Sub 2 w/ High Payment

General Real Estate Investing
1

I received a voice mail lead on a seller whose new job is taking him out of the area. He needs to sell ASAP, and he is willing to allow his payments to be taken over, but the problem is that he has an 8.9% adj. rate mortgage with current payments that put him about $500 above market rents. He is not behind on payments, so there is no opportunity to work a short sale.

My first inclincation was to run, not walk, from this deal, but I was curious as to how other investors are dealing with these crazy adjustables. One local investor suggested that I look for a tenant-buyer that can put up a considerable option fee to offset the deficiency, but this could take time. Also, I don’t know when the next payment adjustment will take place. Here are the numbers on this one:

ARV - $280K
Asking - $280K
His all cash price - $265K
Owes - $220K on 8.9% mortgage ($1957/mo. payments)
Repairs - $200 (so he says. I took a peek at the house because it’s close by - just looking at the exterior, it’s one of the nicer homes on the street)
All cash price - $265K

I stopped here and immediately thought ‘next’ without calling him to discuss his situation, but I got a second message from the live operator service I use stating that he wanted me to contact him ASAP.

Is there any pulse to this deal at all? To me, it seems like I would have to talk him down to under $240K to even start to consider it. My first thought on an exit strategy, if I can get the house for under $240K sub2, is to retail it for-sale-by-owner for $265K to get rid of it fast. I might even throw in a free plasma tv or something like that, or I could finance 5% of the purchase so that a buyer can qualify easier. I know of local lenders without seasoning requirements, so I’m not worried about that.

Thanks.

2

The current fair market value of this property is $280K, correct?

Here’s your spiel. You’ll be glad to try to help him out. However, you are in the business to make money. It would be very hard to do that if you paid MORE than what the average person would be willing to pay for the property. Do you agree with that Mr. Seller?

Here’s your numbers.
On the open market, a RE agent will charge 6% to sell your house, correct? That’s $16,800 off of $280K. Houses normally take 6 months (or whatever in your area) to sell. Your payment is $2K/month x 6 or $12K. (does that payment include taxes and insurance? Doesn’t look like it. Need to add that in too). Most houses don’t sell for full asking price. Most allow 5% for negotiations. That’s another $14K. Now we’re down to $237K on the ‘real’ price.

Now, Mr. Seller that’s what you would get if you leave it on the open market to sell. That amount is what someone is going to have to pay to sell this house, be it you if you keep it or me if I buy it from you today. Do you agree? And for it to make since for our company to buy this from you, we need to see a potential profit. Do you agree?

Normally, we like to see a minimum of 20% potential profit in a deal if we pay cash for the house. That’s not an option here. There is always a risk involved with real estate and even if we assume your payments, our standard margin is usually 10%, which would be $28K on this house. Again, that spread isn’t here. However, this is a nice house. Here’s what I’m thinking. We put this under contract for the $220K that’s owed. At closing, you’ll get $2K to help you move. Now, that’s only a $15K spread, but if I can get the company (partner, etc) to agree, would you do it?

Raj