My first call back

[Miles White]

I have been sending out mailers for the past two weeks and I just recieved my first call back ( Yay), the guy lives out of state, wants to sell his fathers property immediately, and the house from what I have seen through my research is in great condition. The guy was sounding like the ideal canidate for a first time wholesaler, but his father has $155,000 dollars left on his mortgage, this to me sounds like a "subject to" deal which I have no experience at all in so I would love some feed back in what steps I need to take to make this deal happen or even if I should go forth with this deal?

[Jeff Copeland]

Equity is the difference between what the property is worth, and what is owed. If your ARV is truly $200k, and he truly owes $155k, then there is $45k in equity in the property.

You need to be absolutely sure of the ARV (and the mortgage/lien balance(s)), then the next question is how much will be sell the house for?

With an ARV of $200k, using the wholesaling "rule of thumb" formula of 70% ARV, minus repair costs, minus your assignment fee, to get your offer price,  there isn't any room for a true wholesale deal to another investor. $155k is already 77.5% of ARV (or, to look at it another way 70% ARV already puts you at $140k), and you already know the owner can't take less than $155k.

Chances are the owner is also going to want some cash out of the sale, so he's probably going to want more than the loan payoff for the house, leaving even less meat on the bone.

I'm not saying there isn't a potential deal here somehow - but a typical investor/flipper is probably going to need more equity to work with. So I would be hesitant about tying up the owner's property with a contract if you don't have a buyer lined up in advance.

Subject-To deals are very risky and are not for the faint of heart (or newbie investors) - banks are more frequently using the due on sale clause these days - meaning if they find out the owner conveyed title, they will call the entire mortgage due immediately. See http://www.biggerpockets.com/forums/311/topics/183...

And even if you owned the house subject to the $155k mortgage, all of the numbers above still hold true - unless you are just banking on rapid appreciation (another risky proposition), I don't see the benefit of owning it sub-to. 

If the house doesn't need much work to be "rental ready" and would cash flow as a rental, it might be possible to wholesale it to a buy and hold investor who wants to add it to their rental portfolio. This may be your best and only option from a wholesale standpoint.

The seller's best option might be to list this property with a realtor slightly below market value to stimulate a quick sale - sometimes that's the best advice an investor can give a seller - the numbers are what they are, and the seller should at least be advised that this is an option. They usually appreciate the honesty, and the good karma has a way of coming back around.