Paying for the equity only in a sub to deal?

General Real Estate Investing
1

Do you normally just make an offer for the remaining equity in a sub to deal? I read a sub to course recently, and it said that you should make an offer on the equity remaining on the home, but then it said to walk through the place and see what work it needs, kind of like an appraisal.

Should you still get the house appraised, then see what work it needs, then subtract that from your offer for the equity, or should you make an offer on the appraisal price?

Maybe its just me, but I cant see someone giving up a house for like $3000 even if they only have $5000 equity in their house.

Thanks for any advice!!

2

aares,

Glad to meet you,

Really it is pretty simple. Let’s say someone has a $200K house and owes $180K, this person has no equity in the house if you explain it properly by setting down and showing why they have no equity. This would be a “Pizza Money” for their equity deal.

The reason I know this is because I have done it hundreds of times.

“Maybe its just me, but I cant see someone giving up a house for like $3000 even if they only have $5000 equity in their house.” To answer that, “yes” it is just you.

John $Cash$ Locke

3

$cash$

Do you try to stay with a certain price range when you are buying sub2? I am in houston and the rental market here seems to top out around 1500-1600 in the outer area where there are newer houses. So I usualy don’t buy houses with mortgages over $1500/month. I also usually get the seller to pay me a couple months of payments for me to buy their house. Do you think I am missing out?

David

4

David,

Glad to meet you.

What area rents are is of no importance to me the way I sell. I sell on Contract For Deed, when done this way the Buyer has a true feeling of realizing the American Dream of home ownership. They can deduct the interest paid on their taxes, which is a very important feature when selling this way.

I have had Buyers put in swimming pools, porch additions, etc., to improve the property. I get a nice size down payment selling with a Contract for Deed, add a few points to the interest rate I purchased at, which gives me a monthly passive income. Then I add property appreciation for the period of time until my Buyer is required to refinance at this selling price.

I stay with medium priced properties for the area (bread & butter) when I take over with a Sub 2 deal. There have been times when a Buyer has paid me to take over their property, however the majority of the time I give them “U-Haul” or “Pizza Money” to leave. What I am trying to do is help someone, yet not forget I am in the creative investing business to make money also.

One time I do remember when a friend called me from Florida and he lived in a very exclusive area of Boca Raton, boat dock etc. He had a property worth around 1 million and asked me for help as he was retiring and when he did could not make the payments. I looked him straight in the eyes and said “No Problem”, maybe not in todays Florida market, but not a few years ago it presented no problem. $100K Down No Qual, took about 1 week to sell it for him.

As the auto dealers say “There is an ass for every seat” so goes it in the creative real estate industry if you understand how it is done and done properly.

So to answer your question, just keep an open mind and you won’t miss much.

John $Cash$ Locke

5

Thank you Cash for your response!

How do you determine if the equity in the house is low enough to buy, or is it pretty much personal preference?

Do you still take into consideration repairs? If so, how do you deduct your payment for the equity if you are already giving them a low dollar amount for their house?

Thanks again!

6

aares,

First I show the house owners that there is no equity in their house, which is the case on the houses I primarily market to, which are 1 – 4 year old houses. Very simple equation, when sold the conventional way you can show that 10% of the selling price goes to commissions and closing costs. This tells us that the house owner’s equity is reduced with these costs and does not go in their pocket anyway.

Now if there are any repairs, this puts them in a deficit position as far as equity goes or if I do need more deductions, there are several ways to do this. Only one example would be, “Mr. & Mrs. Seller, your house payments are $1,200 per month, if it takes 6 months to sell your house you will be paying an additional $7,200 for a house you do not want to be living in and chances are will not increase your equity any significant amount.”

Here is how I re-hab a house. I have a pair of needle nose pliers in my re-hab kit. Almost every house when the owners leave there are nails in the walls where pictures were hanging. I remove these nails and patch the holes with Spackle. When this is done my re-hab is complete. I do make sure that the house is cleaned immaculately … very important.

One of the houses I took over Sub 2, was a case where the owners were getting a divorce. The house was in a very nice neighborhood and about a 3 year old two story. This couple had three small children. There was red Kool-Aid stains in the carpets, every door in the house was punched through where apparently the husband would hit the doors with his fist, bad temper I guess. Let me not forget the Silly Putty on the ceilings.

Put the house up for $12,000 down figuring that I would knock off $4,000 for repairs when the buyers complained. Showed the house to a nice young couple with children, I watched as they were pointing out where their furniture would go, which is a get the paperwork ready to sign deal. As they were coming down the stairs from the second floor, I was waiting for the “we want it but…” The husband said, “This is exactly what we want, we are going to enjoy fixing it up. When can we move in?”

Remember when selling on a Contract for Deed the owner feels the true “American Dream” of owning their own house. Since I do not do a credit check, because when someone puts $12K down on a house their credit is good with me.

John $Cash$ Locke