My buddy just put a house under contract and I think he really messed up, I don't want to tell him to get out of the contract though unless I know for sure.
Details on the house:
Market value: $68,990
Under contract for: $51,500
Is this a bad deal or what?! I'm pretty sure if he gets the house for $51,500, add in a $30,000 mortgage, he's under contract for a total of $81,500 for a house at market value for $68,990?!?!
Even if the ARV value is $100,000, I just feel like the numbers are too close and it's too much of a risk. Any advice or comments? I don't want to tell him to get out of the contract because I am new to this, but I'm pretty confident that this is NOT a good deal, especially since he is just a wholesaler.
If it had been me, I would have tried to establish an ARV before anything. This person didn't seem motivated either. If he/she would've taken $40,000 or less for the house, that's when I would've jumped on it. But I just don't think this is a good deal. Am I wrong?
By the way, he wants to sell it fast for quick cash, not rent it out. Please keep that in mind when you answer. Thank you!
I don't know that this is enough information to determine whether it's a good deal or not, but the $51,500 should include the payoff of the $30k mortgage, shouldn't it? So he should still only be the $51.5k into it.
Doesn't it depend on how the contract is written out? I haven't made an offer on a house, but I'm also a wholesaler and would like to know if there is a way I could word the contract being that (I'll use his case as an example) the $51,500 is an offer but the mortgage company must be paid off with the $51,500?
I'm confused by your numbers. When I place a contract on a house, I buy it for what the contract says. Existing mortgages are the seller's problem, not mine.
It's probably not enough of a discount to make a decent assignment fee for an investor buyer. Only way you know is to shop it and see!
I thought the mortgage becomes yours since you're buying the house... Like if you bought a home for $50,000 and it has a $10,000 mortgage, does it make the total investment $60,000? Or simply $50,000 and the seller has to put $10k away on the mortgage? Might sound like a dumb question but please keep in mind I'm new to this. Haha.
I'm with Paul, if he's under contract to buy it for 51.5 then that is what he is paying. Escrow takes the 51.5k pays the 30k mortgage and gives the seller 21.5k. The only way to know if this is a good deal is to know what the ARV is and the rehab estimate. The mortgage balance is irrelevant to your friend. Are we missing some details? It almost sounds like you are saying he is giving the owner 51.5k and taking over the loan sub2?
You are correct in that you can write the contract to say i'm buying the house for 51.5k, taking over your loan of 30k and giving you the seller the difference of 21.5k in cash. That would be buying subject to the existing mortgage. Unless the contract is written differently, the purchase price on a contract is the price the buyer pays, the mortgage gets paid off and the seller gets what is left over.
Okay, I was just making sure. And not to throw out numbers again or to confuse anyone, but I just want to be 100% positive.
Woman has a house with a market value of $100,000. The house has a $50,000 mortgage. She wants to move to California. I tell her I'll give her $60,000 for the home so she can get rid of the home and have a little money to start in California. She agrees.
So, I got the home for $60,000, she pays off the mortgage and gets an extra $10,000. I find a cash buyer, assign him the contract for $70,000.
So at the end of everything, I make a $10,000 profit off an assignment fee, she gets her mortgage taken care of and an extra $10,000 as well, and the cash buyer gets a $100,000 home for only $70,000. Right?
Mostly correct. You never "get" the house - at closing, your cash buyer pays $70K, you get 10, and seller gets 60, netting 10 after payoff.
Now you just have to find that lady who'll let her house walk for fifty cents in the dollar.
That is close. We still don't know if it is a good deal with those numbers though. You said the market value is 100k, so that is what it is worth in its current condition, but what is it worth when it is all fixed up, which is the After Repair Value (ARV)? how much will it cost to rehab it so it will sell at that ARV price?
If your friends house has an ARV of 80k and needs 20k in work, then it isn't a deal at 51.5. But if the ARV is 120 and it needs 10k of work, then it's a wholesale deal at 51.5.
Thanks for the help guys! Answered my question perfectly.
Originally posted by @Mike M.:
Existing mortgages are the seller's problem, not mine.
Now I'm confused. How is the mortgage only the seller's problem? Isn't the house locked up by the mortgage and if there is not enough money to pay off the mortgage, the mortgage company has to either foreclose or the seller needs to do a short sale? You wouldn't be able to flip the property to another investor if there's an unpaid mortgage on the house. Is that not correct?
From what I understand, Phil, if you can buy the house for enough money to pay the mortgage, you can own the house. If the mortgage is $50,000 and you pay $55,000, the mortgage company gets paid first and the seller gets what's left afterwards. Roughly $5,000, minus whatever interests involved. I mean you couldn't buy a house for $10,000 when it has a $50,000 mortgage, but as long as the mortgage is covered, you could pay $50,000 and the seller not get a dime but get to walk away without bad credit.
@Phil B. You'll have to reconcile the existing mortgage in some form or fashion during the sale. If the mortgage can't be reconciled at the sale price necessary for an investment strategy, then it's not a deal, and I'm not about to make it my problem. That's what I meant.
ok got it. That's what I thought. I thought you knew of some kind of magic loophole or something I wasn't aware of. I get what you were referring to now. It works like that if the seller just wants to walk away clean if he's got a larger mortgage. You offer him the mortgage balance, it gets paid off and he walks clean. Hopefully you have enough market value left for an assignment profit and room to flip to another investor after that.
@Phil B. re: your first comment, that's why we want equity :)
Join the Largest Real Estate Investing Community
Basic membership is free, forever.