Need help with "Subject to" deal

6 Replies

Hey all,

I have my first potential deal if I can get it setup "subject to". Here are the details:

First mortgage is currently at 211k
house appraised for 270k, but really comps to 240k
Has a renter in the house right now for 1400/month (ouch!)

The owner is considering selling the property subject to, or the loan is assumable as well. Does the spread seem large enough? I know that the house was listed at 240k and didnt sell, so we know it cant get that. Maybe listing it at 225k would get the home sold quickly.

The seller is asking me to send him an explanation of how the subject to process would work (as in the steps to be taken). I'm not entirely sure myself, since I have not set one up before. Also, the seller is long distance, so he wouldn't be here for a closing. Does anyone know of a good resource that gives a good step by step outline of the subject to process?

Thanks much!

Garrick Solberg

Solbergg,

This is a HUGE LOSER no matter how you look at it. A rent of $1,400 for a $211,000 property means this has big negative cash flow. A purchase price of $211,000 on a property that is worth less than $240,000 is way too thin. IF the property was worth $235,000, that would mean that you would be purchasing at 90% of the value. If the market declines even a little, you would be upside down.

I'd pass!

Mike

Yeah, it's definitely not good for a rental. I had hoped, since I would not be putting any money down, that flipping might be an option here (assuming renter would be willing to vacate, which seller was pretty sure he would).

But you're right, as lease optioning wouldn't really work because no one would be willing to rent for that much. Retail is possible, but then I would probably lose out after all the comissions, closing costs, and concessions are paid out.

You need more details to be able to analyze the deal. How much is his payment? What is his motivation? Would he be willing to make the difference between the $1400 and the amount he pays? Can you get that person out and get a little more on the rent when you advertise it on a rent to own basis? Consider taking it under an option and trying to sell it retail yourself, you won't be able to list it because the property is not yours, you only have an interest in it. Good luck

Would he be willing to make the difference between the $1400 and the amount he pays? Can you get that person out and get a little more on the rent when you advertise it on a rent to own basis?

A little more on the rent or making up the difference between $1,400 and the owner's mortgage won't fix this deal. It is still a negative cash flow deal in a big way.

Mike

Originally posted by "boricua":
You need more details to be able to analyze the deal. How much is his payment? What is his motivation? Would he be willing to make the difference between the $1400 and the amount he pays? Can you get that person out and get a little more on the rent when you advertise it on a rent to own basis? Consider taking it under an option and trying to sell it retail yourself, you won't be able to list it because the property is not yours, you only have an interest in it. Good luck

His PITI is $1721 with an additional $12 HOA fee. As far as getting somebody in an RTO situation, I suppose it's possible, but I'm not sure how much higher a month people are willing to pay for that. 3/2's generally top out at 1300 in this part of town. The HOA doesn't allow for multi-tenant rentals, so its a bit of a miracle that he has a single tenant for $1400, really. Losing $300 a month isnt bad if you only have to stand that for a month or two until sale, but it's definitely not a long term strategy.

A little picture painting here: It's an out of state investor that purchased the property through foreclosure in the late 90's. The subdivision is in a suburb of generally nice homes in the 230-450 range. His purchase price back then was around 130k or so. He had it listed for awhile at 240k and the listing eventually expired. Through realquest I was able to find out that he refinanced the property in April, and the transaction records say 202k, not 211k which he says is currently owed. There is apparently only that one mortgage.

Through realquest I was able to find out that he refinanced the property in April, and the transaction records say 202k, not 211k which he says is currently owed. There is apparently only that one mortgage.

That was REALLY STUPID on the part of the owner. To take out almost all the equity on a negative cash flow property in a declining market is financial suicide. Very foolish. With a small decline in the market, he could easily be upside down and stuck with the negative cash flow for many years.

Again, this is the fallacy of betting on appreciation. He bought the house for $130K (plus whatever repairs were needed at that time) and it appreciated to $270K at it's peak (according to the appraisal). Now that the market is declining, he can't sell it at $240K and yet instead of selling it at whatever price he can get and locking in his profit, he's accepting a big negative cash flow while HOPING that the market picks back up. If he did a little research, he would know that after a real estate boom and upon reaching the new low (yet to happen), it takes 8-10 years for the inflation adjusted price to once again reach its previous high. OUCH!

A good lesson of what NOT to do!

Mike