Indianapolis Subject-To Deal, Or Not?

Question

Little Flower Neighborhood in Indianapolis

2BR 1Bath Bungalow

Current Loan Balance: $38,000

Seller's PITI Payment =$380  seems high, but maybe not? $95 of that payment is taxes. What would be his insurances and taxes, I'm not that great at math :)

Will Manage Myself and there are recent CapEx upgrades.

Maintenance - $63/ month (10% of rent payment)

Vacancy - $63/ month (10%)

--------------------------------

$625 Gross Rent Payment every month

-$63 Vacancy

-$63 Mainetenance

-$380 PITI

=$119 NOI per month

I planned on putting $5,000 down on the subject to financing

I am estimating $3,000 in updates

$119 NOI per month x12 months = $1344 in NOI per year/$8,000 acquisition and repair costs = 16.8% CoC returns.

For those of you experienced in Subject To deals do you have any ideas on best way to go about closing this. (Wrap around, Land Contract, Loan Assumption etc.)?

For those experienced in the Little Flower or Indianapolis market, does this seem like a good deal?

For everyone, what are some exit strategy ideas to make money on the back end?

Thanks for the feedback!  I'm scheduled for inspection Monday evening, and will keep you updated unless some of the more experienced members in these types of transactions tell me to run from this deal...

Shawn Holsapple · Answer

I'd try for zero down sub2 then turn around and offer it to a retail buyer, as-is, for $69k, $725 per month, $2200 down - lease option!

If you don't want it, I'll look at it and pay a finders fee...

Aaron Mazzrillo · Answer

If you ask a question and specifically call me out for an answer, you have to buy me coffee whenever we meet. LOL

Do you know how old the loan is, what the original balance was, what the interest rate is and the terms; I/O, balloon, fully amortized? Those are the important things you want to look at when considering doing a sub2 deal. For me, sub2 isn't about the property as much as it is getting amortizing financing on a rental that I don't have to sign for. I buy in a trust so my name doesn't appear on the property or the loan - it is the ultimate stealth investing model. Sounds like you haven't been on the phone with the seller and the lender and done a loan/terms verification. You must do this.

Down side - the loan could be called. I wouldn't get involved in a sub2 deal where I couldn't cough up the money to close it if I had to and that means I need to capture equity when I buy which brings us to the next question; what's the property worth?

Just because the seller is willing to let you buy it sub2 the loan, doesn't mean you should. We have to capture an equity buffer which solves your question of exit strategy - if the loan gets called, you can always sell the property. You could also get the owner to sign a deed to you, deed it back to the seller, prove to the lender the seller still owns it, then go and record the deed you just had the seller sign. I might still do the sub2 if there isn't enough equity, but the numbers still make sense because it is a turnkey house that I can obtain long term, very low interest rate financing on. I personally don't do wraps, but wouldn't be opposed to it under the right circumstances. I've found that people who do wraps just aren't strong enough closers to buy sub2. The only reason a seller does a wrap is for control. If you're buying the property, you also need to get them to relinquish the idea that they will have any control. It's not their problem any longer so why do they still need to be involved?

I do a couple of subject 2 deals a year and the 'idea' of doing one is fun and exciting, but you need to seriously dot your i's and cross your t's if you want to do it and be able to keep it.

As for your question about making money on the back end, I buy subject to for long term holds. My back end strategy is a fully paid off house. I have wholesaled subject to deals as well though so there is always that option.

Lastly, never assume the underlying loan. If the seller ever had a late payment you also assume all that mess on your credit report as the 30, 60, 90 day lates transfer with the loan... so I'm told. I've never done a formal assumption for that reason, but also I see no point in putting some other person's debt in my name. We help people out of quicksand by offer a stick for them to grab onto, a stick which is very expensive to grab a hold of. We don't replace them in the quicksand.

Shawn Holsapple · Answer

@Ben G.  - Little Flower is a good area...IF it's truly in Little Flower!  A lot of times sellers say it's in a neighborhood but it's actually several blocks away...

You might be able to flip it depending on the address.  ARV on some of these bungalows are over $80k.

