Deal or no deal? Will seller finance work for this deal?

10 Replies

Hi, I’m a wholesaler and just wondering if there’s a way creative way to structure this deal.

Details:

So I have a seller who has been in preforeclosure twice in the last two years. He owes $163K -PITI (FHA) the neighborhood is a beautiful area which the comps are selling from $185K-$303K.

Price per sqft is $112.55.

This house around 1800 sqft feet colonial with a 2.5 car garage and full unfinished basement. I’m sure this house could sell for about $225K possibly more it’s a hot area in a pretty good school district.

Financial details w/seller wants :

ARV: $215K-$225K (could be more)

Mortgage:

$163K -Monthly payment -$1471-PITI

Seller wants is cash:$15K-$20K?

Repairs: $10K-$15K

Repairs:

*The roof needs to be fixed

*Pool- needs a new line which can close $5K-8K. So if it’s cheaper maybe just fill it with cement.

*Other than that the house was in great condition didn’t see foundation issue kitchen,bathroom were nice.

So with the details I’m working if there’s a way to do seller/owner finance (Sub 2) where I could make a profit and seller could get money and be happy as well.

@Jerrel Jones

A couple of things. I would tighten up the ARV, the initial range of 185-303K leads to more questions, than it does answers.

Your price per sq. ft, puts the ARV around 202K, not the 215-225K.

With that being said, this is the information you will need to know to start analyzing this deal.

What are the rents for this area?
Is this a desirable area for buyers?

Depending on your or another investors exit strategy, you will need to come up with the necessary data to properly evaluate this.

For myself, I only owner finance, as I am not interested in being a landlord. I would analyze this deal, from the strategy of wrapping this note. 

163K existing note

20K cash to seller

15K repairs

$198K  + closing costs. If your $112.55 is accurate then essentially I have no equity, which is okay with me. Looks like around $40K in out of pocket expenses. 

If I wrap at 200K, 9.5% interest, 12 years with 10% down.

PITI = $2048 I will want to know that the area can support this, and is it reasonably inline with the current rental market.

If so:

$115K collected interest over the length of the loan

$577 per month cash flow. This equates to $83K in additional income over the length of the note. 

Looks like I would make roughly 200K on a 20K cash investment (reduced from 40K, after the 20k down payment), over 12 years. If all the numbers were accurate, this would be a deal I would do. 

John

Your first statement is inaccurate...at best.  There is no way the comps can be between ($185-303k).  What that range represents, are comps for this house (maybe)...and comps for every house larger, smaller, etc...in the area you pulled the comps from.  Not all of them can be applied to this house.  I would say only the ones that are between 1600-2000 sf...and only if they are in the immediate area.

Until an actual ARV is established, the question can't possibly be answered.

@Joe Villeneuve

The range of $183K-$303K is a general range of what the area is selling for. Not necessarily the particular house I’m talking about. I provided that detail so that the reader could get a picture of it since it’s a desirable area.

I know the area As I don’t stay far from it the house would easlily sell for $210K.

Originally posted by @Jerrel Jones :

@Joe Villeneuve

The range of $183K-$303K is a general range of what the area is selling for. Not necessarily the particular house I’m talking about. I provided that detail so that the reader could get a picture of it since it’s a desirable area.

I know the area As I don’t stay far from it the house would easlily sell for $210K.

Not to be blunt, but...so what? What value does that really have? What makes an area desirable (to the REI...which is the only person that matters) are the numbers with $ in front of profit and cash flow. Just because an "area" has a high property value, doesn't make it a good area for an investment. Just because an area has a high average property value/sq ft, doesn't mean all properties have that same property value/sq ft. This is why mentioning a range that wide means nothing. You need to only concern yourself with the numbers that relate to your property...based on a tight range of your property's sq ftg...as I mentioned above.

Sub2 can provide value by saving the costs and hassle of having to get a new loan, but must applied only in optimal situations and be done correctly to minimize risk.

When a seller has faced pre-foreclosure twice, the seller will definitely be considered distressed, subjecting the investor to potential equity stripping claims later. 

Additionally, title definitely is under a microscope. Lots of risk of title transfer discovery and DOS activation.

I have no opinion about your ARV, but I would not put $20k down on a sub2 in this situation. Buy conventionally with title insurance or don't buy at all.

Originally posted by @Steve Vaughan :

Sub2 can provide value by saving the costs and hassle of having to get a new loan, but must applied only in optimal situations and be done correctly to minimize risk.

When a seller has faced pre-foreclosure twice, the seller will definitely be considered distressed, subjecting the investor to potential equity stripping claims later. 

Additionally, title definitely is under a microscope. Lots of risk of title transfer discovery and DOS activation.

I have no opinion about your ARV, but I would not put $20k down on a sub2 in this situation. Buy conventionally with title insurance or don't buy at all.

 having had sub too foreclosure rescue a major part of our business model until it became basically illegal in WA and OR for the reasons you suggest.. the same rules apply buying a home sub too with virtually no equity is a waste of time and money unless its in a SPECTACULAR location .. you need equity to absorb when the buyer who bought from you on terms for next to nothing down defaults. which is often.. and now your stuck with cash in the house.. your stuck making payments to the senior and then you probably have to rehab once you get it back.

not to mention having the loan called..  SUB too is just so very dangerous to the seller.. many simply don't get all the facts and the nice smooth talking investor downplays their risks..  

now if your well capitalized and can payoff a mortgage that is called on you.. that's one thing.. but I don't see that often in the real world I see the opposite well meaning investors getting themselves and the sellers into a mess.. 

I did a rescue in 2005 of a group of young investors who drank the sub too kool aid.. did about 30 of them resold them on terms at the point that 10 plus were in default they ended up defaulted on all of them.. they had the new buyers in there.. its was a mess.. the sellers were suing them and filing complaints with the AG.. I did my best to rectify it and we kept them out of trouble.. and of course the market helped a little with some appreciation..  but bottom line when non pay hit about 7 of 30 deals they did they were sunk.. 

@Jay Hinrichs thank you Jay those are things that I need to hear. At this point I’m advising the seller on the best option for him to sell with a realtor. But definitely sub too can be a good strategy but can be very dangerous

@Jerrel Jones

No it does not make sense. There needs to be more equity.

You have to learn to get a tighter price range for the value. Most people learn to appraise a property using the same methods bank and lenders use. Your range is too broad, doesn’t really make sense if you can properly estimate the comparable value of a home.

Lots of good responses here but I would caution that a "bad" pool can be a really deep money pit. To either repair or fill them can be very expensive. Make sure to take that into account.

@Jerrel Jones

Sandwich lease it.

give the seller cash 15k and for asking 163k

Put it under contract for 5-7 years

Give seller a per month rent until it’s sold.

You can get paid 3 ways.

Find a tenant rent to own

Deposit non- refundable

15k-20k a little high but I don’t know your market so possible 5k profit

The spread between the rent from your tenant and the seller 200-500 possible

Selling price 235k selling at a premium.

Win/win/win