Subject to deal

[Christian Cabrera]

My very first wholesaling deal: the seller has a mortgage in the amount of $168k and Zillow lists the house at $163k meaning no equity. I've done a lot of research trying to figure out the best way to go about this deal. 

The only route that makes sense is "subject to". I found a buyer that is willing to put $10k in a escrow for 6 months of mortgage payments upfront to motivate bank to not use "due on sale clause". Also, $5k to give seller as an incentive since he's not as motivated as desired. Assignment fee is $10k, and the plan is to sell the property within 6 months listing it at $250k since similar houses nearby are currently at $270k. Property needs minimal repairs and cosmetic work. 

Thoughts? Comments? Advise?  Thank you in advanced! 

[Jeff Rappaport]

@Christian Cabrera

I am very confused by your post!  Is the property worth $250k-$270K or is it worth $163K.  The zestimate on zillow is hardly a reliable source for comparables.  Putting $10k in escrow on a subject to deal will do nothing for the bank in terms of the due on sale clause.  In my opinion, the last thing you want to do is alert the bank that you and your seller have violated the due on sale clause.  

I am not sure why you would be giving the seller $5k if there is no equity in the property.  I am even more confused why someone would give you an assignment fee of $10K.  I assume that the property is actually worth $250-270K.  If that is the case no wonder the seller is not very motivated.  If the property is not worth that how do you expect to sell it for $250K?

In my experience (I have done a lot of subject to deals) that the biggest motivating factor for a seller to do a subject to deal is debt relief.  If your seller is not looking for debt relief you are not structuring the deal correctly.  

Lets look at some ways you might structure this deal:

1.  Based on your numbers you could probably offer the seller $175-$185K cash.  This certainly depends on your comps, repair costs and what rehabbers are paying in your area. 

2.  Owner financing - You could offer $10K down, a low interest rate and $240K for the property.  You could then wholesale the deal to another investor or owner occupant for $20-$25K down and pass on a good payment and low interest rate that would have a rapid pay down on the principle amount.  You could do this as a wrap around mortgage or an all inclusive trust deed (either one will violate the due on sale clause).  You could also do a Contract for Deed or a Land Contract that will not violate the due on sale clause.  

3.  Owner financing - You could offer a lower price like $210K with a higher interest rate (4-5%) and a small or nothing down.  You could then wholesale the property to someone else just like you did in the last example.  If you get a small down ($5k or less) you could keep it and rent to own it to someone else.  You would have nothing in it as you would recoup your down payment through a tenant buyer.  You may have a decent positive cash flow a month and you will get the principle pay down of the loan.  You may have a pretty nice pay day at the end of the term.

4.  Rent to own - Offer $215K with a payment that is either in line with rents in the area or what covers the monthly payment.  Tell the seller after 60 days he will not have to worry about maintenance and repairs on the property.  Depending on what you negotiate you can either stay in the deal or wholesale it to an owner occupant.  

I could probably create several other scenarios that would work as well.  The point is that you need to gather more information from the seller and find out what the seller's needs are.  Right now you are just trying to make this deal fit with what you want.  I can tell you if there is real motivation on the sellers part this would be a deal for me.  I would construct something that would fit the seller's needs.  

I made a bunch of assumptions here.  Don't have all the facts.  Not sure you do either.  If you have other questions you can pm me.  Good luck with this one!