possible Sub To deal?

Question

Hi, have a seller who is looking to get out of their primary residence that they have owned for about 10 years in order to get into another property to accommodate their growing family. They have approached me first in 'selling' their home. Ive used hard money and conventional financing in the past; however this one has numbers that wont work for those and was wondering if there was an option to create a win-win for everyone.

The home is currently valued at $70k conservatively and is in clean condition (just an older roof). The neighborhood comps reflect a sales price range of $70k to $77k, so not too much upside even if I do some upgrades.

Their loan balance= $77k for a $720/mo loan payment. The market rents for that subject property neighborhood, sq. ftg.,  etc is between $900 to $1k/mo.

So basically they are under water on the loan. The interesting part is they are wanting to rent the house from me for a couple of months until they can move into their new property.

Any ideas on this one?

Gabe E. · Answer

Thank you Chris and Tim. I hadn't considered a short sale (don't know much about them), but overall it seems clear that sometimes the numbers just wont work in these scenarios. My next option was to get them in touch with a realtor so they can try and sell that way. thanks again!

Tim Lindstrom · Answer

I would not touch this deal, unless you could work out a short sale.  By the time you factor in maintenance, capex, vacancies,  and other expenses, you are barely breaking even (or possibly cashflow negative).

And buying a property for more than it is worth makes it hard to exit if things go wrong.

Christopher Morin · Answer

If you take this property sub to then you are inheriting that overvalued mortgage payment.    The debt service is too much and will kill your cash flow for any sort of rental.  That's before the seller asks to get something for their nonexistent equity.   You could try and refinance once you own it and pay the difference in the original mortgage in order to make cash flow, but your appraisal might come in undervalued.

Think about what your offer price should be as an investor... much less than the 70k ARV. Sounds like the only way to make this a good investment would be a short sale, which your seller wont want to do (credit = tanking before purchasing a new home) and likely wont qualify for financial hardship.

Sometimes the numbers just dont work.