Home that is underwater

[Suzanne O'Connor]

Hi, I need some help.  

I have an opportunity to take over a mortgage on a house in Gainesville Fl.  The house is worth 106K but the seller owes 118K at 6.5% for 23 years.  He wants out of being a landlord and willing to do a subject to deal. House needs some sprucing up about 4K in repairs. Problem is there is quite a few houses in that subdivision that are being sold short sale which could bring the price down more.  I would like to resell house on purchase option deal.

So my question is how would you structure a deal with this scenario?

[Raj Gandhi]

First suggestion is to walk-away.

Second suggestion is to have the owner pursue a short sale.  You pick-up the property for $106k with much better loan terms, 4.5% for 30 years.

Third suggestion would be to structure the purchase as a Contract for Deed or option on the property (probably forbidden by his original mortgage).  Down payment of 5% (=$6k) + $4k rehab with three year balloon payment.  Pray for 5% appreciation on the $106k current value.  In three years, the value would be about $122k; if it isn't then walk away from the balloon payment.  Hopefully in the three years you'll have cash-flowed $10k that you had into the property.  This quasi-terrible plan seems like a lot of work with break-even returns over 3 years.