"Subject To" Offer on a House Needing Work

9 Replies

BP family, I've got another silly(?) question...

I have a guy who's sister passed away and now he's got her house in Virginia. He's in Arizona and just wants it sold.

He knows it needs work (by my estimate about $20,000 worth) and the remaining principal is only $40,000. The house was appraised at $115,000. PITI is $600 per month, and market rent is +/- $1,000 per month.

If I offer the guy $65,000 on a "subject to" offer with a promissory note to pay in 5 years, can I turn around and refinance it for $85,000 (+/- 75% of the appraised value) and use the $20,000 for repairs?

I know that sounds convoluted, but I'm trying to use as little cash out of pocket as possible to get the house.

I look forward to hearing the folly of my thinking

There are several issues.  Here's some:  Do you intend to try to do the refi right away?  That won't work because there is a seasoning requirement.  

Next, are you going to live there?  Conventional guidelines won't allow cash-out on a non-owner-occupant property.  Other lending programs that do usually only go up to 70% if I remember correctly.    

Finally, are you going to fix up the property prior to the refinance?  Most lending programs won't allow much deferred maintenance.  If the property hasn't been repaired it may not meet the underwriting condition guidelines.  

I'm not saying it's impossible.  If you find an investor friendly lender they may have a program for you.  

Good luck. 

It sounds like you're planning to rent the house and keep it as a buy and hold. You'll probably need to season the loans for at least 3 months but the longer the better. If you look hard enough, you'll probably find a lender willing to do your refi but you do run into the issue of underwriting condition guidelines. Are the $20k in repairs necessary in order to make the place livable? If so, it probably won't pass underwriting. If not, you can get the refi done first and use the cash out to upgrade.

Another option is to find a partner to put up the $20k. Your investor puts up the $20k in exchange for a certain percentage of the deal. Half seems like too much especially when they get all their money back after the refi. Maybe 1/3, whatever you both agree is fair....

Hope this helps. Good luck!

@Brett K.  

I do intend to refinance as quickly as possible. I don't intend to live there, it will be a rental home. The home appraised as-is at $115,000 and is in liveable condition (the sister was living there, but was a heavy smoker and her dog peed everywhere) Cleaning it up, plus updating is where I'm getting the $20,000 rehab figure. Can probably be done cheaper, but I want it to be very "rentable".

@Andreas Mirza 

The repairs aren't necessary to make it liveable, just "rentable" (heavy smoke smell, dog pee, etc.)

Thanks for the help. I've got a great lender, but didn't want to bother her if it's not something thats doable. It sounds like it's worth pursuing. I'm obviously trying to avoid spending any of my own money, and if the seller is willing to go the "subject-to" route, I figured I'll try to avoid using my money for the rehab as well.

There are some banks around here that will cash out refi on a non-occupied property.  I recently used BB&T to refi a subject-to with cash out.  I did own it for nearly two years prior to doing the refi though.

Also 20k to make something 'rentable' sounds like more than smoke smell and pee. I would get an inspection and make sure there is nothing lurking.

Hi Brooks. First, I wouldn't "offer" him anything. Let him be the one to tell you how much he wants, he might just say something less than 65k. Next, if he understands what "subject to" means and he accepts, then he's going to want some cash at closing, but not necessarily the full amount of equity. Of course that will depend on what you settle on as the final purchase price. I would just get a hard money loan at this point for whatever amount you settle on for upfront money plus repairs. Get an inspection and detailed repair estimate before contacting a hard money lender, as that will be required anyway. Most hard money loans will be for 6-12 mos, this gives you time to get the repairs done, find a good tenant and then do your refinance. It will be much easier to refi once you have the repairs done and a tenant in place IMHO.

Good luck and keep us posted as to what happens.

@Brooks Rembert   just curious!  How did you come across this deal.  I am looking into wholesaling here in Hampton Roads and am looking for creative ways to find deals.  Thanks in advance for your time.

@Marcus Irons  I found it through good old fashioned legwork. Driving around, running down the owner through the county website and sending a postcard. 

I made an offer and was countered, which I declined. 

@Brooks Rembert   thanks for the response, I'm looking forward to doing a little more legwork myself.  I am in the Navy but will be out in a few months so I'm excited about being able to devote more time to Real Estate.  Thanks again.

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