"Subject To" How does this change the 70% ARV - Repair Analysis

2 Replies

Hi - I have gotten fairly comfortable with the basic Investor MAO formula of 70% of ARV-repairs.

However, I know there is another model of acquiring investment grade properties which is to take over the sellers mortgage.  This has a few advantages including much less cash out-of-pocket, no need to secure financing, etc..

My question is: if the seller is willing to let you take over their loan, what are the analytics to generate the total offer you make them? Do you need to give them some cash? Do they need to come up with cash? How much? There are dependencies, I think, on the equity in the home which relates to LTV (before and after repairs).

There are a lot more moving parts in the analysis. Any best practices, formulas or worksheets to help calculate MAO's in these kinds of scenarios?

Thanks in advance for any advice!

Let me make this a lot easier for you.

when you take over the debt on a property, you are not generally looking to give the seller anything other than debt relief.  If they want more than that, they you way want to walk away.

You do want to look for two things, either cash flow (will the property rent for more than PITI + expenses including maintenence)

or you want to get a bunch of equity

or both equity and cash flow

You can make money in any of the above cases

MAO only applies if you need to do repairs to rent it Most of the property that you will look at subject-to is lived in my the owner or was recently lived in. If you do need to do any form of rehab then MAO applies, but with a caveat. Lets say you have a 100k ARV house, you can take it for the remaining 65k mortgage, and it needs 35k worth of rehab. In this case you need to walk away

If the same property needs 5 k in rehab, then you are still walking into 30k in equity

I hope that helps

Josh

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