A subject 2 is when an investor takes over an existing loan in place from a seller. The Investor makes the payments going forward on the loan. Any mortgage, interest, and insurance payments are made by the investor. Any utility, maintenance, rehab expenses going forward are typically paid by the investor.
The advantage to the seller is that they “can wash their hands” from their mortgage. if they are behind on payments, or cannot make payments going forward, but do not want their credit adversely affected, this can be a great option. The key here is to find a trustworthy investor that is a great operator that will do the right thing.
The advantage to the investor on a subject 2 is that they can acquire a home without all of the down payment requirements or a massive cash outlay to purchase a property in cash. They can just pay closing costs on the property, then instead of spending money purchasing the home, they can utilize those funds to rehab the property to resell it.
The investor typically has a couple exit options. They can rehab it and resell it and then the full loan would be out of the sellers name within 6 months typically (depending on the level of rehab and if its priced right)
They can rehab it, and keep it as a rental and then refinance it into their name, thereby paying off the loan from seller at closing.
Disadvantages to the seller on a subject 2 is the risk of the investor defaulting on the note and not paying on the mortgage, or by not upkeeping the property. The key here is to make sure you vet the investor to make sure they are not a “fly by night” outfit and have completed these types of transactions before. There is a safe way to handle these where both sides win.
Typically, this can be rectified with a good attorney who can write safeguards in the agreement to protect both sides, using trusts etc. You will want to consult with an attorney who understands investors.
Though it isn’t a one size fits all approach, this strategy has its place and makes sense in certain situations. Lets say if there is limited equity in the property and some repairs to be done, often times it makes sense to look at a subject 2. In addition, if the seller does not want to perform any more repairs, and just wants out quick, this can work well.
Talk to a real estate professional solution oriented investor to see if your situation makes sense.
We have completed many of these in many states and have great attorneys lined up to assist.
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