Opinion on a possible "subject to" deal. Good deal or bad deal?

[Bobby Njoo]

Hello BP Family,

I need ideas of how to approach this opportunity. Initially, I see it as a bad deal. However, I started to wonder how I can turn it into a good deal. The seller is my coworker, who has been mismanaging the property and is in distress, and I really want to help her out. She came to me hoping I can help her since she knows I am an REI. I have never done a sub2 deal before but I see this deal as an opportunity that would define me as what an REI should be, which is someone who is a problem solver that provide value and solution to someone in need. Anyways, here is the property's info:

Background:

- SFH 3/2.5 1600 sqft

- Purchased with VA loan in 2016 as a rehabbed property for 186k.

Current condition:

- current mortgage balance 178k

- late payment balance 15k

- original mortgage payment 1305

- current mortgage payment 2345 (new rate to catch up behind payments. Will return to original once late payment is paid)

- currently rented to bad tenants. Lease ends at the end of FEB.

- require 5 to 7k in rehab cost (full paint, partial floor/carpeting, reglaze tubs, patch drywall, and washer and dryer)

Projected condition:

- ARV 215k

- Market rent $1450 to $1575

- possibly offering it as a lease option to help the spread between mortgage and rent.

What I like about the property:

- major components are in good condition. (Roof, windows, doors, HVAC)

- large fenced in backyard

- 2 car driveway in a location where driveway is not common

- Overall, interior is up to date and property is in a good condition and area.

How would one should approach this to make it work for both parties?

Any feedback is much appreciated!

Thank you in advance!

Bobby

[Erik W.]

@Bobby Njoo, could you clarify what you mean by "current mortgage balance" and "late payment balance"?  Is the late balance part of the current balance or in addition to the current balance?

Let's pretend that $178K is the total owed on the property. It needs $7K in rehab. Total "in" is $185K. ARV projected at $215K, so if you sell it for that there's a profit of $30K. Pretty decent.

But the payment is $2,300 for now and $1,300 once it gets caught back up.  Rent is $1,400 - $1,500.  So you start out cash flowing negative $800-$1,000 per month from the payment alone.  How long can you carry that while finding a Tenant/Buyer?  Even after catch up, the profit margin is very thin.  You'll have to find someone fairly hard up to be willing to pay the spread on the rent to cover your payment and profit.

"Subject to" is a gamble for both you and your Seller, but mostly for your Seller.  I don't think it works out nearly as well and as often as the gurus claim.  If it did, they wouldn't need to be hawking their courses/boot camps.  Keep in mind if this doesn't work out perfectly, your reputation at your job will suffer.  Not sure I'd risk that for $30K + a tiny rent spread.