Subject-To Purchase with free rent to seller for one year
I've never done a subject-to deal, but am working a possible opportunity for one. I put the information below. Just looking for anyone's insights or if they think I've missed anything. Thanks!
Scenario: Potential seller lost his job due to a DUI. Has a wife but can't currently afford the mortgage on their own. Is looking for a buyer who will purchase home and rent it back to him for a year. Seller wants profits from sale of house to cover a years worth of rent.
The Numbers: Home is worth about 220k. Seller owes about 180. Rent would be 1500-1600.
My Proposal: I acquire home subject-to and credit seller a years worth of rent at $1500 a month. Win-win as he gets a free place to stay for a year and I don't have to pay a large sum out of pocket to acquire a nice property. After mortgage, HOA, maintenance, etc, it's roughly 1200 a month. that's about 350 a month in eventual cash flow after the first year, assuming conservative rent of $1500. Using the first year of monthly fees as my purchase cost (as I'm getting no rent during this time), that's puts money down at $14,400 ($1200 X 12). Cash on cash return, after first year, of 29%.
Risk: Continued job loss could leave tenant unwilling or unable to move after first year and I'd have to deal with eviction.
Risk Mitigation:
1. Offer credit back to seller if he moves out prior to a year, to encourage move out and allow for properly screened tenant to move in. For example, if he moves out after 6 months, he gets 6 months of rent in cash.
2. Plan for 6 month eviction process. $2500 in legal fees plus monthly expenses of $1200 X 6 = $9700. That would still result in a cash on cash return of 17% (granted it would be 18 months before realized), but on a home in a good neighborhood I feel has good appreciation potential. I could also use an amount smaller than the total as a cash for keys option which would result in a greater return and moving in a paying tenant sooner.