Subject 2- does this deal worth it?

Question

Hi guys,

Will you please help me out? I have been thinking of doing this deal but not sure if I should do a subject 2 or how to structure it.

Seller owes 35K to mortgage. Rents are 1.7K (owner pays heat, water/sewer/trash, all under $500 per month). Purchase price 55K.

Property needs new roof (10K), new siding, plus new windows, plus some mold issues (does not seem like big mold issue).

The seller has no money to do repairs and wants to get out of dealing with tenants. A bank wants roof fixed, etc, but the seller has no money to do it.

1) Is it even a good deal?

if yes, how should I structure it?

Here is what I was thinking:

Do 5 years amortization schedule, (I know its better to do 30 year but the seller wont do a  long thing), 5% interest, so hopefully within 5-6 years I will pay it off...

2) Who holds the title to the property ?

-Seller? If yes, then what do I have? Nothing? Its like working on a property that does not belong to me.

- If I will hold the title, then the mortgage company can call do on sale and then I lose all the money I put into the property as well, right?

How would you do this deal?

Thank you

Geordy Rostad · Answer

@Alex Mikhals

I have not personally done a deal like this. I haven't found a deal where this sort of thing has made sense for what I've needed to do. When I've done creative thing, it has typically been with an owner who has owned the property outright in cash so they could just owner finance it to me.

Darius Ogloza · Answer

One potential structure is that you enter into a secured loan agreement under which you advance repair costs.  You file your agreement as a lien against the property as protection.  You will now have a lien junior to the bank's.  The owner and you simultaneously enter into an assignment of rents agreement, whereby you receive all rents to cover loan advances and interest.  This arrangement should work until the rents you collect start to exceed the amount of loan advances and interest.  You can resolve this by also taking an option to buy the property at the same time you enter into the loan and assignment agreements.  Here is where it gets tricky if you are concerned about the bank's due on sale clause.  Before you exercise your option you should get the bank's consent to the sale.  If you cannot get consent, your loan advances have been paid back with interest and you are no worse for wear.

Mary Jay · Answer

3) Here is another scenario that I stole from another topic:

https://www.biggerpockets.com/forums/311/topics/121694-subject-2-structuring

"have the seller put the property into an LLC, and have an operating agreement that lays out the structure/terms. This way the seller is still on title technically, but by way of the operating agreement we have the ability, to rent/rehab etc."

Here is what I am thinking, may be the seller can  put the property into a trust  instead of LLC and then the beneficiary of the trust would be my LLC that I own?   Since the seller owns the trust, this way the bank thinks the seller still owns the property , so there should be no due on sale, right?

Alex Mikhals · Answer

@Geordy Rostad are you taking subject 2's and then lease optioning them , or do u normally take subject 2's and sell them on land contract

Mary Jay · Answer

Thank you so much, guys!

I really appreciate your help!

Mike C · Answer

Mary Jay,

You received some pretty good advice from Geordy. If the after repaired value (ARV) is really only 67k, this is not even close to a good deal imho. The ARV needs to be be way higher to even consider this a possibility. The numbers don’t jive to me as a rental that commands 1.7k ( really 1200 when you take out the 500mo you are paying) should be worth way more than 67k ARV. I personally would never do a deal where I had to add a new roof unless I was paid a lot (with some margin of safety) to take on that risk. Let work some hypothetical numbers.

Seller has no money so his bottom dollar isn’t going below 35k. You need 10k for a roof, must fix mold (need to find out how big a mold issue and how much to fix) estimated at 5k, plus misc costs. Do you have 15k to fix these issues and if you do is you money better leveraged somewhere else? Only questions you can answer but I would say I can find a better use for that money. Another big number we don’t have is the PITI pmt of this property on that 35k mortgage. That is important and I hope it is low.

A good subject to deal requires very little to no cash from you as this guy seems like he want to make his problems your problems. Just based on what we know it would be a pass. You are paid to be a problem solver however not all problems can be solved. This is a numbers game remember. You can however use this as a good learning experience and think about what numbers this deal would make sense at. The more deals you work through and analyze, the easier it gets.

Mike

Mary Jay · Answer

Thank you, sir!

I really appreciate your opinion!

Mary Jay · Answer

Thank you so much!

James Wise · Answer

Avoid all of that Subject 2 mumbo jumbo. If you want to buy the property you need to buy the property. That could be with cash or your own bank loan, no hocus pocus.

Mary Jay · Answer

I had an appraisal done and the after repair value is 67K, which is weird because buildings can go in that area for 100-200K...

Appraiser did put the value is after fixing the roof, siding and windows.

The seller owes 35K on the mortgage, purchase price 55K, so I guess 80% of the after repair value of 67K is around 54K...

The problem is if I put in about 30K into repairs after purchasing it for 55K, which would be 85K, the total cost is more than what I can get if I try to refinance it...It does cash flow though about 500-1000$ per month depending on the season (because the owner pays the heat bill, so in the winter it may eat up more of cashflow)

Subject 2- does this deal worth it?

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