Sub 2 / Option

I have a motivated seller who bought a house last year 100% financed. She had it listed at $214K and dropped it to $189K and it is now expired. She currently owes $189K. She is willing to take up to a $15K loss. I would like to take the house either sub 2 or on a option. The comps support $191K on the high side. The house is 1 year old and in excellent condition. There is still new construction in this subdivision with approximately 80% occpupied lots. It seems that something could be done with this but I am not sure of best exit strategy or paper work. Any suggestions would be gratefully accepted.

What you have is a motivated seller with zero equity.

The fact that there are still new units going up in the subdivision means that she is competing with the builder for the buyers who are interested in this area. That’s tough to do since a buyer can pick out the amenities on a new house, along with getting any builder’s incentives that might be offered. Why should a qualified buyer with good credit and a down payment purchase her house when they can get a brand new house just the way they want from the builder?

To get a Realtor® interested in listing this house, they have to list it at a price that will allow room for their commission. This might be above the market price, hence no buyers. This might be why the listing expired without a sale.

You said that she was willing to take a fifteen thousand dollar loss on the house in order to sell it. Would she pay you fifteen thousand dollars to take over her loan payments and deed the house over to you? I have had people pay me to take a house “subject-to” the existing financing. Perhaps your seller will agree to this when you show her the benefits to her for doing so.

Your exit strategy might be to lease this house to a tenant who also has purchased an option to buy the property from you at some time during the term of the lease and the option. This way, you are not competing directly with the builder as they are most likely looking for buyers who can cash them out with new financing. You will be serving a different niche when you target rent to own tenant/buyers.

Overall, it looks like a skinny deal to me, but maybe worth doing. The $15K from the seller is less than 10% of the fair market value of the house, so this is not very far below market. Collecting a good Non-Refundable Option Consideration from a tenant/buyer might make it worthwhile - if your rental net operating income analysis indicates that you can still show a positive cash flow on a monthly basis. I would avoid a negative cash flow situation under normal circumstances.

Your option to the tenant/buyer should reflect a higher sales price than your purchase price. This spread in prices gives you a third payday when and if the tenant/buyer exercises their option and cashes you out of the deal. If the option term runs long enough, perhaps the builder will have finished building out the subdivision, so you will no longer be competing with him for the available buyers. This will make it easier on you if you have to repeat the lease/option process, or just sell the property outright.

Because the house is only one year old, you shouldn’t have any major maintenace issues for a while. Perhaps even the builder’s warranties will transfer to you as an added bonus.

What about her willing to take a $15K loss? Maybe selling to a tenant buyer with a 1 year balloon and raising the sales price for some extra equity?

Yeah, that’s kinda what I was trying to describe above. Perhaps I wasn’t too clear.

Your seller can’t really just lower her price below the current mortgage balance without going into her pocket to make up the difference.

I doubt that an institutional lender will discount the note without a good reason to do so, but then, I don’t really do short sales. Someone with experience in that area might be able to advise you about the chances for this.

That’s why I asked you if she would pay you fifteen thousand dollars to take over her loan payments and deed the house over to you. You would take the property subject to the existing financing at the current loan balance. Part of your profit is the amount that she is willing to pay you to take over this position. Her “loss” is the amount that she must pay you to do the transaction - the $15K.

The lease/option to a tenant/buyer is your exit strategy, as I described above. A one year option is great if you can get a tenant/buyer to exercise it in one year and cash you out. My tenant/buyers usually want more time, but go for one year if you can get it.

PS: Don’t be tempted to take the property “subject-to”, collect the $15K from the seller, and then disappear without leasing the property to a tenant/buyer and making the mortgage payments until it sells. They have a name for this, and it isn’t good. Don’t do the deal if you can’t perform as you agreed.