Thoughts on a potential subject-to deal? Is this even any good?

[David Hayes]

I have what I consider an interesting scenario and I am curious to get some coaching/thoughts/feedback from fellow BP members:

I have a seller who wants to get out of her property (4 family in Cincinnati, Ohio), but ultimately wants more than it’s worth (in my opinion), but she has great equity so I offered her full price if she was willing to seller finance the remaining portion at 0% for up to 3 years so that I could easily refinance and get her paid off later. She agreed to this, but was concerned about transferring the property subject to existing mortgage because she went and asked the bank if she could do this – and they of course said no. I told her of course they would say no because it triggers the due on sale clause – but they don’t have to call the mortgage and my plan was to of course tell them I was taking ownership of the property and have full plans in place to continue to make it a performing asset and then would re-finance later to get them fully paid.

Here’s a couple more details of the property:

• Purchase price = $300,000 (I think it would appraise around $280k, although comps are hard in the area because not many multifamily)
• Downpayment from me = $10,000
• Remaining mortgage = $150,000 (monthly payments of $1360, $800+/month principle)
• Seller finance at 0% = $140,000 (balloon payment after 3yrs)
• Monthly rent = $2800/month ($700/unit) Easy to rent at that price, opportunity to increase to $750-$800, maybe even $850

Now – you might jump on this and say that maybe this isn’t a good rental at all based on these numbers since it’s about half of the 2% rule. I would agree in general, which is why I was just trying to figure out a creative financing/acquisition solution. The property is in what I would define as an A neighborhood, in general it should have very low vacancy and potential for continued improved rents, maybe even appreciation (although I wouldn’t count on it).

Any coaching for further educating the seller on subject-to financing? I am definitely not trying to convince her to sell it to me, I’ve been very open about the risks and exact procedure that would happen.

Any other creative ideas or thoughts on this?

[Jerry W.]

@David Hayes if you are going to do owner finance your down payment let me give you some advice.  First you need to use a 5 year balloon, not a 3 year.  Next you need to be paying on your primary note at a 15 year amortization schedule.  This will allow you actually be able to refinance in 5 years and pay off the balloon.  (If you are paying 20% down)  Look at an amortization schedule for 5 years and it will show you what I mean.  I have used that method several times.  Even if you get a 20 or 30 year note, look up and see what the payment would be on a 15 year loan and make that payment monthly.  You do not want the note coming due and being unable to pay it off.