Hi BP family
I recently posted a few days ago about my potential first deal...well I have a little bit more of information to go on to ask for help on how should I go about handling this seller situation.
A have a motivated seller who's mother has currently moved out of the home to a nursing home. The home is about to go into foreclosure and they really want to avoid this because they say that it will affect her medicare. He (son) has contacted the bank & told them that they have a buyer (me) & that they need an extinction on the time before foreclosure process begins, so that I can bring in carpenter to estimate repair costs.
The house is paid off but the mother took out a 2nd mortgage for $50k with $45k still remaining, arrears of 5 months totaling $2680 but bank said they will take $1350 to bring the payments current status, plus a contract showing they have found a buyer, the monthly mortgage payment on the 2nd is $670.
I finally got a chance to go see the inside of the house, from what I seen it needs some minor cleaning / repairs done (paint, carpet, broken mirror on closet door, wood floor cleaning). The house is worth inbetween $67k (tax assessment number) & $77k. It's a 2 / 2 built in 1962 renovations done in 2010 (worth $70k) due to a hurricane in the area that damaged the home, 2 car garage, jazzui deck on side of the house. I will take pictures next time.
I would like some advise on potential way to structure my options to give to them. I really need to seal this one, they are HIGHLY motivated. Thanks everyone
Initial thoughts are that the structure of the deal depends on how you plan to exit. Three strategies I use are buy and hold (rental), flip, wholesale. As a rental I would need to know the local market rental rates and how that figure compares to this particular property and the expenses. You might have heard of the 50% rule, but if not it is the idea that rental units will require 50% of the income to go towards expenses, but does not include debt service. This is area dependent however.
For example, if you buy at $45k, invest $10k in the light rehab you mentioned totaling $55k and rent rates are $1k/ month, you probably have a good rental on your hands. If the rentals command $700/monrh, maybe not.
But, in the event you are going to wholesale or flip, your go/no go data is going to be a bit different. I'm looking for a maximum of 70% after rehab value (ARV) in either scenario, so if the comps are $70k, that means your max. purchase price plus repairs will be $49k. If you are wholesaling then add your cut into that as well. If you have $10k in repairs, the absolute max you should offer is $39k. Of course, figure in closing costs, etc. But that is the skeleton of the strategy.
Now, as a rental you could purchase this with cash, conventional financing, lease option, seller financing, private lender, etc. As long as the deal makes sense to the seller, buyer and lender, should be ok.
If it is wholesale, no money required unless you need a deposit to get it under contract. Just give yourself enough time to find a buyer in the purchase agreement. If you are flipping, subject to is a good option if the bank will not foreclose so long as the owner brings the note current.
Now, here is one way I might structure this. Subject to is first offer to seller with purchase price the balance of the loan, no more. If they don't like that I would go to lease option. Either way, I bring note current and make repairs necessary to sell on lease option myself. The down payment from my buyer would need to be equal to my total investment. Do check lease option threads here as I have only done one and I know option agreements can get sticky in some states.
The figures as presented might be a bit thin for wholesale or flip, but check comps with a good realtor to make certain.
Why don't you cash out the bank and give the seller some walking money?
I would not do a subject to on this property. medicaid has a 5 year look back period now on nursing home care eligibility, so I would get the property out of the name of the seller asap. It might not hurt to get a market analysis in the as is condition from a realtor that factors in it is an emergency cash sale situation due to bankruptcy/foreclosure possibilities. Even though the first lien is paid off get a title check done to make sure the paperwork was done to clear the first mortgage.
Thanks a lot for all of the helpful information guys. As of 9am this morning the house has been foreclosed on & I will probably have to see how the auction for it goes. The son that I was in contact with kept giving me information piece by piece, meaning everytime I talked with him about the house all this past week he was telling me something new that would of helped me structure the actual deal better in a timely manner. But I do take some blame for not asking any & everything about the house & their situation all at once. I found out yesterday that he said that medicare will only allow his mother to sell the house at FMV [$67k], which was not going to happen because of the margins / spreads was not big enough in that neighborhood's comps & plus home needed some touch up repairs.
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