What margin would you find acceptable in this sub 2 deal?

General Real Estate Investing
1

It’s a highly motivated seller. Bought house in 2002 as a single person and later married. Now its a rental and it’s not cash-flowing for her. She is 3 months in arrears. She wants it sold because her family wants to make an addition on their personal home and she needs to her fix credit.

$725 is what the current tenants pay per month. Her monthly payment is $625 including interest and tax. This is a loan refinanced in “2009 or 2010.” 2012 taxes are estimated at $760/yr. current mortgage is 100k 30year 4.25% annual fixed rate. I estimate that she might have $5000 in equity if she made 2 years payments. I’m not clear on how much equity is in it.

After $2k in repairs is worth 85-95k. Basically I need to get the curb appeal to 100% otherwise the house is acceptable.

After talking to her, I can sense she just wants it off her hands. She’s 3 months behind, she already got her cash out when she refinanced…

what do you think of this:
-purchase house subject to the current AHMSI owned loan
-purchase price is payments in arrears + her equity

exit:
-lease for 5 years at $775/mo
-option to purchase for $115,000
-non-refundable consideration for option of $4000 (covers $2k in cosmetic work and $2k for payments in arrears)
-leasee to pay for all repairs under [home own insurance’s deductible]

is $150/mo enough margin if the leasee is going to cover repairs? what else needs to be considered so I can work with such a small margin. Can this work?

Nick

2

Nick, this is not a good deal.

We don’t know if the loan reflects the market value, or not? Really? :shocked

We must know the market before we start investing. This isn’t the Nancy Pelosi, “We’ll all know the value, after we buy it” method of investing.

If the rents are $750/mo, we can bet the overhead is at least $375/mo including the taxes and insurance, maintenance, management,etc. etc. Now, our payment of $600 includes taxes and insurance of say $100/mo.

So, with $750 in rent, less $375/mo in expenses, we have about $375 left to cover the debt or the NOI. The debt is about $500/mo, not including the taxes and insurance. So the NOI, less the payment of $500/mo, equals about <-$225/mo>.

That means after we’ve paid the mortgage and expenses, we’re coming out of pocket about $225/mo.

Now add in the arrears and our negative cash flow for the year, and we have a net loss of -$6,700.

It’s no wonder the owner has decided to let it go. It’s an alligator.

If we could buy this house for about $75,000, or so, it would be a good income property.

Now, there is an alternative… Yes, there is.

Instead of renting the house, we take over the loan, and get the deed, and sell the house on easy terms. We could bring the payments current ($4,000), and sell it for say $120,000 with $8,000 down (assuming the house is attractive, and not an obsolete looking dump). Then we’d pocket the $4000 we had left.

Then we’d look for another house with two or three payments in arrears, and do the same thing again, and pocket yet another $4,000. We do that once a month, and we’ll gross $48,000 in 12 months.

Now, what would happen if we found houses that weren’t behind, that we could just take over the payments on? We would sell those for $8000 down, and keep all the money.

If we did that once, or twice, a month we would create a gross annual income of between $96,000 and $192,000 for ourselves.

It might cost us a couple of thousand dollars to find and re-market each house, but it still leaves us with a hefty profit margin. All without having to get new loans, title insurance, or paying a realtor. We’d be getting paid to solve a serious financial problem for dozens of sellers…and getting paid a wad of money to do it!

That’s what I would do with that house, but in no event would I buy it and rent it.

Interesting post.

3

Yes, having this property cashed out is the only option I see. I suppose I will start testing the waters to see if I can find the right lease-option buyer.

Price values are very funny in my community. On one hand, everything is stable and is worth a lot because we are at a VERY strategic part of the US. But because it’s a small community, the brokers and appraisers literally control house prices in a very draconian (i.e. bad) way.

If someone would man up and spend the time to get an insitutional loan at 4% they would have a reasonable debt amount for a reasonable property.

The current tax assessment is $105k. The property is worth 120,000… but so are the other 450 on the MLS right now. nah mean? If I could get a warranty deed for 58,000 I’d have closed already.

Alligator. sheesh! I’m going to pursue it a bit further to figure out how much equity she really has in it. I’m going to put out some feelers for potential buyers with $8000 to purchase an option. The interior is in great shape, it just needs curb appeal.

Thanks for the input. Please! Anyone else! Post up any thoughts you have. Gracious thanks!

4

If this house is actually worth $120k, and the seller owes $100k, then it’s worth pursuing.

However, just to be clear, the actual equity isn’t $20k. It’s $20k less the arrears of $4k, less the fix-up costs of $2k, for a gross equity of $14k.

A lease/option is NOT the exit strategy for this particular deal. It’s a full-on seller financing offer with full ownership benefits transferred. Why? Because you can’t get enough money from a lease/option buyer to cover your initial costs. Plus you’ll be responsible for ongoing repairs and maintenance, regardless of your intentions otherwise, during the lease/option term. A lease/option is a non-starter.

Get the deed, take over the payments, resell the house on a 2 to 5 year Land Contract at $120k, with $8k down. Create a spread on the payment by $50 to $100/mo. This gives you a $2k equity profit initially, a $600 to $1200 a year cash flow, and when the buyer pays you off you’ll get the rest.

5

I live in a state judicial foreclosure state (KY). I believe that because of the safe act owner financing (land contract and contract
of deeds, etc.) are not legal. Even if they are, I believe the foreclosure process can take up to a year. With that being the case, how
do you recommend selling houses after taking sub2 to ensure you get quality buyers with better downpayments?

Thanks for any guidance.

mph612

6

It seems like there is not much equity. And very little to no cash flow. Construct great terms and wholesale the contract for quick cash; then, you’re out.

You can construct a contract for deed/land contract/purchase contract (where title doesnt transfer) and you can put a 5 year balloon on it if you want.

Make the purchase price and monthly payment exactly the same as loan payoff and payments.

Then, arbitrage it.

Find a buyer looking for seller financing, that has $15k down, and then assign your contract to that buyer.

Your profit is their down payment - arrears and closing costs. $10-12k profit.

7

Don’t touch a deal unless there’s 20% equity or more and no repairs needed…