What a first subject-to deal needs answered before an offer goes out

The friend of a friend deal is the one that costs you the friend. Anyone who has run a service business knows how fast a referral turns into a grievance. Your coworker is going to hear about every late payment for the next 27 years. Decide now whether you are fine with that.

Taking your list in order, with the parts that vary flagged where they vary.

Due-on-sale. Most residential mortgages contain a clause letting the lender accelerate the loan on transfer of the property. A subject-to conveyance is a transfer. Lenders holding low-rate performing paper have generally had little reason to act, and that observed behavior is what practitioners rely on. It is a pattern, not a promise, and it can change. Your protection is a written contingency plan that says what you do if a demand letter arrives, priced at today's terms rather than the terms you wish existed.

Payments. Use a third party loan servicing company. They collect from you, remit to the lender, and produce a payment history both you and the seller can pull. It costs a modest monthly fee and it removes the argument that starts three years in when he can't tell whether you paid.

Insurance. The existing policy insures him as owner. After transfer he no longer has the insurable interest that policy assumes, so coverage has to be restructured, and the lender must remain listed as mortgagee. Carriers and servicers differ on what gets reported and when, so ask your agent in writing what the carrier transmits to the mortgagee.

Documents. Beyond the deed there is typically a purchase agreement, a disclosure to the seller describing the due-on-sale risk in plain language, an authorization letting you speak to the servicer, and instructions to the title company. Deed form, recording practice, transfer tax, and required disclosures all differ by state, so this set needs an attorney licensed where the house is.

On point 5, nothing about this is beginner-friendly. That is a judgment about your own tolerance, not about the numbers.

Your maintenance reserve at 380 a month for everything including vacancy looks light to me for a house you haven't inspected yet. What year was it built?

Taxes at 421 of a 1,480 payment is 28% of the payment, which is high. Two things to check: is that a homestead or owner occupied exemption he's currently getting, and does that exemption fall off when the property is no longer his residence? In a lot of states it does, and the reassessment or exemption loss lands in the escrow account, which raises the payment on you. That could be a couple hundred a month and it would eat your entire 190. Rules on this differ by state so confirm with the county assessor for that specific county.

@ryanmck27 just found the biggest number in the thread and everyone's still talking about the deed.

Anchor, run the deal at 1,650 or 1,700 PITI and see if you still want it. If the answer is no, you don't have a deal, you have a house with a good interest rate on it.

One question worth settling before anything else: if the loan stays in his name and he is mid divorce, does the other spouse have to sign anything? Depending on the state, a spouse can hold an interest in the marital home whether or not she is on the title, and that is exactly the kind of thing that ruins a closing on day 44.

@aaron_fitz10 that's a title question and the title company will surface it, but yes, marital property and who must sign a deed differ by state and a pending divorce decree can control it. Anchor, do not let him tell you the answer, let the title company tell you.

Separately anchor, your 26,000 isn't the number. Add title, closing, an attorney to draft the doc set, and whatever the inspection turns up. I'd budget 4,000 to 6,000 on top before anything breaks.

The 3.125% on 206,400 is worth roughly 570 a month against a seven-ish rate on the same balance. That's the entire asset here. Your rental spread is 190 by your own math and could be zero after @ryanmck27's escrow point. So you're paying 26,000 plus costs for a payment advantage that only pays you if you hold a long time.

Nobody's asked what the house is actually like. Divorce, kids in it, seller wants out in 45 days. I've walked a lot of those. Deferred maintenance is normal and it's usually the things you can't see from the living room, roof age and the HVAC. Get a full inspection with a sewer scope and price the roof by remaining years, not by whether it leaks today. A 3 year old roof and a 19 year old roof are a 14,000 swing on the same house.

The document that matters most is the disclosure to the seller. It should say, in language he could read aloud and understand, that the loan stays in his name, that his credit is affected if payments stop, that the lender may demand full payoff, and what you will do if that happens. Have him initial it. That page protects you more than it protects him, because it is the record that he knew. Have a licensed attorney in that state draft it rather than pulling a template off a forum.

Slow down is easy advice to give and hard to take, but the arithmetic here is plain. Putting 26,000 of 61,000 into deal one for a 190 a month spread is a lot of liquidity committed for not much monthly.

@monica_tran3 is right about the coworker. Add one thing: get his mailing address in writing and keep it current, because servicer mail goes to him. Escrow analyses, insurance notices and year end statements all land in his box. If any of that stops reaching him he starts imagining things.

