First potential deal subject to

[Julio Cesar Lopez]

Hello everyone, first and foremost would like to say I'm a newbie so bare with me! I have a possible sub to deal and would greatly appreciate any input or advice!

Property details

* ARV 3/1 : $160-170k

* ARV 3/2: $190k (Potential if Garage is converted to a bathroom)

* Mortgage balance: $143k

* Rent estimates as is: $1400-1500

* Rate: 4%

* Term: 30yr

* PITI: 1410

* 1980 built

* Repairs: cookie cutter 10-15k

New roof, HVAC and wiring is in great conditions

according to seller.

* Seller wants to clear 18k, but is open to negotiate.

was thinking of offering around 7-10k

Seller is in dilemma and cant pay next months payment due to COVID-19 and is in the process of moving into senior housing. I have an appointment with her tomorrow evening and ultimately want to be prepared as this is my first ever appointment. I haven't presented her my sub to pitch yet but i will make sure she understands and fully agrees if thats the exit strategy i end up going with. Ultimately would like to wholesale this if seller agrees and understands the process of sub-to and essentially having the end buyer taking over. What would y'all do?

[Mitch Messer]

Hi @Julio Cesar Lopez and welcome to BiggerPockets! Also, congratulations on getting in front of a real live seller and looking for ways to creatively solve their problem.

However, you're asking the wrong question here.

If your plan is to wholesale this deal, your only question should be this: How would an investor buying this deal from me actually make money?

And, if you want to be a professional in this business, you need to know the answer. It's not something you can crowdsource.

Fortunately, it's not hard to get an answer. (It's just math.)

There are two primary ways investors make money from situations like this:

1. Fix-and-Flip
2. Buy-and-Hold

A Flipper is generally looking for deals they can resell to an owner-occupant by buying at 70% ARV less Repairs. With an underlying mortgage balance of $143K, we can see that even at an ARV of $200K, a Flipper would be buying the property at more than 70% ($140K), putting them in the red before they performed a single repair.

The mortgage balance is too high: This doesn't work as a fix-and-flip!

A Holder is generally looking for deals they can rent over the long term to earn a great return on their money. We look for a cash-on-cash return of 10% or more. If the monthly PITI mortgage payment is $1410, and assuming property management fees are just 9% of rents, then even at $1500/mo rent you're already looking at hugely negative monthly cash flow. And that's not even mentioning maintenance or vacancy.

The monthly loan payment is too high: This doesn't work as a buy-and-hold!

So, here's the sad truth: This seller really has NO equity to speak of, much less $18K; I wouldn't pay them a penny. Even if the seller gave you the house for free, there's little here to interest most serious investors. And, there's no hope of you earning a fee on any wholesale transaction.

I just don't see a deal here.

Buying subject-to is an insanely powerful acquisition strategy, but it doesn't automatically guarantee you are creating a viable and worthwhile deal.

You've still got to run your numbers from the perspective of an investor.

Hope this helps!