Need opinion on analysis of a SubTo/SellerFinance to Wrap desl

[Paul Gomez]

I have been running some numbers on a deal that utilizes a hybrid SubTo/Seller Finance deal into a wrap around mortgage. Please follow along and be brutally honest with feedback.

Property: 

Motivated Seller Listing on MLS. Sale price $355,000. Can't sell house on open market due to comps being in nicer condition, high interest rate environment, house needs updates.

Underlying debt: 

$169,000 remaining principal. 2.8% interest rate, 240 month original term. -> Debt payment $1006 /month

Assumptions: 

-Seller is motivated and does not need proceeds from the sale of this house. 

-The house is overvalued by around $25k when comparing with MLS comps. Goal is to use this in negotiating seller finance terms if necessary.

-Initially, I would assume I could do the hybrid, sellfi portion of it at a 4.5% rate at 360 months

     ->Principal value: $169k 

     -> Delta between asking price and remining principal ($355k-169k=$185k) , at terms above -> $940 /month

-2% Seller agent fee  -> $7,100

-2% Closing cost -> $7,100

-Seller pays closing cost and commissions

-I pay attorney/title fee - $3000

Acquisition Strategy:

Offer full asking price -> $355k using hybrid terms

-SubTo remaining debt ->  $1006 /month

-Seller finance delta (from above assumptions) -> $940

Total Debt Service: $1946

Disposition Strategy:

-Sell home on wrapped mortgage, 360 months, 8%, $355k, 10% down ($319,500 principal)

     Payment  -> $2344 (local rental comps about $100-200 above this amount, so feels justified for 8% rate)

Profit:

Upfront cash from the deal => $ 35,500 down payment -$3000 attorney => $32,500

Cash flow => $397.51 per month => $4770 /year

Note a few assumptions were made here. 

Positives: Owner gets full asking price, no money down, cash upfront, cash flows, do not own the property so no rental management.

Caveats: No equity play, assuming seller would do 4.5% or less rate, assuming there is a buyer who will accept higher wrapped mortgage payment in this area. assumes seller does not need proceeds from sale of the house.

I know this is a long one, any thoughts? Does a subto deal always have to be an equity play or can you capitalize on the loan arbitrage between underlying debt and a wrapped mortgage? What am I missing that kills the deal?

[Shiela R.]

@Paul Gomez I like your thinking! In my experience wraps are more of a PITA than they are worth. My answer is usually a lease option (L/O) but I see you are in TX and TX is pretty unfriendly to a L/O strategy that will actually work. TX people, please chime in! But I think the option can only be for 6 months. My L/Os (for exit) average 18 months to be ready to bring in new financing. But, if your assumption is correct that the seller is motivated and doesn't need the proceeds than they are a prime candidate for sub to on acquisition. Agree with @Chris Davidson that you may need to offer a balloon sooner than later. It's all how you present it;) 

Best of luck!

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