I overheard a coworker speaking with a tenant. She was complaining about managing the property, the issues, etc, and expressed that she wants to sell.
Later in the afternoon, I approached her and mentioned that I was looking to buy. We got to talking and I found out that her motivation level is very high, and that she just wants out. She then produced the loan statement and mentioned that I could call the bank and ask about assuming the mortgage.
The loan balance is 140K at 3.75% interest. The house has a deadbeat tenant with a lease until May at 1200/month. Nothing sounded that spectacular until I looked up the address. The house sits on a small spring fed lake and is 1500 sf 3/1.5. She’s put a lot of work and money into the place (new septic, flooring, kitchen and bath updates, new plumbing, HVAC, and exterior paint.) Houses in the area are selling for around 110-120/sf non waterfront, so I think there would be some equity.
I am looking for some advice on how to approach the transaction. Thank you in advance.
@Nathan E. That's some great financing, but I wouldn't assume it; instead, I'd consider purchasing the home subject to (Sub2) the existing mortgage.
Assuming the mortgage puts you personally on the hook for paying it off, and there's no deal worth that, if you can avoid it. Buying Sub2 means she'd remain on the mortgage, but you'd take over her payments, making them directly to the bank. You'd get the deed, and thus be the new owner. Meanwhile, she's then free of the headaches and hassle.
Then, deed in hand, you get to approach the tenant and give the "new sheriff in town" speech. Either they start paying, or they move on.
But let's not get too far ahead...
To know whether or not this approach even makes sense, you'll need to first answer some questions:
- How much is the total mortgage payment?
- Is the mortgage current?
- How easy is it to get a deadbeat tenant evicted in your state/county/city?
- Is the owner ready to just walk away, or is she expecting more?
- Are you prepared to be a landlord?
If you know these answers, tell us here and perhaps we can help you analyze your options.
You may have just stepped into a small goldmine!
@Mitch Messer thank you for your reply. I came to a similar conclusion about sub2 and its good to hear confirmation.
The total mortgage payment is 1080 including pmi. She is current on the mortgage and has been dumping money into the home, concluding that it is a pit. She is 100% ready to walk away, only asking that closing costs be covered.
Evicting would be a new experience for me, but would be prepared to start serving notices immediately. The lease is up in May. Dealing with the tenants will be the toughest part here of this deal.
I don't see this as a great rental unless I can get a much higher rent. A quick flip could be profitable!
@Nathan E. I'm assuming that mortgage payment is PITI. So, $1200/mo rent isn't so bad, but maybe you could do better...
Don't rush to flip, though.
That 3.75% financing is the key: Why be in a hurry to pay that off? Many folks out there would kill for financing like that on a nice home.
I would market the home as a lease-purchase for maybe $1350/mo and $4-6K down. Find a good family that wants to own but needs 2-3 years to qualify. While they do, you get cash upfront, monthly cashflow, and a possible back-end pop.
Or, flip the whole deal, financing and all, to a starting investor who wants to get in the game for under $10K.
When you've got the deed, you've got the golden ticket!
If only it were so easy. The seller is now getting cold feet and wants to let the tenant try to buy the property, knowing full well he has no credit. She really clammed up when I explained subject-to. The idea of keeping the financing in her name caused some head shaking, so I backed off.
At that point I offered some advice, that she should have the tenant get prequalified before even considering that he may be a potential buyer. I then gave some landlording advice and offered to help any way I can.
Here we are 6 months later and I have this house under contract for the amount due on the loan. I thought for sure the deal was dead.
The assumption is a no go since the original mortgage is a FHA (I would not qualify as a non owner-occupant), and the seller is not interested in a Sub2. She wants off the mortgage and away from the tenant.
I am currently looking at getting my own financing. I'll keep this thread updated on how it goes.
Please keep us up to date with the process. It is always interesting to see the anatomy of a deal.
As promised I'm back to close the loop. Everything went fairly smoothly with the transaction. I was able to get traditional long term financing which puts me in a cash flow situation. The best part is the built in equity. Here are some numbers:
Purchase price 139, Appraised Value 175 (this is fantastic to me, and the main reason I pursued the deal)
Repairs - Minimal for continuing rental, 5-10 for sale
Current rent 1200, market rent 1300-1400
The closing was a little interesting. The seller was adamant about not bringing any money to the closing, to which I had agreed. When we got the HUD, their prorated county property taxes were due. They balked, claiming that I was not holding up my end of the deal. I tried to carefully explain that these were not closing costs and that this money was sitting in an escrow account at their mortgage servicer. I offered two solutions a) to wait another month until the tax bill is paid out of their escrow, or b) I would personally loan them the money for closing, which they would repay when the refund comes in. We went with b. I know it sounds a little sketchy, but I've come to trust the seller as an honest person (and they cant hide from me :). I did what it took to get the deal done.
Now for the next deal...
Wow. Awesome. Congrats on the great deal and thanks for keeping up with the thread and closing the loop. I look forward to your next deal.
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