found new deal, need advice

Hello Everyone,
I found a 2 fam house owner wanted 175k got him down to 163k. Average price of this stlye of home in area is about 170k to 185k. House was purchased for 140k, payment is 1750mth including taxes and PI. Tenants pay 950 and 850. However after talking more with owner he is in foreclosure and owes 30k on property. He has also began bankruptcy preceedings to hold off the forclosure which did work. He is considering a chapt. 7 or 13. I did manage to bind this deal on a contract subject to my partners approval and am considering a sub 2. He did agree to let me take over all payments as long as he does not have to pay anything. However is this a waste since there is no equity in the house and it is in foreclosure 30k deep. Also if he does a chapt. 7 anything in his name will be vanquished and thus our deal. I am new at this and really need some help. Thanks Youngone

Howdy Youngone:

You will not be able to do sub2 while in Chapter 7. The property is part of an estate for the benefit of the creditors. The trustee must sell for cash or new loan. If there is no equity you do not want the hastle of going to court to buy the property.

There is no cash flow either. If this is the best deal you can find send me your money I will lose it for you.

thank you for the advice Tedjr. I will cancel this contract. I however today recieved another call from a motivated seller that wants out, but she owes 170k on her mortgage and had the house on the market for 179k but isagreeing to come down to 170k. The house is a duplex and was said to appraise for 180k, I have to find more comps on it. She tried to sell before but the buyer fell thru. Now heres where I come in. She just wants out “a quick sale” as she said. Should I lease option with this lady since that as I see it is the quickest way to take possesion and then sell, and does this seem like a better deal?
There is not much equity but it’s a start.

With this new deal I have asked the owner more questions and found out that, #1. she is very desperate. #2. her mortgage everything included is 1700/mth. The average rent/ payment for condos in her area are 1200 to about 1500/mth. I also pulled some comps on the home and there are units in the area that have sold for up to 200k and some for sale currently at 224k. Based on everything does this sound like a good deal. I can always ask her to pay the assoc. fees and I would take over the actual mortgage and interest pymnt. Any help would be appreciated thank you, Youngone

Howdy Youngone:

You need to get the comps closer. Compare square feet on the sales for instance. A larger unit may sell for fo $25,000 more than a smaller unit. The rents are also a wide range . Narrow it down to what you can get and how long it will take. You said it right off the bad there is not much equity. If you plan on buying and reselling you need to consider carry costs and closing costs both buying and selling. The commission alone could be $12,000.

Even to buy and keep a deal like this for future appreciation you need to be careful. What are the HOA dues? The tenants usually do not pay these. If you can do a zero down and make a positive cash flow of $500 per month you may have an Ok deal. You need to figure collection and vacancy loss into the costs too. I would figure at least 10% and even more in some areas.

I wish I could be more positive for you. Maybe there isenough appreciation in your area to overcome negative cash flow but you can lose it all waiting for the rainbow at the other end. A lot of times the pot of gold turns out to be a vacant unit trashed by the previous tenant and no prospects on the horizon.

hey Tedjr thanks for the reply. Here is some more info. I met with the owner today. He has a tenant renting now that pays 1650/mth. They wanted to buy but could not obtain the money. The owner carries the assoc fee 150/mth. Willing to take 174k. Property will appraise for more than 185k. Also I am in NYC property apreciates every minute here it seems. Owner is willing to pay 250 negative every month, And I can rent to own for same or higher price than now for about a 200/mth profit. Owner also willing to take a lenghty lease. They really just want out of the place desperately, it’s like I am not even trying here, so given this new info does this sound like a good deal. Or am I to eager making this seem good. Is there something I am not looking at. Also their condo contract does not prevent them from renting or leasing to anyone.

Howdy Youngone:

All I can do for you is point out the pitfalls and hopefully you can make an informed decision. I like no brainer deals but they do not come around as often as we like. I have learned most of what I know from losing most everything I owned several times. It has made me more cautious and hopefully a little wiser.

A lot of investors would not touch the deal. That $250 check every month is going to be hard for the owner to write every month. However they are still on the mortgage and if the tenants pay you and you can make some monthly cash flow with little risk then go for it. I like to add up what I have to lose and weigh it against the odds of success and failure. I always ask what is the worst that can happen and then hopefully I can be prepared for it. Here about all that can happen if the seller gets tired of paying the $250 and the tenants move out and you have to give the property back to the seller or mortgage company. How long it lasts depends on your agreement and how strong your seller is financially and how committed they are to saving their credit and the deal.

Try to make your decision on the numbers and possibilities and not on your excitement to do a deal. The best thing you have going is appreciation but then again where is the appreciation your seller should be getting when they bought the property. The recent 20% appreciation per year in the stock market went away overnight and it only took the Red Sox 4 nights to make the Yankees look bad.

Be careful. Hope this helps a bit

Thank you for the advice Tedjr. I will look at this from every negative and positive side I can find. Really thank you for your help, Youngone