A subject to fourplex where the servicer confirms the buyer as successor in interest without calling the loan

The forgotten HELOC is the detail I'm writing down. He forgot an $18,400 lien on his own property. How do you even ask that question in a way that gets a real answer?

Numbers check. Total in: $18,400 cash at closing plus closing costs plus the escrow shortage. Call it $24k. Net $940 a month is $11,280 a year, and the $500 a month on the seller note is already subtracted from that, so once the note burns off in month 40 the figure is roughly $1,440. That is a 47 percent cash on cash return on year one money, going to 72 percent. Which says the rate is the smaller story. The larger one is that a tired owner handed over $520k of value for $34k. What is missing from that read?

Can someone explain why the seller agrees to this at all? He stays on the hook for a $412k loan and walks away with $14k. If cairn stops paying, whose problem is it?

@jessreyes12 it is his problem, entirely. The loan carries his name and his credit, and the liability follows both. That is why the whole strategy rests on the buyer's reliability, and why the servicing arrangement should be reviewed before anyone recommends a seller do one of these. @renee_dubois did the reserve get rebuilt after the HELOC ate it?

On the successor in interest step, since a few people will read that as a workaround. It isn't one.

Federal mortgage servicing rules require covered servicers to have a process for confirming someone who has acquired an ownership interest in a property as a successor in interest, and once confirmed that person generally gets the information rights and access to loss mitigation options a borrower would have. What confirmation does not do is release the original borrower from the note or waive the lender's rights under the due-on-sale clause. The seller still owes the debt. The lender still has the contractual ability to accelerate on transfer. Confirmation gives you visibility into escrow, payoff, and delinquency status, which on a deal like @renee_dubois's is worth real money, because an escrow recalculation you find out about three months late has already cost you.

This depends on the loan being one the servicing rules cover and on the servicer's own procedure, both of which you confirm in writing with that servicer rather than assuming from a forum post. Rules and internal policy change.

@hannah_west29 you pinned down where the return actually comes from. The 3.75% is worth about $1,100 a month against a current-rate loan of the same balance, which is most of the cash flow, and the $34k price on that equity is the other half. Both came from the same fact, which is a burned-out owner who valued being finished. That is not a repeatable input you can underwrite. The rate gap is repeatable while it lasts. The tired seller is luck, and pricing luck into a model is how people get hurt.

Pull the note out of the loan file and read what it says about transfer, word for word, since the recorded paper can differ from the standard uniform instrument. Check whether there is a rider as well. @renee_dubois did you read the actual recorded deed of trust or just the payment history? On a 2020 refinance there is usually a copy at the county and it is worth the $12 to pull it.

Four units of 1974 mechanicals with a manager who quit. What did you find in the first month?

Ask for a payoff statement on every lien, @jordan_ellis2, and make title pull the whole chain. The record answers that question, and the seller only thinks he does. Sellers forget second mortgages the way people forget old store credit cards.

8 percent management on four units in a market with $1,300 rents means someone is doing that work for about $412 a month gross. Whoever took it is either very local or about to quit like the last one. Two evictions in eighteen months usually means the tenant base needs re-screening from scratch, and that costs more in vacancy than the management fee ever will. How many of the four are original tenants, @renee_dubois?

The part I find interesting is that the seller's real product was relief, and cairn was the only person offering it. A listing agent would have given him a higher number and four more months of the thing he hated.

$4,400 of your own money on top because of a lien nobody found until title. That's the kind of thing that kills a deal for me on a thin one, and it barely dented this. Big spreads forgive mistakes, thin ones don't. I do fast deals and I've learned that lesson from the wrong side.

On the seller note at 0% for 40 months, is it secured by a recorded junior lien or an unsecured promise to pay? Secured, the seller can foreclose if payments stop. Unsecured, the seller is an ordinary creditor, a different seat when things go wrong.

@raj_mehta14 that is the right question. If the seller carry is secured, cairn has placed a lien on his own property in favor of the seller, which changes the Plan B refinance math because a new lender will want that junior lien paid off or subordinated. @renee_dubois worth spelling out. The other thing to know is what the reserve looks like today, because a structure like this works until it does not, and the answer is always months of payments in the bank.

This one rewards a second read. The detail that matters most is that the Plan B refinance was priced before signing and still covered at 7.4%. That is the test to pass before touching one of these, and most of the subject-to deals that cross an underwriter's desk would not clear it.