Potential Deal: How can this be seller financed?

Question

Hi BP!

A seller contacted me after receiving one of my pieces of direct mail and is interested in selling their duplex. She mentioned she's willing to do seller financing however she still owes $95k on her loan. I asked her what she'd be willing to sell it to me for and all she said is she wants to walk away with $35-40k. She's a family friend of my wife's family and is open to working with me on how we can structure this that benefits both of us.

Each side is a 3 bed/2 bath, tenants have been there for 5 - 9 years and are currently paying $650. The property is only ~25 years old and with some cosmetic updates could rent for $850 each at least.

Is there a way that I could structure this deal using seller financing where she get's a chunk of her $35-40k now and the rest once I fix up the units and refinance? Appreciate and advice from you creative financers out there. I'm in Wisconsin if that helps. Thanks!

Mitch Messer · Answer

Thanks for the mention, @Brenden Mitchum! Yes, you're on track! @Mitch Kennedy, I'd definitely explore this as a sub-to deal, but there's more info needed:What is the property currently worth? Taking over $95K in debt and offering to pay $40K to the seller values the property at $135K. Is that an accurate assessment of the value?How much is needed in renovation cost? At 25 years, you would expect the roof, HVAC and water heater to need replacement, if they haven't been already.What is the monthly loan payment?With this information, you can project operating expenses, net operating income (NOI), cash flow, and cash-on-cash return.Subject-to is just an acquisition tactic, with no guarantee that you'll actually make money down the road.Running the numbers is the first step to determining if this is REALLY a great deal or not!Lastly, I would urge you to be EXTRA careful working deals with family or close friends of family. Too often, today's "great deal" becomes tomorrow's awkward Thanksgiving discussion topic.

Mitch Kennedy · Answer

I'll get reading on the Subject-to piece, thank you so much for the valuable information. Appreciate the help from my fellow "Mitch" crew :)

Mitch Messer · Answer

Hey @Mitch Kennedy, let's be clear: Purchasing subject-to is NOT the same as assuming the loan.Did you speak to the *actual* lender, or to some phone representative? If it's a major bank, then that "you can't do it" response is entirely predictable but wholly inaccurate.We've been doing these for two decades!Once you've seen the property and have a sense for renovations, I recommend you perform TWO analyses: One assuming a conventional loan (yuck!), and the other assuming a sub-to purchase.Working the numbers will make it clear what the benefits of each approach are.Even if you DON'T do the deal, sub-to is too powerful a tactic to NOT understand!You can find more resources here on BiggerPockets at https://www.biggerpockets.com/...

Brenden Mitchum · Answer

Hey @Mitch Kennedy, sounds like a perfect opportunity for Subject To! I am definitely no expert on this.. @Mitch Messer would be the guy to talk to. However, it's not too complicated. If she wants $40k, agree to pay her a downpayment now on a seller second that gets fully paid off after you refi. She transfers title to you and you take on her loan payments - most banks you can just change the login and auto-pay account so that you don't have to alert them to the change in ownership. Mitch M. - Am I fairly on track here?

Mitch Kennedy · Answer

Thank you for the responses and info @Mitch Messer @Brenden Mitchum! I reached out to the lender and he said I can't assume their loan... and the seller could only seller finance if the $96k loan is paid off.I dug into comps today and it could actually be worth closer to $220k based on a duplex sale from October (let's call it $200k to be conservative), but based on what the seller wants from the sale they'd sell it for ~$140k. I'm seeing the property on Thursday so I don't know 100% what work is needed inside but she mentioned some cosmetic updates would likely be needed, $5-10k max (I'd do the work myself). I'm not sure about HVAC/water heater age, but roof is 2.5 years old as well.My current capital is a bit limited which is why I was looking to get it with seller financing and limiting my down payment and then paying back the seller the rest of their $ once I refinance but that isn't looking too promising. It looks like I may have to pull some funds together and go at it the conventional route... if numbers make sense once I re-run them.