$5k down on a $38k sub2 is way too high.  For me, I shoot for as close to zero down as the seller will tolerate.

Yes, less than $200 net per month WITH PM figured in is too low.

And, as @Rodney Kuhl mentioned, I've learned [the hard way] that sub $700 rentals in Indy draw sub par tenants.

Bill Jacobsen · Answer

I budget $2,000 for maint/cap exp. for a single family house.  That is more than $100 per month more than the numbers you are using.  You should also budget for management to see how this stacks up as a pure investment.  Based on that this does not look like a good investment to me.  Just my opinion.

Good Luck.

Bill

Rodney Kuhl · Answer

@Ben G. I don't know that much about the Sub2 aspect of the deal. But if I'm looking at the deal anyway, it's not one I'd be interested in having in my portfolio. Though you can cash flow $119 per month, that doesn't take into account property management. Even if you are planning on managing it yourself, it's good to account for PM when analyzing the deal in case you want to hire PM down the road. Of course, all of that could change depending on the terms of the loan, years left, etc.
	 
	 Another thing to consider is something @Shawn Holsapple has told me several times. Looking at rentals with rates under $700 can look nice on paper, but the lower rental rates doesn't change the cost of replacing a furnace/roof/HVAC/etc down the road. So though it may look nice on paper without all of these repairs, at some point they are going to come up and that'll cut into your pockets a lot more than a property under the $700 mark.
	
	Just my 2 cents.

Ben G. · Answer

Hoping the creative @Aaron Mazzrillo had some input and advice on this one.

Aaron Mazzrillo · Answer

This is my main point when arguing with California investors about going out of state to buy properties they claim cash flow. What they are really doing is buying based on fear. They lack the knowledge of how to make a $200K house here in CA work. All they see is that huge number and it scares them that they might have to make those payments on the loan, so instead of figuring out how to make it work, they head east of the Mississippi and load up on $50K houses that rent for $600/month. The problem is Home Depot doesn't discount for water heaters, roofing materials, paint, carpet, or copper plumbing just because you bought a cheap, small house that produces little rent.

I personally don't look at houses that won't rent for at least $1,000/month. If you already have a portfolio of income producing properties, throwing an inexpensive house like this on the pile probably wouldn't hurt, but if this is your first rental, you'll basically be buying it just for bragging rights that you own a rental home and you did a subject to deal even though on a yearly basis, you'll probably be paying for those rights. That's not how you want to do real estate.

You need to find out about the loan. When was it originated? What was the original balance? What is the term? Interest rate? Is it fixed or adjustable? Ideally, you're looking for a 30 year, fixed, low interest rate loan. I like a 20 or 15 year loan even better and I want it to have been paid on for at least the first 5-10 years. That way, I pass that heavy front end interest payment period and start to enter the higher principal reduction payments. Get that information and you'll be in a better position to decide if this is worth pursuing.

Shawn Holsapple · Answer

Yes, it's at the top of the rental amount.  Don't forget one can ask for [and get] this with a lease option.

Ben G. · Answer

Thanks @Shawn Holsapple for the feedback.

It truly is in Little Flower, but it's also a truly tiny 2BR 1Bath bungalow.

The seller is motivated, he is in California, he is fed up with his PM not answering his calls.  That's why he's willing to go Sub2 on it or that's what he's telling me.  His loan balance is 38k and I figured there wouldn't be enough equity to wholesale it to you or anyone else in my network.  Do you think it's worth looking at? I passed on viewing it yesterday based on all the feedback I received in this thread.

$725 isn't pushing it stretching the rental rate being that the property is only 700 sqft?

Ben G. · Answer

Thanks @Shawn Holsapple for the feedback.

It truly is in Little Flower, but it's also a truly tiny 2BR 1Bath bungalow.

The seller is motivated, he is in California, he is fed up with his PM not answering his calls.  That's why he's willing to go Sub2 on it or that's what he's telling me.  His loan balance is 38k and I figured there wouldn't be enough equity to wholesale it to you or anyone else in my network.  Do you think it's worth looking at? I passed on viewing it yesterday based on all the feedback I received in this thread.

Indianapolis Subject-To Deal, Or Not?

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