Do I have any financing options here?

Question

I have an acquaintance who wants to walk away from his property. He has no interest in making fixes, cleaning, and selling his stuff. He has no interest in making money. He just wants out without a foreclosure.

He owes $114,000 on a property worth about $135,000 in a mostly affluent suburb with excellent schools. Rent comps look like they are around $1,350.

He is not interested in a sub2 because he says he is looking for a clean break. I don't have 20 percent of $114,000 ($23,000) right now.

Is there any way I can buy this house? Can he transfer the title to me under a sub2, then I immediately refinance?

Or is there another way I'm not thinking of?

Edit: It's an FHA loan at 5%. I can't assume it because I wouldn't be an owner/occupant.

William Hochstedler · Answer

@Jessica G.

Does he prefer a clean break like foreclosure?  I think you need to do a little salesmanship here.  A guru once told me, "Find the seller's primary motivation to sell and satisfy it overwhelmingly."

Your offering a creative solution where he can walk away from his property while his mortgage continues to get paid, thus improving his credit.  Moreover, you can do it quickly.

When you get title, after 3 months you can put it up for sale and after 6 you can refi based on appraisal (if advantageous).  Or he can spend the same time frame receiving certified mail and having public notices taped to his door only to destroy his credit for 3-7 years.

If I were in his shoes, this wouldn't be a difficult choice.

Good luck!

John Chapman · Answer

@Jessica G. I'm sorry, but this doesn't sound even remotely like a deal.  That's really thin equity and I promise you will need to make repairs.  I'd pass.

In answer to your original question, I think you are asking whether the bank will let you take it subject to and then refinance based on a new appraisal.  There is zero chance a bank will let you do that unless you are doing significant repairs, at which point you'd likely be paying more than retail.

If you are looking to purchase a rental with less than a 20% downpayment and not do subject to, then the only way I know to do it is to buy a fixer upper, do lots of repairs, and then refi based on a new appraisal.  That's the way I buy, and I like it because when I'm done, I have a brand new, maintenance free house that is exactly the way I want it.

Jessica G. · Answer

@William Hochstedler

@John Chapman

Hi John! I agree that the house is tiny! But on MLS, the cheapest 3/2s in Allen by far are $1,500 and up. I whether the house makes sense as a rental depends on what his mortgage payment is.

Thanks William for the tips! I will try to convince him that the only way he's getting out of this house trouble-free is via sub2 (which I think is true, actually).

John Chapman · Answer

Yeah, Allen is a very nice area, there's no question about it.  If he's not willing to do subject to, though, I don't see how you can make the deal work.  The only other way I can think of would be private money.

As an aside, that's a pretty small house to be getting $1350/month in rent.  I haven't looked at Allen in years but off the cuff that seems kind of high.  Usually you can get 1% of ARV in rents (e.g. $1350 on a $135,000 house), but my experience is that home prices have risen much faster than rents lately.  Not saying it's not achievable but I would really look more into it.

Jessica G. · Answer

@William Hochstedler

@John Chapman

Jessica G. · Answer

Hey, sorry guys! I did mean a sub2 loan, or AITD, where he would transfer the title to me and I would take over the payments. That's what I would like to do, but he is afraid that wouldn't be the clean break he is looking for. I am just trying to see if there is another way to buy it.

The repairs the property needs (without having looked at it myself yet) are dead tree removal and replaced fence post. Then of course it would need the normal prep for sale or rent. It's a very nice, quiet neighborhood in the middle of an extremely affluent suburb of Dallas (Allen, about halfway between McKinney and Richardson).

Here is a recently sold comp (same layout) he showed me that is one block over. http://www.zillow.com/homedetails/1400-Flameleaf-Dr-Allen-TX-75002/26633257_zpid/

William Hochstedler · Answer

Apologies.  I think AITD is what you meant by the sub2.  I think that @John Chapman (and me) took it as "subject to" improvements, which is typically how we use that term here.

Banks like Wells Fargo have programs that will finance improvements.  I think they only apply to owner occupied.

If your friend is just walking away, why does he care what happens if the mortgage gets paid?  In other words, why would you consider a quick refi, instead of riding it for a while?

Cheers,
	Wm

William Hochstedler · Answer

I agree with @John Chapman that the equity is pretty thin.  Most investment loans are 70% LTV, so even if you could finance it based on appraisal rather than purchase, you could only borrow $94,500K against it meaning that you'd still need to bring $19,500 to the table (plus closing costs).

I don't know anything about Texas lien law, but if it is a lien theory state, you should have the option of an all-inclusive trust deed, sometimes called a wrap-around mortgage.  This means that your friend would seller-finance the property to you subject to the existing mortgage which would remain in his name and he'd continue to pay (often through escrow).

Lots of caveats with wraps including the "due on sale" clause, so make sure you know what you're doing, but it is an option allowing you to get into the property and refi it based on appraisal (6 mo -1 year) or when the LTV reaches 70% or whatever banks are offering at that time.

Even with a relatively small equity position, to be able to get into an investment property for closing costs, and if your friend would extend this instrument for 5-10+ years, it could be a really nice deal.

Good luck!

Wm

Do I have any financing options here?

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