Your list is really asking about the operational spine of a subject-to, so here it is in order. Before closing, a full inspection with sewer scope. A payoff statement direct from the servicer, dated within a week. A screenshot from his portal does not count. Title work ordered from a company that has closed one of these before, and ask them that question directly, because plenty haven't and they'll slow you to a crawl at day 40. Confirm the tax exemption question @ryanmck27 raised with the county in writing and re-run your numbers at the higher payment. At closing, the deed and the full document set drafted by an attorney licensed there. A signed authorization to release information so the servicer will talk to you. A limited power of attorney restricted to the loan account so you can act if he's unreachable. Insurance restructured effective the same day with the lender still listed as mortgagee, and get the binder in hand before you sign anything. After closing, a third party servicer makes every payment, no exceptions, no month where you just Zelle him money. Autopay funded from a dedicated account. A calendar reminder to pull the payment history twice a year and email it to him unprompted, because the seller who gets a statement every six months never calls you worried. On reserves, price your Plan B rather than describing it. Get an actual DSCR quote today on a 206,400 refinance for this property and see what payment and what closing cost that implies. Then hold enough to cover a demand period plus that closing cost, or hold enough to carry the payment through a listing period. On this house that means 20,000 to 25,000 untouched. You'd have 35,000 minus your closing costs, so it's close, and that tightness is the real answer to your question 5. The deal isn't crazy. Your margin for error is thin in two places at once, the monthly and the reserve, and 26,000 is a lot to pay for equity on a house where the tax situation is unresolved. Offer less and tell him exactly why.

The twice a year statement email @carlos_nunez mentions is the whole relationship in one habit. Steal it.

The 45 day timeline is doing something to this deal that nobody's named, and I'd flag it even though I've only got six months of research and no closed deals behind me. Inspection, title, attorney drafting, insurance binder, plus verifying the tax exemption with a county office. That's not a 45 day list on your first one. He picked the timeline and you're inheriting it.

Someone should say the value is soft. Three sales within half a mile in eight months say nothing about condition or lot. If 285,000 is really 270,000, his 26,000 of equity becomes 11,000 and you are overpaying by more than half. What is the range on those three comps, and how did they differ in square footage?

The question I'd be too embarrassed to ask in a room: when you say the deed transfers, does that mean it gets recorded at the county and becomes public? And if it does, isn't that how the lender would find out?

@jessreyes12 yes, it is recorded, and recording practice varies by state. Whether the lender notices is a separate question. Servicers are not monitoring county records for every loan in their book. What tends to reach them is the insurance change and the tax bill going to a new name and address. Not recording is worse, though. An unrecorded deed leaves the buyer exposed to anything that attaches to the seller after closing, including judgments in a divorce.

Pull the recorded deed of trust and read the acceleration paragraph yourself. On the standard uniform instrument it is usually paragraph 18 and it runs about a page. Read whatever rider is attached as well, because riders sometimes say more than the body does. Read the divorce filing too if it is public in that county, which varies by state. A decree that awards the house to one spouse, or that requires proceeds to be split, changes who can sign and what has to happen with the 26,000.

421 in taxes and 175 in insurance for a house at 285,000. That insurance number is going up when it converts to a landlord policy, usually 15 to 30% in my experience getting quotes for people. Add 40 a month to your model.

@mitchell_ray4's 40 plus @ryanmck27's exemption plus @omar_haddad's roof, and the 190 goes negative. It is still worth a look, because the rate is real and rents move, but it should stop being called cash flow.

Managing this one will be normal, a single family in a decent area rents fine. The part to worry about is that you have one property and one loan that is not yours. If the tenant stops paying you still owe his lender 1,480 on the first, and eviction timelines differ a great deal by state. Find out what yours is before you sign, because that number is your reserve requirement in disguise.

Does he have anywhere to go in 45 days? If he doesn't, he's going to ask to rent it back from you for two months and that's a whole different set of problems.

I do thin deals fast and this one is thin and slow, which is the bad combination. Offer 15,000 for the equity with 5,000 at closing and 10,000 over 24 months, keep your cash, and tell him plainly why. He came to you because he doesn't want to list. That's worth something and it's worth it to him, not to you.

The thread has landed on the right frame. The interest rate is the asset and everything else in the deal is a cost of holding it. Anchor, if you come back with the tax exemption answer it would be worth seeing how the numbers land with it in.