Subject-To Purchase with free rent to seller for one year

[Brian C.]

I've never done a subject-to deal, but am working a possible opportunity for one.  I put the information below.  Just looking for anyone's insights or if they think I've missed anything.  Thanks!

Scenario: Potential seller lost his job due to a DUI.  Has a wife but can't currently afford the mortgage on their own.  Is looking for a buyer who will purchase home and rent it back to him for a year.  Seller wants profits from sale of house to cover a years worth of rent.  

The Numbers: Home is worth about 220k.  Seller owes about 180. Rent would be 1500-1600.  

My Proposal: I acquire home subject-to and credit seller a years worth of rent at $1500 a month. Win-win as he gets a free place to stay for a year and I don't have to pay a large sum out of pocket to acquire a nice property. After mortgage, HOA, maintenance, etc, it's roughly 1200 a month. that's about 350 a month in eventual cash flow after the first year, assuming conservative rent of $1500. Using the first year of monthly fees as my purchase cost (as I'm getting no rent during this time), that's puts money down at $14,400 ($1200 X 12). Cash on cash return, after first year, of 29%.

Risk: Continued job loss could leave tenant unwilling or unable to move after first year and I'd have to deal with eviction. 

Risk Mitigation: 

1. Offer credit back to seller if he moves out prior to a year, to encourage move out and allow for properly screened tenant to move in.  For example, if he moves out after 6 months, he gets 6 months of rent in cash.  

2. Plan for 6 month eviction process. $2500 in legal fees plus monthly expenses of $1200 X 6 = $9700.  That would still result in a cash on cash return of 17% (granted it would be 18 months before realized), but on a home in a good neighborhood I feel has good appreciation potential.  I could also use an amount smaller than the total as a cash for keys option which would result in a greater return and moving in a paying tenant sooner. 

[Joe Villeneuve]

Terrible idea.  All your solutions depend on future events you have no control over, but based on current track record, are not likely to occur.  In other words, your plan is based on hope.

Your most likely scenario is this:

1 - You spend $14,400 over the course of a year.
2 - Tenant (actually the owner) can't afford to move out due to continued lack of job.
3 - You're want to evict, but since you don't actually on the property...you can't.
4 - Owner no longer your tenant...actually never was since you never collected rent.  Come to think of it, since you were paying their mortgage for them, I guess that made you their "sugar daddy" (I was actually thinking of a different candy...on a stick).
5 - Owner loses property due to delinquent mortgage payments.
6 - You're out $14,400 plus legal (if you actually try to think you can change this result legally).

Hope is not a plan, and emotions have no place in REI as a basis for a solution. That's not being mean, that's just the way it is. This doesn't mean you can't want to help these people. This isn't the way though.

Also, I have no idea how you calculated your cash on cash return since no cash is coming you way, and the CoCR is only calculated over the first 12 months...not 18 as you are trying to do.