In the last two months I’ve bought 3 Subject To's for less than 85% of ARV each.

[Ken M.]

In the last two months I’ve bought 3 Subject Tos for less than 85% of ARV each.

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I found this 4 bedroom 3 bath property built in 2001 in Phoenix AZ through our normal marketing.

Then the key was to find the owner and ask the right questions.

I always introduce myself and mention why I’m calling. I say something to the effect of “Are you or anyone you know planning on selling a house in the near future and would you like an offer?”

Do I get screamed at and get hung up on? Yes, a lot. Do I hear some pretty interesting responses, some dirty, bad, nasty words? Yes. But, Do I care? Not really.

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When I finally found someone who was interested, I tried to come to a reasonable offer.

To figure out how much I would offer, I took the Zillow, Redfin and Realtor estimates of $401,000, $412,439, and $402,889 respectively – added them together and divided by 3 which gave me an average of $405,422. But, I never pay ARV or MLS, so I multiply by 85% and offered $344,608. It was accepted.

Zillow $401,000

Redfin $412,439

Realtor $402,889

Average $405,422

Average times 85% = Offer

$405,422 * 85% = $344,626

As I explained to the seller, there are no realtor fees of 6%, so that saves the seller $24,000. The sale is certain, it is now, and they have no repairs to make and no inspections to pass.

I showed my seller how I arrived at my offer and why. No serious repairs are needed on the house. It’s in a reasonable nice neighborhood.

Since it is a “Subject To”, I take over the 2.75% loan payment of $1,306 instead of having to pay for a new loan at 6.88% or $1,653 monthly for a difference of $347 a month. That saves me about $116,000 over the life of the loan. And I save about $6,000 in new loan origination fees. I have no real estate agent fees.

No loans, no new lenders, no 1031, no MLS sale,

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So, how did I handle the equity the seller had? He took $60,000 on a carry back (2nd) at zero percent interest (o% interest) for monthly payments of $177 for the remaining length of the term.

In this case, one of my students, who actually prefers to have me find the properties for him, bought this one from me. His cost was $369,626 “all in” on paper, (he didn’t actually need that much money or credit as you shall see) on a value of $405,422 for a savings of $35,796. It helps to know the right people. ;-)

Rents in the neighborhood are $2,300 a month for a cash flow of $2,300 minus $1,306 PI and $112 tax and $91 insurance, so he clears about $ 791 a month.

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How much cash did he need out of pocket to pull this off? (I don’t allow borrowed money.)

1st & 2nd month’s lender payment, $2,612, carry back payment to seller for two months $354, change door locks, $200, closing costs $3,500 (title, escrow, recording) house cleaning $500, yard care $500, my fee $25,000, pizza for a work crew for a day $100. Those are my requirements to allow him to buy the property.

It takes money to do “No Money Down Deals”. Don’t let the “gurus” fool you.

Borrowing that money is a recipe for disaster. Anyone who buys from me has to be able to prove ability to service the loan.

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So, This is how I locate properties for investors who are tired of faking it.

Places like AZ, ID, TX, GA, MidWest, Deep South are great markets for these, but Sorry, in CA, NY, Il, NJ, or other crazy states, the numbers just don’t work because of taxes and regulations.

So, realistically he needed about $32,766, Using a bank he would have needed 20% down or $80,000. Now, if he had done it himself, could he have saved some money? Sure, because he never would have done the deal. He’s just like you. Wishful thinking doesn’t buy you properties at great deals. 

Could he have negotiated such a sweet deal. Lol

Of course not. But, If you like sweet deals . . .