Subject 2 WOULD YOU DO IT?

Question

Hey BP!

So a couple days ago I go a call on a craigslist add that I posted.

The guy has a home in Toledo, Oh that he can't take care of because he lives in FL.

Info on home

4 bed 1 1/2 bath

2 car garage

Roof- needs replaced

kitchen- some updating

carpet- needs replaced

water heater- 20 years old. probs needs replaced

I figures 15-19k in repairs

The homes in this area are selling for 50k-60k. He owes 40k on the home and just wants to get out of it. He is currently renting it out for 800/month but could charge 850-900/ month

I realize  that a cash offer wouldn't be great because I am way bellow how much he owes.

I was thinking I could Subject 2 the homes and just service his mortgage payment but I don't know if it is worth it or not because of how much repair the home needs before it it rent ready.

BP WOULD YOU DO IT?

Side note- SUbject 2 is like a land contract but instead you get the deed at closing instead of after mortgage pay down

Andrew Fidler · Answer

Hi Larry-

Feel free to PM me the details, happy to advise further.

Personally I don't like the $60k neighborhood with a deal that is $40k principle ($40k interest over a 30 yr term???) and $20-30k renovations.

Flippers do their math something like "if I can't be all-in with a 20% profit then I'm not doing the deal" and it feels like yours is a "since I am not outing anything down I am technically making a profit" but you are committing to the loan and I am concerned you will end up with someone else's problem.

I would definitely prefer to hear you approached the bank with a short-sale deal...the $40k principle was written down to $10k cash and you put the $30k in and came out with $40k all-in in a $60k neighborhood.

I don't do flips and I don't do complicated deals so consider my opinion in that  light. I am just a buy-and-hold investor who buys, renovates, and rents. If I have any observation- it's that I make my money at closing...the renovation costs and rent income can oscillate as the market (and luck) allows.

My deal this past week was a 3 bedroom house purchased for $8,000 with a room to be closed up making a 4 bedroom and needs a new roof. I will be all-into the house for $15k and it will rent for $750 a month. Of course it's 43608 so many investors can't swim in those waters.

Allen Fletcher · Answer

@Larry Smith

You can run the numbers the same as with any rental. Sub2 usually has reduced closing costs and requires no down-payment (assuming you negotiate well). A couple of things to remember when trying to use Sub2:

1) Make sure the lender is okay with it. If the current owner has a copy of his closing documents, there should be a page that outlines whether or not the lender I going to allow it. If he does not have the closing docs, you need to contact the lender and work with them.

2) After the purchase you make the payments directly to the lender. This seems silly, but I have heard horror stories of investors who made this mistake and the property was foreclosed on because the old owner kept the cash instead of making payments.

3) Make sure to get a very thorough title check and a title insurance policy. Sometimes properties do not sell because there are title issues. You do not want to have the deed signed to your name and then get hit with some nasty surprises do to title issues.

4) Have a back-up plan to refinance in case issues arise down the road. Remember that using Sub2 the mortgage is on the seller's credit history and stays there. If the seller wants to get another large loan they may approach you asking for you to pay off the loan so they can qualify. It is always better to be ready for such a situation than to get blind sided.

Hope this helps,

Allen Fletcher

Account Closed · Answer

@Larry Smith Since there's NO equity in this whatsoever, the only way you should take this Sub2 is if the seller coughs up a LOT of cash at closing towards repairs. Break it down for him:It will cost you X in repairs JUST to sell it for Y and after you pay closing costs, commissions you'll net Z (or more likely still have to come to closing with cash)OR If you'll contribute X towards repairs, ill take the house subject to and save you the time, hassle and additional expense of selling it retail.Good luck

Account Closed · Answer

@Larry Smith I like your style. Since you are new, I'd make the offer to gain the experience. I'd have the funds available if the offer is accepted, but I wouldn't count on doing this deal,  and after I submitted the offer, I would spend my time looking for other deals that might make more sense.

Account Closed · Answer

@Larry Smith When I have done short sales, it was a looong process. So, be prepared for months of waiting. You should have photos of each major defect to include with the short sale offer and an explanation and cost of repair from a contractor. It is a "cash" transaction. I don't know of any banks that take financing on a short sale. The bank will have a BPO done.

My question to you is why would a bank give a short sale if the amount owed is less than they would get by taking it to foreclosure sale? When I've done short sales it is because the value of the property is less than what is owed and the bank wants to dump the property. That doesn't seem to fit in this case.

Account Closed · Answer

@Larry Smith All that I do is Subject To, but I won't take it if it prevents me from doing a better deal elsewhere. That is, if it ties me up time wise or if it ties up available cash. Even in Subject To, there are costs. A deal like this has additional High Opportunity Costs. About 10% of homeowners are "don't wanters" for various reasons at any given time. It'd be a shame to get locked into a so-so to bad deal that prevents you from finding a Great Deal sometime in the near future, especially when you are just starting out. I don't do any rehab on the houses I buy. I leave that to the Tenant Buyer I sell to. Personally, with the amount of rehab, and the numbers you've given, I don't think I'd spend the time on it. I don't want to be a cold rag, but count your costs before you commit.

Frank Chin · Answer

As to the seller getting his property back if you don't pay, this is standard in a subject to contract. See model contract: Subject to contract

As to you not understanding why this is, there been scams where properties are taken subject to, the buyer makes a payment or two, then stop paying the mortgage. Meanwhile they continue collecting rents. Some years ago, an investor took over 30 to 40 houses subject to, rents them all out, then stop paying the mortgages, but continue collecting the rents for another year.

I guess some investors are like you, not understanding how such a scam like this can be pulled off.

Engelo Rumora · Answer

Agreed with Andrew,

Look for a 20% net profit or margin as a minimum.

Toledo is a great market with deals galore

There will always be another one around the corner.

Much success

Engelo Rumora · Answer

Sorry mate,

I didn't see that you are local :)

John Thedford · Answer

I would ONLY do this if I had the ability to pay in full if it was called. I would NEVER put the seller at risk. Both of you have responsibilities...his being to the lender...and yours to him.

Subject 2 WOULD YOU DO IT?

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