Thoughts on a Sub 2 deal?

Question

Hi folks! I'm fairly new to proactive, full-time real estate investing, but I love and I'm actively trying to replace my income and move into this as a business. Like most, I started out looking at wholesaling, although my long-term goal is to put together a strong rental portfolio.

Here is the deal I came across, and I could try and flip it, but I would really like to keep it as a rental! I would greatly appreciate your thoughts on it.

It is a sub 2 deal on a fantastic condo in downtown Nashville, on West End Ave. The location is absolutely incredible.

Retail comp: $380k

Total remaining on 2 mortgages: $347k

Rent: $3k

Cash flow: $1k

Sub 2 term: 3 yrs

Down pmt: $17k

Total purchase price: $163

I simply want to assess the risk of doing a sub 2, the risk of the bank calling the note. Furthermore, what would it look like to try and short the 2nd mortgage. Would that simply draw attention to the deal as far as the bank is concerned?

If I decide not to hold it myself, I can try and wholesale it, although that's a bit high for an investor prop here. Then again, $1k monthly on a property isn't bad. Is there any appeal there as a wholesale deal? I'm wanting to stick with this, be creative and try and create a deal for me or someone else.

Last note: no I do not have $347k if the bank calls. I wish I did. All in due time...

Dan Walters · Answer

You are stating two different numbers here for mortgage balance($347k w/2 existing mortgages/$164k total ($147k+$17k DP).  What I assume you are saying is there is a remaining of $147k on the first mortgage and a 2nd with the difference of $200kish?

From the initial numbers you are stating it may look like a solid opportunity, however I think you're missing some "real" expenses that will make this look not so attractive.

First off let me say that I do not know the Nashville market whatsoever, so hopefully someone that is can chime in and give you a better perspective.  My experience has been that condos are not greatest of investments.  In most markets their values are the last to appreciate and the first to fall during a crash (generally speaking).  If your intent is to flip, you have a very small, specific buyer's pool as most want SFR.

If you flip, based on numbers provided ($380k retail comp and $347k existing mortgages) gives you little to no profit on the deal.  A bare bones minimum transaction of this size w/no realtors will cost you 1.5-3% in fees (up to $11k), add in an additional 3% for realtor on selling side($11k), now your under a $10k profit (assuming you have no carrying costs, repairs/upgrades, mortgage payments, utilities...etc****DON"T ASSUME THAT!) Not a deal at all.

Cash flow/rental- My subj2 deals are always taking over the existing loan with no time frame set for me to refinance/cash out or otherwise.  I take it over because the terms are favorable for the purpose of long term cash flow/rental income.  My seller understands that and has no expectation of it being refinanced.  There is no right or wrong. You can structure however you want.  This just gives me the security that I don't have to come up with $XXX,XXX at a certain point in time.  The other thing I would consider is how viable/strong is that $2800-3K/mo rental income? Is that inflated due to vacancy rate, economic conditions..etc?  Does that location historically hold those values?

Make sure you calculate for expenses.  Your monthly net income is not mortgage pmt/condo dues.  You need to factor in a percentage for maintenance every month (paint/flooring/HVAC..etc), reserves for vacancies(3-8% if not more).  All of these cutting down your net monthly.

Lastly, sub2 transactions are great, creative ways to acquire RE and get into the game, however there are some CYA steps you need to take regarding documentation and most importantly the due on sale clause.  Every mortgage has them and yes the lender can call a loan.  Regardless of the likelihood that they will is irrelevant because you just don't know.  What you have to ask yourself are 2 things when doing a sub2:

1) Will I be able to sleep at night knowing that the lender(s) could potentially call a $347k note due?

2) Would you want 20 of these same properties w/same numbers?

Hope that helps.

Brian Bandas · Answer

@Dan Walters

I don't have all the specifics on the existing loans yet, except for the fact that they are fixed rate conventional and come to around $1650/month PITI.

The down payment is what I would pay her in addition to taking over the loan via a sub2 contract. Higher than is typical, for sure. But perhaps worth it to get ahold of such a killer property?

The term is how long she will leave the loan in place, at which point I'll either be responsible to pay it off, sell it, or refi. Is it more common for the existing loan to remain for the life of the loan? I've heard both.

The total of $163 is the remaining mortgage balance (147) plus the down pmt (17). I see now that that would be 164, haha. My mistake.

PITI is $1650, condo dues are $300/mo, totaling $1950/mo.

Rented now for $2850. Should rent for $3000 without much trouble whatsoever.

Dan, first off, thanks for chiming in. Much appreciated! There may not be a deal here, but I've resolved to not back away from things that intimidate me. I figure the best way to learn is what I'm doing now: keep asking the questions I need to move forward. So what do you think? Can I pull off a deal here? Either a buy and hold, or a wholesale flip? Or is there any appeal here for an investor?

I will say this. The location is unreal. It would be an anomaly if the property didn't appreciate steadily over the next 3 years, in my opinion.

Dan Walters · Answer

Brian,

I'm not completely following the numbers that you're explaining.  You state that the total on the 2 existing mortgages is $347k.  What do you mean by your sub2 term of 3yrs, Down Payment (by/from whom?)?  Where is the $163 purchase coming from? What type of loan (FHA/VA/Conv.)? Rate? Fixed or ARM? Monthly PITI?

I have a few more comments but will wait to include once I can understand the numbers you are stating.