Seller Behind on Payments! Possible Sub2??

Question

I have a seller who has a two bed bungalow  and is 3 months behind on there mortgage. This property was once an investment property and his tenants tore his property up. He is afraid that he will lose the home he lives in because of this two bed bungalow.

He is willing to do a sub 2. Now I am waiting on him to email me over all the basic information on the property. Lets say this deal is ok to do after performing due diligence. Say I want to lease option the property and use the down payment to bring the loan current, along with making some form of profit. How would this procedure be done? 
LeJonR

Mike C · Answer

LeJon,
                    
                    Yes, this is possible but at this point we have many more questions than answers. For starters, do you have the money to bring it current and do the repairs up front? You will get money back when you L/O it but you need reserves and some cash for this one or access to the funds. If you donâ€™t then you are done right there. Second, you need good numbers. How long can he keep making both payments? What are the rents, the payments? Is this a subprime or prime loan because this will affect cash flow significantly? The repairs? What is the value? What does he owe? Most importantly, can you get equity and he just wants debt relief? If he owes near what it is worth, who is the lienholder as that affects the potential short sale process? Do you have the knowledge and time to go through that with all the other variables? Is this worth your time on a house worth this amount? That is your call.
                    
                    Assuming best-case scenario, let me make some educated guesses. Say it takes 3k with fees to bring current, 5k in repairs (and if trashed that will be low IMHO), you will be lucky to get 2500 option consideration on a 60-80k ARV house (nearer 60k would be my guess) so you have some skin in the game that is never going to appreciate all that much IMHO. The rent is probably not very high here either. To even be remotely interested, it better not be a sub prime loan as the payment will be high (a good possibility) and you better be getting great equity, i.e. better than 50 cents on the dollar and I would want that at a maximum AFTER repairs). That means he better have held this a while, had a 15 year mortgage or made a big down payment for him to have much equity (not likely). More realistically, he bought it not knowing what he was doing, overpaid, bought in the last 3-5 years, owes what it is worth at best or more than likely is already a bit upside down and thus you will have to go the short sale route. All this adds up to too much work for not enough payoff for me. Granted, I am donâ€™t know the exact numbers and am purely speculating but I think some of my assumptions will turn out to be pretty accurate as you dig into the numbers. I am vaguely familiar with HH is why I even ventured to guess at all.
                    
                    Donâ€™t let this less than rosy picture (maybe as I could be way off) keep you from pursuing this. Worst case, it will be a great learning experience. Take advantage of it and you will be that much more prepared for your next opportunity. And I am an optimist. Go figure. 
                    
                    Best of luck
                    
                    Mike C

LeJon Ratchford · Answer

Thanks for the responds Mike. Unfortunately the deal did not fall threw.
LeJonR

Nick J. · Answer

always a great response from Mike C

LeJon Ratchford · Answer

Chris that is nicks responds:
          
          First, make sure the seller is on board. You could easily be chasing a deal waiting for the seller to do this and or that while time is eating away.
          
          You can start marketing for a tenant buyer now if you want, no biggie. Obviously, you have to know how much he's behind and what exactly it's going to take to bring it current.
          
          more importantly, is he upside down? If so, you don't wanna do anything other than short it to begin with. 
          
          Like Nick said, "make sure the client is on board", the guy was eager over the phone yesterday but i have not received a responds as of yet.
          LeJonR

Chris G. · Answer

Well let's here what Nick's answer was :)

LeJon Ratchford · Answer

Nick you are one of my mentors!! I am proud to say that. I would have never posted this if I would have received your answer first, I was hoping to speak with my client early today (I figured you would not have gotten my message  until today).This was posted before you had responded yesterday evening. I really appreciate all your help!
LeJonR

Nick J. · Answer

what was wrong with my answer :)

LeJon Ratchford · Answer

Jon and Bill Thanks for the responds. Bill I received your colleague request I will pm you soon. Take care guys!
LeJonR

Bill Gulley · Answer

Hi, I may be reading something into this, but which house is he behind on, the one he lives in or the bungalo? If he is behind on the rental, you have something pretty easy to work with. If it's his primary home that is behind, it's still a workable deal, but keep your payment to him in connection with your acquisition, don't catch up another payment through an option on the subject, it depends on how it is worded.
As to doing the deal, I have three pretty simple methods I use. I have information on that if you would like it, too much to type here, just PM me and I'll get taht for you. Good Luck, Bill

Jon Holdman · Answer

Others may have some additional suggestions for how to do this.  Assuming it works (i.e., what's owed plus the amount to bring it current plus the repairs is still well below the value, and the rent and total works with the 50% rule), I think I'd do an option with the owner that spells out the subject to deal.  You're going to have to clean the placeup before you can rent it (yes, I know you said L/O, but essentially the same thing.)  The option would give you some protection.  It also gives you an interest so you can legitimately rent the place.

Once you find a tenant/buyer, exercise your option and purchase the property.  You'll need to pay for the closing and bring the loan current, then get a deed subject to the existing loan.

Seller Behind on Payments! Possible Sub2??

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