Home that is underwater

5 Replies

Hi, I need some help.  

I have an opportunity to take over a mortgage on a house in Gainesville Fl.  The house is worth 106K but the seller owes 118K at 6.5% for 23 years.  He wants out of being a landlord and willing to do a subject to deal. House needs some sprucing up about 4K in repairs. Problem is there is quite a few houses in that subdivision that are being sold short sale which could bring the price down more.  I would like to resell house on purchase option deal.

So my question is how would you structure a deal with this scenario?

First suggestion is to walk-away.

Second suggestion is to have the owner pursue a short sale.  You pick-up the property for $106k with much better loan terms, 4.5% for 30 years.

Third suggestion would be to structure the purchase as a Contract for Deed or option on the property (probably forbidden by his original mortgage).  Down payment of 5% (=$6k) + $4k rehab with three year balloon payment.  Pray for 5% appreciation on the $106k current value.  In three years, the value would be about $122k; if it isn't then walk away from the balloon payment.  Hopefully in the three years you'll have cash-flowed $10k that you had into the property.  This quasi-terrible plan seems like a lot of work with break-even returns over 3 years.

Hi Raj,

Thanks so much for your advise.  Have more questions.

The owner is willing to hold the mortgage for 23 yrs for me at a purchase price of 118K.  He is not looking for any down payment, all he wants is not to have to deal with tenants, so he ask me to spruce up the home and sell on lease with option to buy.  do you think i can make this work.  Rents in the area $1200.00 and the mortgage is $890.00.  If i sell the house on a lease purchase for $125K with a 5% dp (which will cover the repairs) and monthly payments of  $1200.00  buyer would be responsible for taxes and insurance do you think this could work?

Thanks for your help on this


@Suzanne O'Connor 

Selling for $125k sounds unlikely because in your first post there were other properties selling for $106k.  Your terms might be better in some ways but a traditional mortgage would certainly have lower monthly payments.  Taxes and insurance will cost them an additional... $200/mo?

It isn't very good as a pure rental either; rent of $1200 and mortgage of $900 (+taxes & insurance). Monthly cash flow probably won't be enough to maintain property repairs + vacancy.

If the owner doesn't want to manage tenants then you could become a property manager.  Charge $600 per new tenant and $100 per month.  The original owner carries the property risk and has some cash flow.

@Suzanne O'Connor  

No matter how you look at it  you are paying at least $118K for something worth $106K.  If the mortgage rate was in the low 4s or lower, then it might (barely if at all) be worth it to do this deal as a long term rental, since the money would be so cheap.  But that is certainly a long term commitment.  The short sales in the neighborhood makes this very sketchy move absolutely unpalatable.  

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