Is this a good "Subject To" opportunity?

Question

Greetings all,

I found a motivated seller. He owns the house but lives out of state. It's currently rented by a "friend" who pays well below market - just enough to cover the mortgage. He owes 95k and the house is probably worth 95 after repairs. (He used a VA loan with no money down and was instantly under water). He says it needs about 15k in make ready. I have not yet been inside to confirm the rehab needs.

Typically I am a buy and hold investor. This property would rent for 950/ mo. With so little equity and potentially 15k or more in repairs, is this something worth doing as a subject to?

Any other creative options out there?

I'm all ears!

Best,

Tom

Tom Camarda · Answer

Thanks Gentlemen,

I agree the Subject To is not a good option and run away I will... Wondering though...

How would one go about negotiating a short sale for this property?

TC

David Stone · Answer

I would let this lead go and get in on a better deal. You would be buying above market value before fixes started and still be at market value after. If the house is still in poor shape after fixes you won't collect top market rents. You run the risk of putting yourself in a similar situation as this motivated seller.

Good luck with whatever you choose. If you have the time it might not be a bad idea to get inside and confirm the price of fixed and try and negotiate the price and terms in person.

Ed W. · Answer

@Tom Camarda

Creative options can't turn this sow's ear into a silk purse.  Paying $110k (purchase price + rehab) for something you believe to have an ARV of only $95k with rental income that will barely pay (or, perhaps, slightly exceed) only the mortgage payment (that is, leave you no money for the other expenses) is a very large accident waiting to happen (actually, there will be no waiting for the accident - as soon as you close you'll be a cooked goose).  Run away from this as fast as you can.

Paying full price (or close to it) only works with:

(1) guaranteed and substantial appreciation (exceedingly rare almost to the point of impossible and certainly not the case here)

(2) exceedingly good payment terms (very low payments such that very good and very consistent POSITIVE monthly cash flow can be generated from rents).  Taking subject to a very low mortgage balance  (or having a free and clear property) and giving the seller a note with terms very favorable to you for the balance would be okay in this scenario.  If the outlook for rents is stable to increasing over the long term of the note (long term and very low or no interest is almost always needed to get the monthly payments low enough) this strategy might then work.  Even then, however, you have very little in the way of exit strategies to get out of the deal if life throws you a curve and you need to exit quickly.  You might get the seller/mortgagee to take a discount for early payment on his note but that is not a sure thing particularly if he learns that you need to sell quickly.

I've done these deals but they come along only once in a blue moon.