This could potentially be my first deal!

[Vlad Noland]

A friend of mine wants to sell his house. It's 3 beds an 2 baths at 1500 square foot. He bought it for $62k and still owes $55k on it with monthly payments of about $570. He's done his own renovations and updates, along with a shed. His goal is to make at least $15K - $20k and I'm looking to profit at least $5k. Similar houses around the neighborhood are going anywhere between $70 to $80k. 

My situation is this. I can't take out a bank loan due to credit, (I'm a student). I have no more than $5000 to work with. I'm interested in renting the place if I do get it. I want this deal bad. What's the best thing to do here?

[Michael Evans]

So here is how you calculate the numbers:

• Mortgage owed: $55K
• Seller Profit: $15K
• Your Profit: $5K
• Minimum Deal: $75K (not including closing costs)
• Market Value: $70K
• Net on Deal: -$5K

So based on how the deal is currently structured, there is no value in the deal.  So you have to create value, and here's how:

• Mortgage owed: $55K
• Market Value: $70K
• Net Value: $15K (27% of mortgage owed)
• Monthly cost: $570 + taxes + insurance
• Monthly rent: ??? You have to tell me, but let's say it's $1,000

If I'm a buy and hold investor looking for positive monthly cash flow of at least 10% per year, I need to make a net profit of $125 per month if I were to pay off the existing $55K mortgage using a conventional 20% down mortgage, 6% APR based on the following:

• Mortgage owed: $55K
• 20% down = $11K + closing costs = required investment (say $15K)
• 10% ROI on investment = $1,500/year = $125/month
• New mortgage owed: $11K with a monthly payment of $386 principle and interest
• Estimate taxes and insurance at $175/month based on 3%/year of market value
• Monthly PITI cost: $561/month
• Other property management costs: $200/month
• Total monthly cost: $761/month
• Monthly rent: $1,000
• Monthly profit: $239/month = 19% ROI
• Investor is looking for 10%, so you give the investor $125 and you split the rest of the monthly profit between you and the seller ($114/month)
• Takes 175 months (over 14 years) for you and the seller to make $20K, but you've made a deal where you've sold house so there's no mortgage on the seller's credit (didn't do subject to or seller finance), there's no out of pocket costs for you or the seller, you both have monthly income for the life of the mortgage and you can actually create second and third mortgages against the property to secure your position, so if the new buyer sells, you must be paid your $15K and $5K respectively.

There are a whole bunch of assumptions that you will need to verify and tighten, but the concept I am trying to show is that you can always make a deal even when there doesn't look like one.  If you and the seller both want your money now, you can sell the 2nd and 3rd mortgages (note selling).  There are many people (potential investors) who would love to receive a monthly cash payment of 10% per year backed by real estate and all they have to do is put down $5K - $20K.  Be creative and solution focused and look at a deal from different perspective.  Email me if you want more details.