Investor · LOS ANGELES, CA · Member since 2012 · 13 posts · 3 votes
Hi BP Nation,
I have a motivated seller with a property in Florida. He wrote a lease-option on the property 2 years ago, tenants are great, responsible for all maintenance, no late payments. Option is written for 5 years with 1-year renewable. Purchase price is $182,000. Buyer paid $9K option payment. Credit toward purchase price is $150/month. Monthly payment is $1100. Taxes/insurance are not escrowed.
He has an ARM at 3%, balance is $130K, payment is $650.
He needs to get this loan out of his name bc he wants to buy a house to live in--tough to qualify with this loan in his name.
I suspect there are several creative ways to buy this house. However, as a newbie, I am at a loss of how to begin to structure an offer or offers. Thank you BP!
He has an ARM at 3%, balance is $130K, payment is $650.
Since he has an ARM, you should be able to assume his loan, assuming you would qualify to do that. The tenant buyer would have $18,000 credit towards the purchase price after five years bringing the balance owed to $164,000, so I would not offer the seller much more than that. Or you could write a subject to type deal and offer some of the future appreciation, should that occur.
I am a little surprised that the taxes and insurance are not escrowed. How much do those amount to every month? It would nice to have positive cash flow on a monthly basis.
He has an ARM at 3%, balance is $130K, payment is $650.
Since he has an ARM, you should be able to assume his loan, assuming you would qualify to do that. The tenant buyer would have $18,000 credit towards the purchase price after five years bringing the balance owed to $164,000, so I would not offer the seller much more than that. Or you could write a subject to type deal and offer some of the future appreciation, should that occur.
I am a little surprised that the taxes and insurance are not escrowed. How much do those amount to every month? It would nice to have positive cash flow on a monthly basis.
Real Estate Investor · Irmo, SC · Member since 2012 · 106 posts · 90 votes
12y
Are you trying to buy the house to flip it, rent it out with the same tenants, rent it out with different tenants, or wholesale it? A clear exit strategy would help you decide how best to move forward.
First though, you need to solve the homeowner's problem. You can do this by buying the house for cash at $130k or by buying the house subject to and helping the owner find a lender that will approve his new house loan with the current loan still in his name. This may be easier than you think since the homeowner should be able to prove 24 months of rental income for the property, 75% of which would be considered for the debt to income ratio. (If you decide to go the 'subject to' route, get the contract signed first before you introduce the homeowner to your lender, or the HO may decide he doesn't need you anymore).
If the house is a good candidate to rehab and resell, you may consider buying it outright, buying out the tenants' option, fixing it up and selling it. You could get a hard money loan to cover all those costs, if the numbers work.
If the highest and best use is to keep it as a rental and $1100 is market rent, you can find a lender that lends to investors for rentals (basically a HML with a 12 to 24 month term), buy the house and keep the current tenants. After 12 months, you refi into a regular loan. Again, run the numbers and see if this works. (this seems easiest, I think.)
If $1100 is way below market rent and you want new tenants, then you will have to buy out their option and their lease. This is the least likely option, I think, since buying out the tenants could be expensive and the new rents would have to be significantly higher to make that back up.
If you are trying to wholesale it, you still need to do all the math and work above, then package and price the deal and sell it to an end buyer.
Investor · LOS ANGELES, CA · Member since 2012 · 13 posts · 3 votes
12y
Kathy, Thanks for your suggestions. I have emailed the seller with the question about taxes and insurance.
Some follow-up questions: when you write that I could assume his loan "assuming I would qualify to do that," what do you mean by that? Also, isn't that a subject-to deal?
Duplex Investor · Littleton, CO · Member since 2010 · 15 posts · 4 votes
12y
Usually a "subject-to" deal is buying the property subject to the current financing...the current owner would still keep the mortgage in his name, which your seller wants to be free of, so it would not be a subject to deal in the usual sense. My understanding is that ARM loans are assumable if you qualify for the loan otherwise. The lender would have to approve you taking over the loan. The subject to part I am talking about is the purchase price you would agree to give the seller. Is he concerned about losing any potential appreciation over the next three years? Are you looking to get the best deal possible? And Sekelle brings up a lot of good questions. What are your plans for this property? Will you keep it as a rental for just the next 3 years since the tenants could exercise their option at that point? Will you try to get a super deal and try to wholesale it to someone else to get some quick cash?