Need advice on a flip.. good or bad idea?

Question

Aloha BP. Seeking some advice..  I'm trying to get creative with a seller on a deal. It's a 2/1 + a full unpermitted bath in garage. Owner inherited the home from his brother that passed away. He wants $260k cash. He has it on MLS for $299k. Comps are around $320k-$330 and house needs $30k for rehab. I know his situation because I got introduced to him by a mutual friend. He owes (according to him) $215k and is paying $2k a month rent on it. He expressed he really wants to sell fast to move to Vegas & he's tired of paying the rent.

I am meeting with him tomorrow to go over numbers. I was thinking of proposing the idea of partnering. Maybe paying him a down of $40k and going in on title as tenants in common. I'll pay mortgage payments till house sells. I'll rehab home, sell and pay him the balance of $260k - $40k - $8k (rent 4 mo) = $212k. If I go regular route and buy using private money there's no money to be made if he doesn't budge on price. This way we both get what we want!  If not $240k cash should be my all in number.

That make any sense? or bad idea? On my 10th cup of coffee trying to figure out a way to make this work :) Any ideas or advice will be greatly appreciated!

Thank you!!

See what we gotta pay for in Hawaii?? lol

Account Closed · Answer

Of course they will do Wraps. I do them frequently. Or, you can use an attorney. The Due on Sale Clause says "may" call the loan due, it doesn't say "will" or "must". It is a VERY big difference.

Account Closed · Answer

A Wrap is a mortgage from you to the seller for an amount greater than the payoff of his mortgage.

For instance, he owes $150,000 and you are willing to pay him $175,000. You have the attorney or escrow company create the mortgage for $175,000 from you to him minus whatever amount you agree to give him at closing and the rest is what makes up your mortgage.

You make the payment on your mortgage to him, he makes the payment on his mortgage as normal. He keeps the difference. You own the house. He has sold the house. You use title and escrow (or an attorney) to do this.

To keep things clean, most often you use a servicing company. You make the payment to the servicing company (not him) and they make the payment to the mortgage holder (bank) and send a check to the seller for whatever is left over.

Trey Brown · Answer

@Chris DeMello

https://www.attorneyinhawaii.com/hawaii-agreement-...

That's a link that briefly describes an Agreement-of-Sale. Might help to explain it if you go that route

Chris DeMello · Answer

@Tchaka Owen 100% accurate! Been racking my brain trying to make this deal work so bad. I gotta learn to not get attached to a deal. Appreciate your opinion, and thank you for the reality check!

Thank you all for taking the time to respond! You saved me from probably making a stupid move and buying on emotion and not the numbers. I'm just anxious to get my first flip. I know it'll come, and being on BP only helps me gain more confidents as I keep learning!

MAHALO!!!

Casey Powers · Answer

I’ve had a few title people say they won’t do it because of the due on sale clause. When the lender finds out the home has been sold, they will surely call it due. Also not all DOS clauses are the same. Some say WILL, not “may”. Risky.

Casey Powers · Answer

Wrap is risky at best, and not even possible if the seller’s loan has a due on sale clause. Due on sale clause means the first lender is owed the full loan balance at the time of sale. A wrap won’t work in that situation. Some title companies won’t touch a wrap deal, and I can’t imagine any would do it when there is a due on sale clause.

Chris DeMello · Answer

Account Closed Sorry yes, he's paying the mortgage not rent, and he did probate the property. What is a wrap? Thank you for the great advice!

Account Closed · Answer

First, why is he paying rent if he owns it? He should be paying the mortgage. Big difference. If he inherited did he probate the property? Big difference. Have a Title report pulled by a Title company and find out what is going on. Only the person on the Title can sell the thing. It could be a "non starter" from the beginning. I would NOT go on Title with him. It's too complex. Do a Wrap or a Lease Option but don't go on Title with him. In addition you will have IRS short term capital gains (normally from 15% to 35% of the profit ) & selling costs (normally about 8% of the selling price) factor those in as well.

IF he OWNS it, you might be able to put together a deal that works for both of you.

Michael Borger · Answer

You're focusing on the wrong thing which is the structure of the deal. You ought to be focusing on the numbers first, and the numbers say there's no rehab deal here, assuming your ARV and rehab #s are correct. If the ARV is 320-330k, there is 30k in rehab cost and they are firm on 260k, how are expecting to profit from this as a rehab? It's not there no matter whether you wrap, do an AOS or use hard money. Full stop. Your closing fees, resale fees and holding costs will either make 5k at best or send you negative. Is it worth the risk? Absolutely not.

If it were me, I would look to a lease option and then assigning the LO to a tenant/buyer who needs a helping hand toward home ownership while they get the credit together. However, if they are firm on cashing out completely then that's not an option.

Most likely you need to look at this as a long-term play, i.e. check in with them once a month until they give in or else chalk it up as a learning experience and starting spending your time on more productive activities like talking to truly motivated sellers. Your #1 problem here is that the seller isn't motivated enough.

Need advice on a flip.. good or bad idea?

Most Popular Reply