Seller is begging me to do this deal & wants to owner finance

3 Replies

Summary

The seller has 2 mortgages and owes 105k on a property that has been vacant for 2+ years. The house is in bad shape, needing around 35-45k in repairs. I am confident in the ARV being 160-165k. I know this isn't a fix and flip deal. I initially walked away from the deal, but realized that there might be a way to help the seller, using a wraparound mortgage. She is paying $1100/mo on a property she isn't living in. She is willing to sell it for what she owes.


Numbers on the deal

-95k 1st mortgage @3.875% ($890/mo) 

- her insurance is $2440/yr ($203/mo)

- I was quoted at $650/yr ($54/mo)

- her escrow shortage was $896, but if paid in full, her 1st mtg payment is $815/mo

-10k 2nd mortgage @14.9% ($217/mo)

-35-45k estimated repairs (I would do some work myself to get the cost down lower than 35k)

-ARV is around 160-165k

-Rent market ~ $1200/mo

My thoughts

If I paid off the 2nd mortgage (10k) and got a better insurance, the new mortgage would be around $613/mo. Do a wraparound mortgage that mirrored her current mortgage.  Get a tenant buyer paying $1200/mo w/5-10% down on $170k.  I feel like this is a good deal.

Thoughts?? What am I missing?

Thanks in advance, and apologies for the lengthy post.

-Daric-


Daric,

Personally, I wouldn't do this deal. Let me know if I'm misinterpreting anything, but as I understand it, you'll need to do the following (assuming the worst-case scenario in terms of costs):

Front $45,000 in cash for the rehab+ $10,000 for wiping out the lien in the second position, and also obtain a wraparound mortgage for $95,000 to absorb the lien in the first position. That puts you all-in at $150,000 without closing costs, which would likely be another several thousand. 

At this figure, your rent/purchase price ratio is well below 1%. If you're new debt service was $613/month, operating expenses of 49% would result in you breaking even. The numbers tell me that the likelihood of losing money on this would be quite high, unless you could command above-market rents.

Michael Garofalo, thanks for your response.  I suggested the wraparound to help the seller and put her mind at ease.  My initial plan was doing it subject-to.

By getting a tenant buyer, my operating expenses should be minimal in regards to the maintenance, repairs, utilities, etc. I guess I'm not seeing where I would potentially break even.

The P.I.T.I. is $665 (correction from $613). 

You are essentially paying $105k for a $115k house. Not horrible of not for the shady 2nd, the wrap, DOS and insurance risk, 2yrs vacant surprises that will come up, no title insurance... wait did you run a thorough title search? A full O&E? Make sure the ex is off entirely? What type of deed will you use to receive ownership?

Pretty deep for no equity, IMO.  Even if your going to lease option it, you will still have middleman risk when it doesn't work out. But congrats on finding an interesting deal, Daric.  It's admirable that you want to help her.