Those are great questions…!
Not every house should be purchased sub2 just because you can.
Frankly, I do buy and resell underwater houses. However, I don’t recommend this, until you’ve got three or four solid deals under your belt, so that you know what to look for; what buyers will buy; how long it takes to sell, etc. Otherwise, you might be surprised how long it takes to market an underwater house for any appreciable amount of money up front.
If a seller has 10% equity in his house, realistically speaking, he “realistically” has zero equity in his house. If he sells it conventionally, the agent fees and closing costs will eat up every dime of that equity… and if he has to drop the price for a quicker sale, he might have to come out of pocket to get his house sold using an agent. That’s why so many sellers decide they’ll try FSBO’ing (for sale by owner’ing) their house instead. They simply need a sale, but can’t pay the agent.
Well, imagine finding a seller that is completely threatened by the idea of selling themselves. Imagine coupling that with one or two failed escrows, and a job offer out of state… You’ve got a motivated seller. And they’ll really get excited when they find out you’ll take over their payments, protect their credit, and not have to pay anything out of pocket to make it all happen… And (drum roll) you offer them two or three thousand to move out! Yes, you could offer them nothing, and I do, but sometimes the deal is good enough to actually pay the seller to move out, and this tips the scales in your favor, if its a decision to stay and save moving money, or get out of Dodge in two weeks.
Meantime, buying at 10% below retail is NOT hard whatsoever. However, finding that gem is the issue. Buying at 10% under retail, is effectively buying a house with zero equity. If you had to sell using an agent, you would be in the same boat as the original seller.
In this case, you’re simply assuming the seller’s equity position, but using a sophisticated method to reselling to actually make money, and solve the original seller’s “liquidation” problem.
I mark up the price about 10% over retail regardless of the other financing issues. However, the underlying loan terms have GOT to be marketable. You dont’ want to Sub2 properties with loans that “explode” since you don’t know for sure if you’ll have the loans paid off in a certain time frame, or not. Sometimes we sell a house a couple of times before a buyer finally pays us off. That could mean a four or five year stint with a given property. That also means we collected multiple down payments in the $10 to $15k range ($30,000!).
In my experience, the attractiveness/location of the house is the primary concern; the payment/financing is next, and finally the price is last (when selling). If it’s affordable, even the buyers that are wary of the price, will still pull the trigger …if the neighborhood and houses are attractive enough. Hope springs eternal that they can get a loan. Since we hold title, we can offer financing for as long as it takes for the price to match the market. That’s the fantastic flexibility we have as sub2 investors.
Meanwhile, to answer your question about price more specifically, we’ve sold houses that were literally priced at 20% over retail. The houses were REALLY nice and the payment seemed good by comparison. One home WAS older, but it had granite counters, stainless appliances, a 180 view of the valley, RV parking, storage, and the den looked like it as from a cabin in the woods with vaulted wood, open beam ceilings, and wood/gas fireplace and deep, natural-wood, raised paneling …and it was situated out of view of neighbors. Just a gem.
You don’t need to lie about the price. Just pay the transfer taxes and take the money from your new buyer’s down payments. It’s the cost of doing business in the freest country in the world. Don’t muck up your deals with nickel and dime short cuts.