I thought I would get feedback on this deal
I have a possible Subject To for a property that is worth around $105-115k. The seller refinanced the mortgage in Aug 2001 for 80% of the value at the time (97k) which was $77,600 at 10.4% with no escrow. The house has a tenant currently in the house under a $1000/month lease ending in October of this year. I can do a subject to and he wants $10k in cash to deal with some financial problems. I have a good idea at what I would do, but I thought I would see what others would do to see if another good idea pops up.
Tax - $1934/year
Insurance - $650/year
Mortgage payment - $740.52/month
Minimal repairs need to be done, just a few cosmetic things (2-3k) to bring it up to par.
The house backs up to a fairly busy street however.
rjb0467,
I do not see a return on your investment if you give $10K down.
The payments will total $955.00 per month. The 10.4% loan makes this a very poor deal along with the $10K down. Plus the re-hab work you say needs to be done. I do not see an exit strategy here.
You need to learn how to use the figures on a deal like this to eliminate any equity the owner thinks he has. Done correctly this is a 'U-haul' money deal, no more than $500 would be my offer.
This even though the payments are high considering current interest rates, you would still find a 'Non Qualifing' buyer with $8K-$10K down. I only clean them and not fix them, so no re-hab, the new owner can do it. Forget about renting you will never see your money the way you are talking about structuring the deal.
John $Cash$ Locke
John,
Thanks for the fast reply. I have been feeling out his financial situation to try and trim that $10k down to something that will solve his problems. So far I haven't figured that out, but I need to talk to him a little more to see what the financial problem really is.
How do I get rid of the equity that the owner thinks he has? He has probably taken out as much as he can.
I haven't figured out how to make this work yet either.
Ray
How is your credit posture? If the property will appraise for $110K, then an 80% refinance will get you $88K before closing/settlement costs.
I don't know what investor rates you could get, but prime +1% is pretty common in my area. LIBOR based ARMs are getting around 5%, too. Even at a 6% rate, your debt service will only be $528 on a $88K loan.
You don't say whether the seller is current or behind on his mortgage right now, though you did say he has some credit issues. Reduce the $10K walkaway money he is asking for by the amount of any arrearages and the amount of any repairs (be extra conservative when estimating repair costs). If you want to be generous, you could still offer 2K but only if you can refinance the mortgage loan. You may get most of that 2K back as a credit at settlement for the seller's prorated share of the property taxes since there is no escrow account collecting them.
This is one way I see to make this one profitable in the short term until the lease is up. I know that the idea of Subject To is to keep the loan in the seller's name, but if you have the credit to make the numbers work with a refinance, would you want to try it? Get that 6% loan in place, then (if I may take a page out of John Locke's book) sell on contract for deed at $115 with 90% financing at 8.25% after the lease expires.
One of my mortgage lenders tells me that they will accept a refinance application one day after my name is on the recorded title. So, do the Subject To, get your name on the deed, then refinance the seller's loan to lower the debt service and improve your cash flow.
The current owner is not behind on any payments. He has a couple of rentals, and this one he is trying to get a little cash from to solve a money problem. So is the purpose of going through the Subject To to just get the title as soon as possible? This seems pretty much like a regular purchase using money from a lender except that you get the title fast and can get the seller the money as fast as possible.
Thanks for the brainstorming options.
Ray
rjb0467,
If you have the credit and financing available to you, then DaveT gave you good advice on a way to purchase the property.
The Subject To method is where you use the existing financing and get the deed to the property. There is no credit check on your part, the only money required is what you give the seller for his equity.
It sounds like you are dealing with an investor with this deal. Whenever I see a property like the one you have described and an investor is involved I would suggest caution prevail in your dealings.
Is he selling because he is short on cash the only reason he is selling? Due diligence is required on your part with this one.
John $Cash$ Locke
John,
He is an older gentlemen that has a couple of properties for rentals that were old owner occupied homes.
I guess I asked my question a little wierd. I was asking is it worth it to take the property Subject To instead of just doing a straight purchase using the scenario that DaveT suggested? The only benefit I see to doing it Subject To is to speed up the process.
Thanks,
Ray
If the economics don't quite work out without refinancing, see if you can get a "package deal" on some his rentals, since you said the seller had other real estate. [Key here is to do a search on the property tax roles and find out his other properties and possibly see if they are vacant or if he is in arrears on the property taxes, which could be the reason for his cash needs. Otherwise, ask him what he needs the cash for. At worst he will say its none of your business and at best he may reveal the true problem.
If you have the $10,000 to give him, it looks as though you will be out of pocket about $14,000-$15,000 on this deal with fix-up and closing costs. As the other posters pointed out, the deal is not that great at that point. How to you get it better and still give the guy his $10,000? Require the guy to include another one of his properties. Maybe you can tie up one of the other properties on a long-term lease option or possibly buy both for his $10,000 cash he needs. It can't hurt asking him if he would consider selling more than just that one property.
Taxjunkie