Possible "Sub To" deal in Fort Worth, TX...

[Scott Nipp]

I have been looking at a possible deal in Lake Country (subdivision in Fort Worth, TX 76179) on a SFR. Here are the specs on the house...

• 3/2/2 single story w/ pool
• Needs only minor touch up and major work or new A/C system. So total rehab ~$6k.
• Current balance: $135,489.57
• Mortgage company: Wells Fargo
• Payments w/ escrow: $1388
• Payments w/o escrow: $760
• Interest rate: 4.750%
• Number of payments left: 326

Now for the complications... The owner has begun a loan modification with Wells Fargo. She has made one payment on this loan modification program and has two more to go. Here are the details after the loan modification...

• Payments w/ escrow: $1317
• Interest rate: 4.250%Term: 360mo

Here are the comps for that neighborhood...

• ARV: $145k but likely higher up to $160k
• Rental: $1400-1600/mo

I'm concerned about this mortgage being with Wells Fargo and them actually executing the DOS clause. This would probably be a deal killer as this would add a huge out of pocket for us in the down payment and closing costs to finance this ourselves. Instead of being about $6-7k out of pocket to obtain control of the property this would jump to upwards of $15k - 30k.
Wells Fargo suggested the possibility of a short sale, which might be a good option if we could get them down low enough. They also said that they would sell the property for the owner if necessary with a "deed in lieu", but the owner was in over her head and I don't think she got much in the way of details here.
Obviously we want to maximize our profit on this deal if there is a deal to be made here, but I'm not sure how to do that. Additionally, I would like to recommend the option for the owner that is going to be best for her in terms of preserving her credit. What would you recommend in this situation?

[Hattie Dizmond]

No one can guarantee you that any bank won't execute the DOS clause...ever. However, the likelihood of that happening is very low. There are plenty of folks right here on BP who utilize sub-2 close to exclusively and have never had a bank call a note due. What I will tell you, as someone who spend close to 20-years on large corporate banking, owning property is not any bank's business model. Money is their business model. No bank wants to turn a performing asset into a non-performing one. You'll need to ensure the seller fully understands what she is signing up for on a sub-2 sale. Otherwise, I wouldn't personally worry about the bank.

As for the loan mod, as long as it is completed and the loan is brought current, that shouldn't pose a problem.  Again, the bank shouldn't care who is paying the loan, just that it's getting paid.

My bigger concern is that you don't have much in terms of cash flow. Your payments are sitting at $1317 and your rent is around $1400. (I always use the low end!) Combine that with the fact that, particularly if you have to have a new A/C, I think your rehab is low, and you're probably looking at closer to $10k, your COC doesn't look very good for this.

The sub-2 is prob best for the owner's credit, since a short sale with significant loss is almost as bad as a foreclosure.  However, the sub-2 doesn't alleviate the debt from the owner's credit report.  What's best for the seller has to be viewed in terms of what the seller actually needs.

Just my opinion.