Can I Take Over House Payments- Buying House Cheap from a Friend

Question

We have a very close friend who is desperate to sell her rowhome in Baltimore. She purchased it for 250K in 2007, owes 221K, and it is currently rented but the rent does not cover her mortgage. The rent probably could cover the mortgage, but she is not willing to raise the rent with the current tenants  or deal with it is as she no longer lives locally. She is willing to hand us over the property, where we would practically get it for free and simply take over the payments. Our goal would be hopefully to rehab and then flip the property, but we would be okay with renting it out too after rehabbing it. It is in a C neighborhood just north of Patterson Park. It has been rehabbed in the past.  It will need light cosmetic updating as far as we know. How would we go about doing the sale so that we would have our company name on the deed as well as the the loan? Could we potentially switch to another mortgage lender if we can find a better interest rate than she has on the house currently?

JD Martin · Answer

My question is not can you do this, but why would you do this? It doesn't sound financially worthwhile on the surface; she actually sounds like a dear friend who is trying/willing to pawn off a non-performing asset. She bought it at the top of the market in 2007 and can't/won't raise the rent because she doesn't want to deal with it. The truth sounds more likely that she can't raise the rent because she's already on the edge of being competitive with regards to rates, and she can't sell it because she'd be underwater.

I would not do this deal, and just give my friend lots of sympathy and support.

Almateen Yazid · Answer

What is the property worth? Are they behind in payments (arrears)?  Any liens on property? What is the interest rate? 2007??? Granted ALL REAL ESTATE IS LOCAL but, That was one of the worst times to purchase! HYPERINFLATION AND OVER APPRAISED HOUSES!

The rent will not cover the note??  You did say "Class C" neighborhood?" and needing some work?

Lot's to consider.

I've done several "Sub-2" deals. One would basically deed the property over to you, you would take over the payments (be sure to MAKE THE PAYMENTS!!!), then re position (delayed-refi-flip-seller financing, etc...) the asset at some latter date.  You have to have an EXIT! Those figures don't have much of a spread! 2007....??? What is the interest rate?

Word of advice... THIS IS BUSINESS! I would detach your feelings and friend"ship" and make sure it is a deal for you!  A "Ship" is supposed to take you in a direction and to a destination.  I think you may be headed to a place you don't want to be.  Sounds like her shortcoming will become your crisis!

If I were to consider this deal, I would secure it, do a wrap around with "seller financing" to a potential buyer, hold on to it and cash out at a latter date.

Ned Carey · Answer

@Angela DeBorja  I agree, I don't see this working for an investor unless there is a short sale. If it is on the  unit (1-100)  block it could be worth $220k but buying at market price is no bargain for an investor.

JD Martin · Answer

That formula doesn't work as well the more expensive the house, as things are not necessarily linear, but you are on to the right way of thinking. It doesn't take a lot of foresight to see that on a house with a $1600 mortgage, and possible rent of $1850-2000, any major expense will come out of your pocket, as the cushion is going to eat up every other possibility - vacancies, insurance, regular maintenance, etc. People who aim for $200+ cash flow per unit per month are including all other figures in their cost - vacancy, capital expenses, maintenance, insurance, etc. One month of vacancy, needs a cash cushion of $150 monthly by itself. In short, this property is a loser in its current arrangement.

Angela DeBorja · Answer

Ok will do @Ned Carey. I have just come across and learned about lease optioning the house to a new tenant buyer. Would that be something else I could consider? I have no idea how that market is in the Baltimore, but potentially I could do a lease option with my seller friend, then a sandwich lease option to a new buyer. I would think that the area is decently desirable for people wanting to live in the city without a super high downpayment or if they can't qualify for a loan. See you tonight hopefully at the Anne Arundel meeting.

Ned Carey · Answer

it can be a condition of the the short sale that the bank won't come after the owner for the shortage. However in theory that is taxable income.  In the past there was a law to protect homeowners from paying taxes on the written off debt but I don't know if  that still applies.  Talk to a good CPA about that.

Angela DeBorja · Answer

Thanks a bunch @Ned Carey. We drove the area yesterday, and it seems like a decent area and block of N Linwood, really close to Bistro Rx and the park. It is 2 blocks away from Fayette. If our friend were open to a short sale, and her bank accepted the proposition, isn't there a possibility she may need to still owe more in taxes or owe the difference between the current mortgage and the short sale price? Or something like that?

Angela DeBorja · Answer

@Jd Martin and @Ned Carey thank you for the input. @Almateen Yazid her interest rate is 5.75%. She refinanced in the last year or two. It's on the 20's block of Linwood Avenue. Based on all your helpful insight, I think the only way this could be made into a deal is to ask her if she is willing to ask her lender about a short sale, right?

Angela DeBorja · Answer

Thank you for all the input! I was not sure how to find and come back to this thread I started. Upon doing the 50% rule, it looks it is a no go even if the rent covers the mortgage with 250 surplus left over. Mortgage is about 1600. Conservative estimate of rent 1850, maybe little more with a few updates. It has been rehabbed in the past CAC, new water heater last year, but needs paint, carpet, and some new fixtures. I have not gone to see it because I don't know if it is worth it. Assuming Expenses are 50% of rent = 925. I'll be in the red each month majorly, right? Rent would have to be at least 2525 (1600+925) to break even or make it worthwhile right?

Ned Carey · Answer

@Angela DeBorja yes you can simply take over the payments as @Wayne Brooks said. However this has risks which have been debated here many times.

If the rent barely covers her mortgage then why would it be a good deal for you? The are lots of expenses other than the mortgage when holding rentals. Keep in mind you must honor any existing lease which means you can't start renovations until the existing tenant leaves.

"just north of Paterson Park" can mean a lot of things. What hundred block and which street. That is an area I know well.

Can I Take Over House Payments- Buying House Cheap from a Friend

Most Popular Reply