Considering Subto Offer - What do I need to know?

Question

Hello, I have a buyer interested in my property that I have had for almost 2 year that is not cash flowing and I am losing money on ($200-300/month easy). The current equity in the property is around ~$70k and I have invested ~$46k of my own money (down payment + repairs/bills, etc.) thus far. The buyer is willing to offer $50k for the property as part of a seller financing deal with a chunk paid at the beginning and the remaining amount spread across 5 years and after which, the buyer will refinance and take over the mortgage. I am not very familiar with the terms and details of a seller financing deals but given the property is not cash flowing, I think it's in my best interest to get at least my initial investment back. I could sell the property on the market but I think after fees and taxes, I would be at a loss. The buyer will buy the property as part of his LLC and the LLC will be liable. Is this a good deal? What should be some things I need to be aware of and consider prior to signing any sort of contracts? Thanks in advance!

Chris Seveney · Answer

@Taylor I.

So if the property is losing money, do you think it will make money for the other person? Remember if they walk away from it your name is still on the mortgage and you will have to take over making payments again and then get the deed back in your name via lawsuit….

Are you really solving your problem?

Melanie P. · Answer

Basic example. If there are 8 units and you raise the rent 10%, 1 of the 8 moves. Did you make less money or more money that year? Less. Turnover is going to take at least 30 days and have some hard costs. That might be an appropriate rent increase, but it is not a panacea for fixing the financial problems with the project. I would want to know the buyer's source of funds for the down payment and proof of some reserves for repairs. The property cannot afford any more leverage.

Steve K. · Answer

Sounds like a stinker property, and an ambitious plan on behalf of the buyer, I'd just sell it and be done with it if you're burnt out. Not sub to though, if you care about your credit.

Taylor I. · Answer

Would you consider the wrap even if you have high level trust in the individual? Or is there another way to structure the deal so that there is minimal delay in the event of a default to have the property transferred back to you (i.e. additional clause in the performance deed or some other contract, etc.)?

Taylor I. · Answer

His plan is to give all the tenants 30 days notice to raise the rent more than 10% to get to positive and if the tenants don’t agree, they’ll need to move out and he’ll find new tenants who are willing to pay. I personally believe I set the rent at a pretty reasonable price and not sure if the rents he’s proposing will work but that’s for him to decide. I could also do the same myself but I’d prefer not to look for new tenants since the current ones have been so great. We also plan to have a performance deed that will help protect me in the event he defaults and the property will be handed back to me.

Melanie P. · Answer

How you structure these deals is incredibly important. If your buyer isn't able to overcome the challenges you've faced are you able to service the existing mortgage, pay out to do the foreclosure, etc.?

If you have a lot of faith in the potential buyer I would consider whether it was worth pitching on being a 50% partner for $25k. You get some cushion and reduce future outlays while picking up his experience... Just a thought.

Considering Subto Offer - What do I need to know?

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