Step 1: Find a Seller Whose Situation Makes “No” Impossible (2–4 Weeks, $0 Out of Pocket)
You want homeowners who are 60–90 days late — motivated enough that a creative offer sounds like a lifeline, but not so far gone that the lender has already initiated foreclosure.
Skip current/current homeowners. They have time and options. You want the ones who don’t.
Pull pre-foreclosure lists from the county clerk (lis pendens filings are public record and free), probate leads, and direct mail to homeowners with equity who are behind on payments. A consistent mail campaign to 500 targeted addresses runs $250–$400 per drop. Expect to have one real conversation for every 15–20 responses, and one closed sub2 deal for every 40–60 conversations at first.
The mistake that blows it here: Spending money on leads before you have a working pitch. You don’t close every distressed seller — you close the ones whose situation has run out of alternatives. Know the difference before you mail.
Step 2: Pull the Payoff Statement Before You Run Any Numbers (10 Business Days, Free)
Before you write a number on paper, call the lender and request a payoff statement. Federal law requires them to send it within 10 business days. It’s free. It gives you the exact mortgage balance, current monthly payment, interest rate, and any escrow shortfall.
The deal math runs like this: ARV minus mortgage payoff minus estimated repair cost minus your minimum equity cushion. Walk if the equity falls below 20–25% after your acquisition costs.
Real numbers: $185,000 ARV, $108,000 payoff, $14,000 in repairs, $8,000 acquisition costs = $55,000 equity. That’s a deal worth structuring.
The mistake that blows it here: Using Zillow or Redfin as your ARV. Pull three closed comps from the last 90 days in the same neighborhood, same square footage range. In Texas, the appraisal district’s comparable sales tab is a free starting point — but you still need actual MLS closes.
Step 3: Structure the Offer — Three Money Buckets (Cash to Seller: Usually $1,000–$25,000)
A sub2 offer has three components: cash to the seller at closing, reinstatement of any back payments if the loan is delinquent, and sometimes a private second lien if the seller needs more than you want to pay cash.
On a deeply distressed deal with thin equity, cash to seller might be $1,000–$3,000. On an equity-heavy deal where the seller has other options, it can run $15,000–$25,000. Reinstatement — catching up the missed payments to make the loan current — typically adds $3,000–$15,000 depending on how far behind they are.
If the seller needs more and you don’t want to pay it in cash, structure a private second lien as a balloon note due in 3–5 years. Keep the monthly payment obligations on that note as low as possible so they don’t strangle your cash flow.
The mistake that blows it here: Loading the closing with cash commitments before you’ve inspected the property. Model conservatively, then walk the property. A surprise HVAC replacement ($5,000–$8,000 in Texas) changes the deal math entirely.
Step 4: Order the Title Search the Day the Seller Signs ($200–$400 in Texas, 5–7 Days)
Run this immediately. Don’t wait until the week before closing.
On one of our deals, we bought subject to planning to wrap the property to a new buyer. When the new buyer’s title company ran the search, they flagged a disabled veteran tax exemption that had been improperly applied to the property for years. The county came back and clawed roughly $16,000 in back taxes.
Title insurance stepped in and negotiated it down significantly. The policy on that transaction cost less than $1,200. We didn’t lose $16,000 because we had a policy.
An owner’s title policy on a $185,000 purchase in Texas runs $900–$1,200 depending on the county and the title company. On sub2 deals with real equity, you buy the policy every time. The title is one of the places on this deal where you truly do not know what you don’t know — and neither does the seller.
The mistake that blows it here: Skipping title insurance because the seller said the title is clean. The seller did not have a title company review their lien history before they got 90 days behind. You are not the first to have this conversation.
Step 5: Read the HUD Settlement Statement Line by Line — Every Line ($5,000–$30,000 Total Cash to Close)
The HUD-1 or closing disclosure on a sub2 deal lists every number in the transaction: purchase price, reinstatement amount, private second lien payoff, cash to seller, prorated property taxes, title fees, recording fees.
Every line has a name. Every name has a check attached to it. You need to know who is writing each one before you sit down at the closing table.
Total cash to close on a typical Texas sub2 runs $5,000–$30,000 depending on equity, delinquency, and seller terms. Compare that to a conventional purchase with 20% down on the same $185,000 property, where you bring $37,000 to the table before closing costs touch it.
At Black Sheep Convention, we walk through actual HUD settlement statements on real closed deals — purchase price, reinstatement, private second, cash to seller, every line. A deal someone in that room actually closed and can answer questions about.
The mistake that blows it here: Not understanding a line and signing anyway because you don’t want to look uninformed at the closing table. Stop the closing and ask. Closings get paused and restarted. That’s normal. Signing something you don’t understand is not reversible.
Step 6: Service the Loan and Keep Insurance Active (Ongoing: $1,200–$2,400/Year, Not Negotiable)
The moment title transfers, the seller’s homeowner’s insurance policy will lapse or cancel when the lender or the seller’s insurer discovers the ownership change. Buy your own landlord policy on the property the same day. In Texas, a standard landlord policy runs $1,200–$2,400 per year on a typical single-family.
Let insurance lapse, and the lender places a force-placed policy. Force-placed policies run $5,000–$8,000 per year and protect only the lender’s interest in the collateral — not your equity, not the contents, nothing that matters to you. Some lenders will treat a lapsed insurance notice as grounds to accelerate the loan.
On the due-on-sale clause: yes, it exists in most mortgages. There’s no due-on-sale police and no due-on-sale jail. In practice, the scenarios where lenders actually call a loan are almost always tied to a missed payment or a lapsed insurance policy — not the title transfer itself. Keep the loan current. Keep insurance on the property. The realistic risk drops to near zero.
The mistake that blows it here: Treating the due-on-sale clause as the scary part while ignoring insurance. The clause is theoretical. Lapsed insurance is the real trigger.
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