Subject To Townhome Deal Analysis and How to structure and offer? (First Investment!)

[Armin Rostami]

Hi everyone, I came across a subject to deal with that would love to hear some experienced advice and feedback on the deal and if I should move forward with it. This will be my first investment and my goal is to get my foot in the door with a property that has minimal cash flow and is close to me so that I can gain experience as a landlord. Strategy is to ideally buy and hold long term with the possibility of house hacking it for the first few years. 

So the questions I had were:

- based on the info below, does this deal seem attractive and what are some counter offers I should give out to the seller that makes the deal more attractive for me? And how would you structure and negotiate this deal to make it a win-win?

- what are the most important things I should make sure to maintain in a Subject-to deal in terms of legal procedures as well as due diligence to minimize any issues? 

- Is having a 5-year balloon payment risky? and assuming the rates stay the same and I had to refi into a 6% rate after 5 years, would that kill the deal or would it still be worth it?

Deal Info:

- 3bed/3bath 1970s Townhome in the Bay Area (East Bay) - good location with good schools and low crime relative to other parts of east bay. 

- Purchase Price: $700,000 --> Comps are in ranges of ($680k - $750k)

- Downpayment: $160,000

- Agent Fee: $17,500 (I would have to pay as the buyer)

- Other fees: Everything else (including attorneys, inspection, appraisals and etc.)

Financing

- A) Existing Mortgage: $336,000 @ 2.75% rate (subject to) - First position (5yr Baloon)           

- B) Remaining balance: $174,000 - principal only seller finance second position loan (5yr Baloon)

- The most important factors for the seller is to get their equity paid upfront for the $160k down payment and to have the debt off their credit report in 5 years. So they are not willing to extend the balloon payments.

Monthly Breakdown:

- Rent: $3500

- First position Sub-To loan P&I: $1,371

- Second Position Seller Finance P&I: $566

- Taxes and Insurance: ~$870

- HOA: $375

Total Expenses: $3,183

Cash Flow: ~$300

Exit Strategy after 5-years:

- Remaining debt left: ~$470,000

Either refinance or sell


Thank you for all the advice and assistance!!

[John Clark]

Quote from @Armin Rostami:

Hi everyone, I came across a subject to deal with that would love to hear some experienced advice and feedback on the deal and if I should move forward with it.

No. Everyone else has shown you how your numbers are wrong/"optimistic"/whatever, but your real problem is that you are a first time buyer (no experience) trying for a "subject to" deal. "Subject to" deals are extremely tricky, and neigh unto impossible for a rookie. Don't buy and get a LOT more experienced before you start handling tricky situations.

Also ask yourself why the seller is willing to sell, and what protections you have in place if he bank calls in the loan because of the sale, or if the seller doesn't forward the payment to the bank.