A hidden deal; help me find it, please!

I am a beginning RE investor in Atlanta. Recently two deals have come to my attention. I have signed one up already, but the second one is a puzzle… I don’t know how to approach this one. I know there is a deal here somewhere, help!

I received a call from a man whose daughter is going through a divorce. She has a three year old house in a nice s/d in Marietta (suburb of Atl). The house is on the market for $235,900. On first look, that seems about right for the house. The woman owes about $200k, is two payments ($4k) behind, and pays $1,900 PITI a month on a seller financed deal. The owner of the note apparently is flexible with the owner of the house in terms of delaying payments, as the woman had never been late on a pmt until two months ago.

Initially I thought that this deal is really skinny… as there isn’t much equity here and the payments are high, possibly as high or higher than the rental rate. (I haven’t done a market rent survey yet).

Here is where it gets a bit more enticing… apparently another investment company in Atlanta was about to sign the owner up on a lease-purchase deal awhile back. They offered $3k upfront and to take over the payments from there. All the docs had been drawn up and a check was cut for $3k. The owners didn’t take it.

If this other company thought there was a deal here, perhaps there is one. Especially since they were about to put down $3k right then and there.

Does anyone see a hidden deal here?

Thanks in advance,
Dan Cleveland

Howdy Dan:

If you can get the money to cure the default and get the house for the mortgage balance and find a tenant/buyer to lease/sell it to at the market value with $10,000 down you would have a great deal if the house needs no work. Being only 3 years old sound like that part may work. The other if’s ands and buts is where you may come up with the problems. How long will it take to find a tenant/buyer? Will they perform down the road and pay off the loan and pay you? Also how much will they pay over the mortgage payment? It all sounds risky. If you already had some obe ready to move in that would be great. Maybe get it under contract and then try to find a T/B. You would not risk the down payment if you could not find a T/B except the seller would be upset as she counted on you buying the house.

It is surely too thin to buy for cash and hold to resell. The holding costs and sales costs would eat you alive.

I do have the money to get the loan caught back up. I think there is a deal here, like you said… the challenge would be to lock the property up contingent upon me being able to find a tenant buyer.

I have read quite a bit about ways to find tenant/buyers… classified as, and signs in the neighborhood. Any other suggestions would be most appreciated.

I would add also, that for these types of deals, you need to have the reserves readily available. What if your tenant buyer moves out? Can you handle the payments until you find a new T/B? What if they trash the place, and it takes 60 days to get them out… and another 30-60 or more to get a new T/B Can you cover these things and not allow the property to go into foreclosure. This is a good way to aquire property (I still don’t like low and no equity deals… but sounds like you have some here) But just be sure that you can handle the financial obligations should things not go perfectly for you… I’ve learned first hand, it’s not a perfect world in REI Investing !! You can make great $$, just dont bite off more than you can chew to begin with. I have seen it happen too many times a new investor signs up a deal which looks decent, but when the AC goes out, or T/B moves out they cannot handle the payments… and lose the house to foreclosure… and it’s not even on THEIR record, but the previous owners since taken sub2… and the lawsuits start. Ugly ugly business… but one that can be avioded very easily if you invest within your means.

Hope this helps,
Heather Zaal

i was going to say that you could sell it by owner after that and save on real estate agent’s fees, but then realized that is going to be slicky.
I personally wouldn’t get involved in this deal.
But I didn’t see a hidden deal (maybe somebody was going to get a house for himself??? Or they might decided that they could wait a year and sell for more???)
Were you going to finance the purchase? If so, keep in mind that the purchase price would be more, cause you are going to pay closing fees.

please, correct me if I’m wrong :-. Thank you

The woman owes about $200k, is two payments ($4k) behind, and pays $1,900 PITI a month on a seller financed deal.

Let’s do some guesstimating here. How much of the PITI is for taxes and insurance – let’s guess $200 per month. That leaves $1700 per month for principal and interest. If this is a 30 year amortization, then the interest rate must be around 8.5%.

Take that property off the seller’s hands subject to the existing mortgage. Bring the note current and quickly refinance the $200K loan balance on a 3/1 ARM at around 4.5%. This will bring the PITI down to something around $1100 per month.

Now, lease option the property for $250K – 3% to 5% option consideration, 2 year option term, and $1500 monthly rent. The option consideration reimburses you for all (or nearly all) your out of pocket costs. Your monthly cash flow is $400 per month for up to 24 months, and your backend profit when the option is exercised is $50K.

If you don’t use the lease option as your exit strategy, try selling on a Contract For Deed – 7% to 10% down, $250K sale price, 6% interest, 30-year amortization, 2 year balloon. A $25K downpayment reimburses you all of your out of pocket acquisition costs and then some. With 10% down, the interest rate spread gives you about $450 monthly cash flow, and you have $25K backend profit.

I was just guesstimating here, so these numbers may not exactly fit your potential deal. But, if the seller is motivated enough to give you the deed just to get out from under that mortgage payment, you can work the numbers to uncover that “hidden” deal.

In my mind, the equity in this property makes it a better Subject To candidate than a Lease Option acquisition.


Whatever happened to this potential deal?

Encountering many such low/no equity deals with very willing sellers, I’d really like to know too.

What are some creative ways that I can separate myself from the pack and make these types of deals work?