a purchase. If they can?t qualify with a lender, why not? Just married–any reason to believe the marriage will survive? Etc. You want hard evidence that this person is going to make payments and eventually cash you out. If you don?t find it, don?t do it. The seller would need an income no less than three times the cost of a loan + home insurance + property taxes; a higher income if the property needs a lot of maintenance or if the buyer has other high or unusual expenses.

Regarding your first question, use a lawyer on this. Ask the lawyer to construct a land trust for you and the buyer. Ask if the lawyer will add provisions for returning the property to you for lack of payment. When shopping for a lawyer, ask qeustions. you want a real estate lawyer experinced with land trusts.

Regarding your second question instead of a subject to purchase, consider a ?land contract? or ?contract for deed? (whichever it is called in your area) instead. Such a purchase would allow you to control the deed until such a time the buyer cashes you out. The buyer should be able to refinance in one year and you?d be out of the deal. A lawyer can explain the details to you. There are some things you should know before doing this, but I won?t go into that.

Regarding down payment: Yes, of course there should be a down payment. If this buyer wants none you may want to forget it. Why hasn?t he/she saved any for it? If the buyer hasn?t saved any to this point, why will he be able to save any in the future? 3% , 5%, 10%, 20% are common down payments amounts. I think most posters on this board would counsel against the 3% figure. You would want to get enough to make this sort of deal worth your while and protect you financially if the buyer were to trash the place, walk away, etc. Also consider the buyers equity situation after the down payment. The lower their down payment the less equity they will have when it comes time to get a loan to cash you out.

Whatever you do, I think it is important to know your exit strategy. Determine how you?re going to get out of this deal in the end. Consider various scenarios based on what the buyer might do. You?d want to be able to answer these questions or don?t make the deal. Lastly, a common rule of thumb for sellers is to maybe give on price (i.e., lower the purchase price) or give on terms, such as your considering; but not both. If you are giving terms, then you should be getting a top-of-the-market purchase price for your home.

Help with “Subject To” Offer - Posted by Novice Seller

Posted by Novice Seller on February 04, 2002 at 04:59:58:

Considering relocation, I put my house on the market (by owner) to see what offers I could get. I was approached by a potential buyer who inquired if I would be interested in selling “Subject To” stating the purchase was for personal occupancy and not for flipping. My home is 2 years old, I’m current on all payments, and I have very little cash equity in the property…only potential gains through the increase in property values in the area realized through the sale of identical homes in the neighorhood.

Given that I would be bearing a great risk in this venture, my questions are:

1.) If I sold “Subject To”, is there anything I can do to protect myself with my lender should the buyer default or just decide to vacate? For instance, would it be a good idea or even possible to have two deeds signed: one in which I deed the property to buyer and filed at the courthouse; and another in which he would deed the property back to me but is kept by a third party, be it a title company or an attorney, such that I could file in the event payments are not made and thereby regain rights?

2.) As a seller, is there a general practiced limit or rule of thumb on the time I should give the potential buyer to obtain their own financing for the property or flip to someone else?

3.) Is it uncommon for sellers to require a down payment for a “Subject To” sale? It seems very risky, not to mention outright carelessness, for a seller to deed property to a person that doesn’t have ‘skin in the game’. What would be a fair down payment (or perhaps other creative financing) that would not break the deal, but ensure the vested interest of buyer?

Thanks in advance for your replies!!

Re: Help with - Posted by Terry(IN)

Posted by Terry(IN) on February 04, 2002 at 12:30:28:

Novice Seller,

IMHO, the best way for a seller to sell when considering creative financing, is to use a lease/purchase agreement. The reason is because if your TB should default, you can simply evict. With a Subject to or CFD, you will have to go through forclosure proceedings.

Always get a down payment. Get as much as you can, buy not less than 5%. Always check credit, work history and past landlords. If you need further help, please email me.