Does this Deal Suck?

Bird Dogs, Wholesaling
1

I’ve got a seller that’s underwater. He owes 160K The value is 135-140K He don’t want to walk away and let me do a “Sub To” unless I cough up 5 Grand.
Built in 1986 a 3/2 and it’s a good looking middle income house. His renters pay $1,050 and have a year left on their lease. His payments are $800 I’ll find out if that includes PITI, if it don’t that’s a deal breaker cuz taxes and insurance cud easily be $200 a month. But then in 1 year I know I can sell this house with a 7-10K down payment if I want to.
The house sits in a growing area with a nearby prison & Military base, and this house cud easily rent for $1100 or 1200. The prisoners wont be renting but the guards, nurses, teachers and other personal are some high wage earners.
$5,000 is not going to kill me if I lose it, and I don’t want to keep buying crap that don’t appreciate.
My credit is improving, but I can’t show any W2’s for a conventional loan. I’ve been wholesaling for over 3 1/2 years now and I want to build some long term wealth.
Does this deal suck? What would you do?

Rando

2

Hi Rando,

          I don't think I would get involved in this! It is $20k to $25k upside down and your seller insists on an additional $5k forcing this further underwater, and I believe your $800 dollar payment is probable lacking taxes and insurance.

Then you have maintenance and incidental costs to absorb before you get to a point where the tenant leaves and you might be able to sell it. I think it takes 3 to 5 years before price equals value and that’s to far to reach!

Let’s stick to flipping caves and tree stands and selling moonshine to make wolverine and bear skins! Besides you won’t have time for this when we start building canoes and setting up rental TP’s.

                    GR
3

Rando, you could spend less than five grand finding any number of low-equity sellers willing to let you take over their payments sub2, AND WITHOUT giving them five thousand, especially in the price range we’re talking about.

Assuming significant appreciation, or upward rental demands, I would tell the seller, I’m interested in taking over his cockroach-assuming equity position, if he pays ME ten thousand dollars for my pain, suffering, and his credit protection with no promises of a premature payoff.

It would seem that this guy isn’t tired enough of the negative cash flow to give you the house for free, and would rather feed his alligator for the foreseeable future (over the next ten years).

Otherwise, paying the seller money to take over something this far upside down is not only seriously burying money, but assuming years of negative cash flow, from repairs, maintenance, and management time and energy. Uh, no.

I wouldn’t nurse a scarcity mentality over this deal. You just accidentally came upon this deal, but if you were deliberately looking for low/no equity deals to take over the loans on, you’d find MUCH more profitable deals …especially if you sift for properties that are less than ten years old.

BTW, rents in this market are higher than mortgage interest payments, and so attempting to sell this with $7K-plus down, and you can forget any interest spread, much less after you gave the seller $5K it leaves you with practically no profit …and only an obligation and no further upside.

Meantime, one repair on that house, and you’ll flush what measly profit you did have right down the toilet. Never mind any operational costs you have to pay in the meantime.

Yes, this deal blows. You’d have less pain wrapping your lips around the exhaust pipe of a bus.

Why not mail all the sifted low/no equity situations where you want to invest (size, age, location, %equity, etc.) and then wait for calls, just like you do for high-equity beaters you’re mailing to now?

4

Haha, I knew this deal sucks, and I was just waiting for Gold River and Javipa to slam some common sense into me.
Seller is saying he needs to go over there and repair broken tile in the shower pan, well what if it’s been leaking there for years with structural damage, along with mold, cud be a 10 K repair.
And I wud have a difficult time managing the property from my cave in Idaho.
Let’s make some money.
Rando

5

The seller tells me that the $800 monthly mortgage payment covers the Principle, interest, taxes, & the Insurance.
The deal don’t seem that bad with a $200 cash flow.
Once renters move out it’s going to take another 5 Grand to carpet and paint. If it’s vacant for 2-3 months or the air conditioner unit needs replaced that’s another 5 - 7 Grand.
Now it’s not looking so good.
I may just flip this to a new buyer for 8-10K down and walk away.
I have flipped these types of deals before, and it’s insane even though its underwater does not matter. I have flipped deals that were way more underwater, one house was 70K another was 40K and one was 20K.
Being able to walk into a house with not having to qualify for a loan is some powerful stuff, especially here in California, were many people work for cash.
Now I want to do what Javipa suggested, get a list of newer buyers that have little or no equity. There is going to be a certain percentage that is struggling, or has to move, or medical reasons or yada yada, I got my sights set on a 300K 4/3 home with pool, I’m starting to get the fever.
Rando