Our First Sub-To Deal - Looking for Insight

[Kevin Rufty]

Hello, BP Community,

We are eyeing our first sub-to deal and have some questions we're hoping you can answer. Here's some info about the unit:

- 2bdrm, 2.5bath townhome, built in 2021. High appreciation area, was listed as the hottest zip code in 2022 in our area and tons of new development coming in the next months.

- Sellers are asking $340k and owe $290k on the mortgage (30yr fixed @ 3.1%), so not a lot of equity in the deal. PITI of $1580+$200/mo HOA.

- Rents in the neighborhood are around $2100-$2200 for comparable properties.

Here are our questions:

- We'll take over existing loan payments - but how should we structure the equity payout for the seller? If we structure it to be paid over 5 years, we'll have negative cashflow on the property. Is it outlandish to structure the equity payments over 15 or 30 years? Or maybe a 5-year ballon w/ interest-only payments?

Thank you for any info/insight you can provide!

[Kevin Rufty]

Quote from @Mason Liu:

So right off the bat, if we are assuming a 5/5/5% CAPEX/Maintenance/Vacancy reserve, that would mean you are setting aside 15% of $2100 ($315), making your income after reserves $1785. Your full monthly expense is $1780 with the HOA, so essentially you are not cash flowing at all here after factoring in for reserves.

On top of that, you're needing to put down 50k either as a downpayment or through seller financing (which it sounds like what you are opting for), which would immediately put you negative COC.

If you truly believe in the growth story of both the city as well as the neighborhood you are in (both from a value and rents standpoint), and you are willing to manage the property for free or even pay to manage the property for a few years because of your conviction in the market, then you can definitely go for it and try to structure the equity payments of the 50k for as long as possible. When it comes to seller financing, everything is negotiable, so if you explain the numbers to the seller they may be able to work with you.

Personally, unless you have a way to increase the rent potential or add value to the townhome, this really doesn't sound like a deal even though you have the 3.1% mortgage.

 Great insights - thank you, Mason!