Key Takeaways
- Rate arbitrage is the primary subject-to value driver.
- Wrap underwriting evaluates two financing layers.
- Escrow/servicing essential for wraps.
- Model base, downside, and upside scenarios.
Subject-to and wrap deals require evaluating existing financing terms alongside new deal economics.
Subject-To Underwriting
Evaluate: Can rent cover the existing payment? Is the rate meaningfully below market? What equity payment is needed? What is the remaining term? The key metric is rate arbitrage—the savings versus a new market-rate loan.
Wrap Underwriting
Scenario Modeling
Base case: all payments made, value stable. Downside: 10-20% rent decline, due-on-sale invocation cost. Upside: appreciation + favorable financing.
Go / No-Go Decision Framework
Go Indicators
- ✓Rate arbitrage is the primary subject-to value driver.
- ✓Wrap underwriting evaluates two financing layers.
No-Go Indicators
- ✗Calculating rate arbitrage without considering the full holding cost picture: Overstated returns that ignore insurance, taxes, maintenance, and vacancy
- ✗Not having a refinance contingency plan for subject-to acquisitions: If the lender invokes due-on-sale, the investor has no ability to refinance quickly
Scenario: Subject-To: Capturing a 3.25% Mortgage
Seller has $175K balance at 3.25%, 27 years remaining. Value $195K. Needs $5K to relocate. Market rent $1,500/mo.
$268/mo positive vs. negative with market-rate. $462/mo savings, $149,700 total interest savings over loan life.
Sources
Common Mistakes to Avoid
Calculating rate arbitrage without considering the full holding cost picture
Consequence: Overstated returns that ignore insurance, taxes, maintenance, and vacancy
Correction: Calculate net cash flow after all expenses, not just the mortgage payment savings from rate arbitrage.
Not having a refinance contingency plan for subject-to acquisitions
Consequence: If the lender invokes due-on-sale, the investor has no ability to refinance quickly
Correction: Maintain refinancing capacity (credit, equity, documentation) to pay off the existing mortgage within 90 days if needed.
Test Your Knowledge
1.What is the primary value driver in a subject-to acquisition?
2.What is essential for wrap mortgage compliance?
3.What scenarios should be modeled for every creative deal?