Subject To Opportunity

[Shawn Connors]

Hey BP,

Here are the details on my current possible deal. I have been talking to a seller who needs to sell his house now. He currently has 4 mortgages (2 on the house I am dealing with). He owes 108k, 60k for HELOC and 48k on existing mortgage and wants to purchase another house with his wife via traditional financing. The house needs a lot of TLC, estimated repairs are 50k-60k and the ARV is roughly 200k so the numbers do not work for a flip. I have given him the option for a possible subject to deal, which my partner would take over his current mortgage payments ($825/month), fix the place up and put a tenant in at $1500/month. His problem is this; he would like to have his HELOC paid off because he has to start paying the principal back this year (he has been paying interest only for the past 10 years). Does it make sense to pay off his HELOC, fix the place up and start renting it out? What do you guys/gals see as a possible road block in this situation? Thanks in advance.

[Darrell Shepherd]

$170k for a $200k house isn't much of a deal for a $60k rehab. Sub2's really aren't good vehicles for long term holds. It can work, but there's a lot of PIA stuff there that doesnt make sense to mess with with rates as low as they are (insurance, dealing with the bank, escrows, etc). I could see if rates go back up to the 7-8% range that all these 3-4% loans will have a lot of value and we start trying to buy them for the increased cash flow (I'm assuming the current rate is low), but right now there's not a lot of advantage to a sub2 for rental.

A lot depends on area and your overall strategy and your resources, but I dont see much of a deal here if you are buying this thing for $108k and it needs $50-$60k and you have to lay out $48k to pay off the HELOC and pay the $50-60k for the rehab. You could do that and refi it and save some down payment money, but you'd have to shell out $100k+ for 6 months to do it, just for a 15-20% discount to value. Should be 30% for that kinda work unless the area is super hot in my opinion.