I just signed up my first Sub-2 Deal. Is this a good deal.
Market Value: $125k-$130k
Existing Loan Balance: $123,500
PITI= $990
Purchase Price: $130k
Took sub2 with Balance of $6,500 due in 8 Years.
Market Rent on Rent-to-Own: $1200-$1300
No repairs needed.
We pay all closing costs.
Closing in 30 days.
I’m a bit confused by the details…
When you take a house “subject to”, you get them to deed (give) you the house, and you make their existing house payments without formally taking over the note. You then find a buyer/tenant and either lease option or sell them the property outright or by contract.
It is typically advised never to take a house “subject to” unless you are gaining a lot of free equity, (my personal minimum is $20k) and are putting very little cash down, if any.
From the looks if it, you are taking over their payments, as well as giving them $6500? If that’s the case, you are paying retail for the house. If you would be to sell the house conventionally, you will loose $.
Unless I misunderstand the details, the only $ you will make is the difference between what your monthly payment is and what you can lease/rent the house for, whatever up-front option fee you can get, and possibly some appreciation IF you hold the house for many years.
What are you paying closing costs for if you’ve taken the house subject to? There shouldn’t be any.
Why would you agree to pay the $6500? It’s your only built-in profit.
From the looks of it, unless you can get a large lease option fee there’s not much profit in this deal. In my opinion there’s not any real $ here as compared to the risks of vacancy, damage, etc., you won’t be making enough $ to cover any of these.
Maybe I am misunderstanding your numbers?
Z
This is a VERY GOOD deal… for the SELLER not for you my friend. You say the house is worth 130K… imagine you had to sell tomorrow. The top 10% is air (will be eaten up by realtors commissions & closing costs) so now you’re down to about 113K that you would NET at closing. You said that you paid 130K for it! You made the sellers problem your problem. Like I said this is a good deal… but not for your corner.
Let me now suggest how to help…
You have to tell him that your partner did a market analysis (or something) and you have to either change or withdraw your offer.
1st off, go back and tell him you cannot in any way pay the $6500. PERIOD. Tell him you also are not willing to pay any closing costs of any kind. (I still have no idea what they are for)
Tell him that if he’ll deed you the house, and also make the next 2-3 payments that you’ll take the house off his hands. If he asks why he should make the payments tell him it’s because you need time to get a quality tenant… for HIS own good.
This will allow you to make a little extra $ if you move it quickly, as well as cover your marketing costs. The original way you’ll be negative as soon as you put an ad in the paper!
If he accepts your new offer, advertise the house on a lease/option for 139k, getting a $3k-$5k option payment up front. Lease it out for $1290 a month, and try to encourage the buyer to pay extra per month towards the selling price (down payment) when he buys. At least now you’ll have 16k equity built in, and make a little $ up front, as well as monthly.
It’s important to remember that you will have some vacant months as well as marketing costs each time you take a property sub2. With your old structure you’d be losing $ each year if you had as little as 2 months without a tenant. Make sure that you get the $ up front as an option fee too, because otherwise you’ll get nothing out of the deal to pay these costs until you sell!
If he’s insistant, you “can” still give him “some” $ when you sell (I wouldn’t), but I wouldn’t advise it. If anything, it wouldn’t be anywhere near $6500. You’re doing him a favor!
If you do it this new way, you’ll get $3k+ up front, make a couple hundred a month, and have around $15k coming someday in the future. The old way your closing costs and $6500 will eat up your profits, and if there’s ANY vacancy you’ll loose $ every year until it’s sold.
It’s still a marginal deal, but may be worthwhile if you’re in an area where it will lease/sell quickly.
Personally, if he wouldn’t accept your new offer I’d back out of it. It’s just too tight. Some courses teach that you can get sub2 houses and still pay retail… but I don’t buy it. You might make a little $ keeping it the way it is, but it’s risky, and one problem can cost you a lot. Make your own decision.
I suggest you take advantage of some of the programs offered on this site, and/or get a mentor before jumping into another deal… this one could end up painful.
Good luck!
Z
Thanks Guys. We renegotiated with Seller, they seem willing to just deed the property over without the 6.5k. We already have a tenant buyer interested. He has $5k Option, with $1300mo available. Thanks for the input!
Good for you… one call made you $6k!! How much is the selling price?
Z
The purchase price is $123,500.
Make sure you charge your tenant/buyer around 135k-139k
Z
Thanks Znick, I appreciate your generosity. We have not finished the numbers for the Tenant Buyers purchase price. We usually give them 3 choices. High Option$–Lower Price, Medium Option$–Medium Price, Low Option$–Higher Price. More than Likely the price will be around $139k. Thanks again! -Corey
Which is it? Your first deal or one of many and you “usually” do a particular way?
Sandwich Lease and Traditional are my normal methods. I alway market properties to Tenant Buyers. I am leaning towards more SUB2 for aquisition though, it is a little more solid than Sandwhich Lease.