Sub2 Deal worth doing?

Question

House bought in 2009 with $115,000 left on 30 year note.

Pmts w/o Taxes&Ins = 705.11 @ 5.8%

Property taxes paid separately @ $3360/yr

Rent estimates at $1300/month

Ins pmts about $200/month

Renters would be responsible for utilities and lawn care.

If I pay taxes up front that leaves about $400 profit. Am I seeing this right? What else should I consider.

Wes Brumit · Answer

Rocky V.

I did consider the Homestead and looked at County Tax bill. Her HSE puts the taxes at $2600/yr, w/o is what I gave.

@K. Marie Poe, Rocky, I still don't get the insurance number you both say is high. What type of insurance should I carry? Is it not the same as I would have on my personal home? Ms. Poe, you live in CA so I can understand why there would be a difference, but Rocky, my home which is 2400 sqft cost me $2400 a yr and I use USAA which is the cheapest in the State. I've looked. No one could beat it. Do I get a different type of coverage? Is that why it would be different?

Wes Brumit · Answer

@Bill Gulley   Interested in your thoughts.

Wes Brumit · Answer

@Maceo D.

Nope, standard coverage's. 1% deductible. I've tried changing my coverage's, the best I could do was $206/month.  Must be my area.

@Rocky  Can you or anyone else point me to the forms, docs I need for a Sub2 deal?

Maceo D. · Answer

wow wes that insurance seems high on your own house. I too use USAA and have a 3300 sq ft house but pay about $1200 / yr.  You must have a lot of addons to your policy.  For the rental you can expect less since the policy addons should be less.

Brant Richardson · Answer

This looks like a workable Sub2 per podcast 70, I've never done one so I really dont know.  You sell to someone who is willing to pay more because it is owner financed, so sale price 125k, collect 10k.  The wrap loan adds another 2% of interest to the original loan, collect that every month.  Yes the buyer is paying more than market value and higher rate than somebody who qualifies for a loan, but they don't qualify and are willing to pay the extra in order to be a homeowner.

Rocky V. · Answer

Insurance is way to high and keep in mind current owner probably has a homestead exemption on taxes so your tax bill will go up.

I would stay away from lease to own in TX:

Lease-purchases, lease-options, and contracts for deed present serious burdens and risks to sellers under Texas Property Code 5.061 et seq. relating to "executory contracts" – i.e., contracts that remain essentially unfinished for a period of longer than 180 days. Sec. 5.061 provides that numerous initial and ongoing requirements must be observed if an executory contract is going to be properly implemented, and the burden (as well as all the risk of violation) is entirely on the seller to meet these. (www.lonestarlandlaw.com)

If it was me I would do the deal as your cash flow is about $200/month but my market in DFW is hot and I'm not sure how yours is and I am an experienced investor.  Also, don't over do it on rental rehabs.  Unless there are major issues your budget is on the high side.

You may also consider an Option to Purchase and try to find an experienced investor in your area to sell it to.

Account Closed · Answer

Insurance for me for a $150K house is less than $600/yr.

Sub2 purchases are only as good as the cash flow or equity you can take over or create.

A $145K house needing only $7500 in repairs, with a loan balance of $115K that I can get into for no money down?  That's something I can work with.  But I have the $7500 for repairs and I know how to get it sold with no commissions and minimal closing costs.

IMO there is no deal for a landlord buyer and no deal for someone who can't work on thin margins.

Andrew Kniffin · Answer

I wonder what @Grant Kemp would think?

What if you lease-to-own it to prospective tenant?  That way, you'd get a large chunk of cash upfront, and your sale would be a longterm capital gain (>1 year ownership).

If you're investing for cashflow, then this deal does look pretty lean.  But if you also considering your Personal Balance Sheet, then tenant is (a) paying down principal for you and (b) allowing you to realize appreciation gains while.

"as is" value is $120K, and mortgage is $115k.   So I assume you're only bringing $5K to close?  If you're getting a $120K asset with only $5k down, then you're getting some very good leverage, and not having to either (a) pay closing costs or (b) use up one of the conventional mortgages on your credit report.

So, as long as you're not requiring the asset to produce substantial cashflow, I'd consider to pursue it.

Wes Brumit · Answer

Honestly, the insurance number is a guess based on what I pay for my own home. Roughly the same size and area. Is there another way of knowing the insurance cost? Why do you think that's high?

The "as is" value is $120k. The ARV is $145k, thus the reason why I'm looking at Sub2 instead of wholesale.

145 * 70% = $101,500 - $7500 in up dates and repairs. (House in pretty good condition otherwise) = $94k. My best offer would be no more than $89k which doesn't cover the outstanding loan.

I don't fully understand wraps like discussed in PC70, interesting to me but I don't see how that would work either.

Remember I'm new, so I'm trying to find the option that works best for this owner. If it doesn't work, it doesn't work and I'll move on. Thanks for the info and help.

Account Closed · Answer

If you pay the taxes "up front", there is still no profit.  It just means that if your tenants pay rent, you will get paid back. :)

$1200+ PITI payment for a $1300 rent is a negative cash flow deal.  Why is the insurance $2400/year?

What's the property worth and what's the condition?