Subject To - No or Negative Equity Exit Strategy

[Greg Zimdahl]

Hi BP,

Looking at a seller with no or a slightly negative equity position my research leads me to believe that a "subject to" deal is my best option. Considering the house is in good condition and no major repairs needed. I am under the assumption that my exit strategy would be a 1 to 2 year "lease to own" with my new tenant buyer. Say ARV (though I am assuming I am not putting any money in / pretty house) is 120K seller owes 125K. Seller just wants out and will literally give me to make their frustration go away.

I'm lead to believe I can charge an "option fee" to my tenant buyer say 15K. Catch a slight spread on the mortgage say $200 a month. Finally when my tenant buyer has his/her financial life in order a year or two from now they will be purchasing the property slightly higher than fair market value (of course as previously agreed upon).

Sounds great other than I am fuzzy as to how my tenant buyer is really going to refi when the time comes. When they are ready to refi they will need at least another 3.5% for FHA or worse 20% traditional. However at this point, especially if we started with a slight negative equity position we will be lucky to just be positive.

So my questions are:

1. What is my exit? How can I be confident the  tenant will get this refi'd and get me out?

2. What Can be done about the negative equity position? Do I need to pay it out? 

3. What is reasonable to sell the property for to the new tenant buyer?

4. Will this situation leave my original owner left unable to qualify for a new loan as it looks like they are still paying for the first mortgage?

Am I close here or am I missing some major pieces?

Thanks in advance,

Greg Zimdahl 

[Steve Vaughan]

I have done a couple zero equity, no work needed long-term subject-to's.  I have held them in my rental portfolio.  Will market rent cover the payment and normal op expenses of it as a rental @Greg Zimdahl?  Probably not if a pretty house in a nice area.

Sometimes these sellers have cash-out-refi'd and already spent their equity.  These folks need to bring money to the closing table. The vacation they took and fancy car in the driveway has now come due.  Will they pay the mortgage down a bit to get right-side-up?

I DO NOT recommend jacking up the price and trolling for suckers for a premium lease option.  If the property doesn't appraise for the strike price at exercise you will be up a creek. If the 'rent rate' you charge is deemed to be over market, same thing.  A couple of the many problems with that exit strategy.