Do I have a deal?

Question

HI Everyone,

I just started marketing for motivated sellers for the first time about a week and a half ago and I have been in talks with what I believe to be a motivated seller.

Here is the story.  He owes $600k on his existing mortgage on a condo in Los Angeles.  Zillow and E-appraisal have estimated the value to be around $840k.  I had my real estate friend pull comps on the property and it said that the RealAVM is between $475 and 749K.  In August, an apartment one level down from his sold for $746k.  I also found on the report that it was in default of 57k on 10/3/2012 and that it is in preforeclosure.  He is looking to sell for $700k but is negotiable.

If I want to try to wholesale this property ideally I would like to offer $490k based on a $700k value of property, but A)  he wont go for it and B) I dont think the bank would allow the deal.

I was thinking about potentially informing him of a lease option.  BUt also I was wondering if a Subjec to would work as well.

I have decent knowledge of how to put together a lease option agreement, however I am shaky on terms and asking price.

He seems like he would be in a good candidate for a Subject To, but I really am not familiar with how to structure those at all.

Does anybody have any insight for me?

Thanks.

Jacob Floyd · Answer

Hi Matt,

First off, I would just like to say that if the condo isn't in need of any repairs and there is no way that an investor can add value to it, it's going to be difficult to find a buyer. Also, if you are trying to find a buyer that will do a wrap deal via subject to on a property that has 600k worth of mortgage,  the monthly mortgage payments are around 4,000 and the buyer will only be able to get 2,000 for rent; you have a math problem.  However, if you think the numbers work, then continue reading.

I agree that a seller like that sounds like a good candidate for a Subject to.  However, before you go about doing that, make sure that you have a title company that has a servicing company and knows how to operate a Subject to.  Now, it looks like they have a substantial mortgage to pay off, and they obviously won't want to do any business with you if you can't do that for them -so anything below whatever the bank will MAKE you pay (without negotiation is $600,000) is non-negotiable.  
Therefore we have two questions: How low will the bank settle for, and How much money will our buyer be okay with getting out of this deal?

Try to negotiate both of those numbers down as low as you can.  I'd say that if you settled the mortgage to 550k, the buyer's down-payment to 50k (the lower the better) and you could market the property for 620k subject to the 550k mortgage with a 70k down payment, you could take 20k and the buyer takes their 50k, that should be a good deal.

Now the contract for a Subject to is simple. On the purchase agreement, you would write "Subject to the first mortgage balance of approximately ____." in the area you believe is most appropriate.  You would also state the amount of the down payment the buyer is to pay.  Your purchase agreement should have a "Payable" section in which you identify the mortgage lender.

After you get an Authorization to Release from the seller bring it to the bank.  Make sure to get a "Payoff" and that you account for a pre-payment penalty.

That's just about it.  Hope it helped.

Jacob Floyd

Matthew Newman · Answer

Do your thing.  I just wanted to follow up.  Thx

Will Barnard · Answer

Got it, have to go out in the field, will respond later to your email.

Matthew Newman · Answer

Will BarnardThanks for your help Will.  I shot you an email at the info@barnardenterprises.com address.  Look forward to hearing from you.

Will Barnard · Answer

Matthew, I just realized you are from Northridge. I know the SFV very very well and know most of the areas by heart on price points. If you want a real life opinion of what you are looking at, send me an email and I will show you exactly how this specific deal plays out.

For an example, IF a home has a real exit value of $700k, and to get to that price, $75k would need to be used in repairs, then your max offer would be $450k. If you intend to wholesale it to a rehab investor, their max offer is likely that so you will need to build in your fee. If you want o make $10k, then your max offer on that example would go down to $440k.

Matthew Newman · Answer

Thank you for your feedback guys.  You guys basically confirmed what I already thought.  But being hat I am still really green, I wanted to make sure that I was not walking away from any potential money.

Based on the numbers he gave and teh comps I figured that I would have to be in the ball park of $440K in order for this deal to work.  Are my calculations correct?  If they are, and I were able to lock it up for 440K, what do you think a reasonable selling price would be?

Will Barnard · Answer

First off, I don't care if Zillow has it valued at $10M, that means nada! never ever use Zestimates or any other public RE site valuation estimate, the true value lies in the comparables and can only be determined by the comps (for residential). If you are talking about commercial properties, values are usually based on the income they produce.

From the numbers posted, not only is this a skinny deal, it is no deal at all, unless the numbers are not correct and much better than posted.

Glenn Espinosa · Answer

Just from the ballpark numbers you are throwing out, this seems to be a very skinny deal.