Subject to Real Estate investments - Part 2
Well yesterday I spoke about “Subject To” real estate deals. I have been doing a bit of research and can’t seem to find much about these types of deals in South Africa. The closest I can come is a “Subject To sale” agreement. Basically what that means is that the offer to purchase will be null and void if the purchaser cannot sell his or her current residence.
That is only a subset of what the “Subject To” deal is. Let’s go over a sample situation which would create an ideal environment for a “Subject To” agreement.
“Subject To” Case Study
Debbie and Joe Blume bought their house five years ago for a R100,000 (I will use South African Rands here because, well I am in South Africa 
). After 5 years, they now owe about R95,000, while their house is appraised for R160,000. Both Debbie and Joe have accumulated a credit card debt of about R20,000 since that time, and of course, the interest on that debt is much larger than they really care to have.
Joe and Debbie take out a second mortgage to pay off their credit card debt, take a vacation and buy a new car. With their second mortgage, they do all those things and have about R10,000 leftover, after everything is done. After 7 short months, most of that R10,000 is gone also.
Shortly after this, Joe receives an offer within his company for a higher paying position, but in a different City. Joe and Debbie talk it over, and decide to take the offer and move closer to the job. Of course, deciding to do that, they must now sell their beautiful home.
Like so many of us, when we look to sell our house, we think logically and talk to a real estate agent. The agent informs them that there is little to no equity left in the house, and tells the Blume’s that they will have to pay the agent’s commissions out of pocket. Of course, Joe and Debbie can’t do that, because they ran out of money and are basically living paycheck to paycheck until the new job starts.
Joe starts to worry a bit, because he needs to get to his new job out of Town, within 14 days, and Joe and Debbie would like to spend a few days off together before going to his new job.
Joe starts to think and remembers a “We Buy Houses” sign down the street from their home and runs down and calls the number on his cell phone. After talking with the investor, Joe finds out that the investor isn’t willing to pay more than R120,000 for the house. Hearing that, Joe is mad and upset that such a person can come in with such a low and insulting offer. Besides Joe couldn’t do that deal anyway because the second mortgage they took out last year, places their debt just about what the house is worth.
Getting worried and running out of time, Joe places an ad in the local newspaper advertising the house as a “For Sale By Owner”.
A True Investor
Mostly everyone is trying to low ball him except for one guy who said “he will offer the asking price, so long as he can see the place first”. Feeling excited and curious at the same time, Joe invites the man over.
A couple of hours later, Brad comes over and tells Joe that he is the one who called about the house. Brad tells Joe to explain to him a little about the house and his situation.
Joe spills his guts and describes his dilemma to Brad. After Joe finishes his story about his situation, Brad tells Joe that he thinks he can still offer the asking price if Joe was still interested in selling?
But before they start agreeing any further, Brad says, that as an investor, that his primary motivation to make a profit on the house. Joe and Debbie understand that, so long as their asking price is met and the house is sold quickly.
Brad continues and tells both Joe and Debbie that because of his need to make a profit, he needs to offer an agreement which will satisfy both their needs. Brad continues and says “That offer is what’s called a Subject To” offer. Of course bewildered and confused, Debbie and Joe ask what kind of program is that. Brad simply states, that it’s a program that suspends both their money for the house and his profit on the house for 2 years, while Brad takes over the mortgage payments. Not fully understanding, Joe continues to listen to Brad’s offer.
Here’s what it entails:
- Keep the current mortgage in place for 2 years, at which time the house will be sold, and Joe’s originally asking price will be met, plus 5% of whatever profit is made by Brad
- An escrow account is setup and paid by Brad to ensure full integrity of his contractual agreement with Joe and Debbie
- The property is claimed over to Brad which obligates Brad to continue making the existing payments to the escrow account. The deed will stay in the attorney’s presence until the deal is fully obligated by Brad in 2 years
- Brad relieves Joe and Debbie of the monthly debt for the mortgage payment so they can move on with their life
- Brad offers to pay closing cost and 2 months of mortgage payments to the escrow account to solidify his offer and his intentions to make good on the contract
After discussing the deal with each other and realizing that their options and time are running low, both Joe and Debbie agree with Brad over the details and sign over the deed to Brad via the attorney.
Brad then quickly rents out the house to cover the mortgage payments and manages the house as a rental.
Two years later, Brad sells the house for R210,000 and pays R160,000 dollars to Joe and Debbie’s mortgage company, plus sends Joe and Debbie a check for %5 of the R50,000 profits, which is R2,500.
Everybody wins!
So that is the kind of “Subject To” deal that I am thinking of. If you have any comments about this type of deal then please comment on this post so that we can discuss it.
I am JMR and this is My Little Corner on JMRPub.com
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