Need help on first "subject to" deal! - Posted by Sheri Bulgatz

Posted by Sheri on June 30, 2003 at 08:46:36:

I think I got caught up in the moment with this deal or “not deal.” I was excited that someone was willing to deed me their house. Time is a major factor here, and I don’t have in place my exiting strategies, and I can see that the potential for profit is small. I’m looking for a less complicated first deal. Good luck with yours!

Need help on first “subject to” deal! - Posted by Sheri Bulgatz

Posted by Sheri Bulgatz on June 28, 2003 at 18:02:49:

Okay, here’s the deal - and by the way, this may be our first one. House is currently in foreclosure, with l2 days left before auction. This is the second time the auction has been scheduled. Prior to the first auction, the owner secured a purchase agreement. The sale fell through, and the house was rescheduled for auction.

The house was built 2 years ago, and was recently appraised for $160,000. It has an FHA loan, and balance is $132,000. It would take an additional $7,000 to bring the loan current. Monthly payment (PITI) totals $1,100. If we do a “subject to” and flip the property, we stand to make about $10,000. After reading the archives regarding short sales on FHA loans, it seems highly unlikely that we can do a short sale with such litte time. Is this correct?

We would prefer to flip the property, but are worried that our buyer will have trouble getting a loan on a flipped property. Is this likely to be a problem, and if so, is there anything we can do about it?

I know we can lease option and cover the mortgage plus a few hundred, with the potential for a much larger back-end profit. But because this is our first deal, we are feeling nervous about holding the property. It just seems with interest rates so low, and 100% financing so readily available to almost anyone who can breath, are we really going to be able to find the quality of tenant/buyer that will be able to qualify for a loan within 12 months? Any information or suggestions from all you experienced investors would be gladly appreciated.

Thanks Again,


Pass. - Posted by GL - ON

Posted by GL - ON on June 30, 2003 at 07:55:48:

This deal does not have enough profit to justify the time and money you would need to invest in it.

Or, to put it another way, it would require too much risk and effort for the possible profit.

Keep looking, there are better deals out there. Until you find them you are better off doing nothing.

12 days… - Posted by B.L.Renfrow

Posted by B.L.Renfrow on June 29, 2003 at 12:50:00:

…probably isn’t a realistic time frame in which to find a buyer or T/Ber with more than $7k cash on hand willing to immediately sign a deal. And I’d guess the chance of getting the lender to postpone the sale a second time after doing it once already and being burned is slim to none.

Difficult, yes, but not impossible. Of course, if you have $7k cash on hand yourself that you don’t mind not having available for a while, you can use that to bring the loan current, taking title subject-to the existing financing.

This assumes you’ve checked title and there are no other liens against the property or seller, and the seller is not in bankruptcy.

You say the property was appraised for $160k. You should be aware appraisals don’t mean you can sell it for that. Appraisals are unscientific, and may or may not reflect market realities. The best indication of what the property is really worth is to look at comparable sales.

Assuming FMV really is $160k, and the loan balance plus arrears totals $139k, if you took it subject-to and sold it for FMV your potential profit would be $21k, less repairs, if any, and closing costs. I’m not sure how you came up with only $10k.

You are talking about multiple techniques in one paragraph: short sale, flipping, subject-to. You need to figure out which one is most likely to succeed given your resources and limited time frame.

You can in all liklihood forget about a short sale at this late date, unless you can show the lender a signed contract and immediate proof of funds. Even so, there’s still no guarantee they’d accept.

Flipping? Well, if you can find a “flippee” with cash who can close before the auction, that would work. Yes, a buyer using an FHA loan wouldn’t be able to get a loan for a flipped property in under 90 days. Regardless, no one could get a loan approved and funded in 12 days, FHA or not.

If you marketed the property aggressively as a lease-option or owner finance on a land contract, it’s possible you could find a buyer with enough down to cover the arrears within the time frame. Then, the loan would be reinstated and you say local rentals for similar properties are above the $1100 per month payment, so you would have a positive cash flow. In this scenario, since you would be offering owner financing, you could set the purchase price a bit above FMV.

HOWEVER…DON’T consider this UNLESS you have money in reserve to use if your buyer defaults or you have to make repairs or something like that. Doing a subject-to deal with no reserves is asking for major trouble should something go wrong.

You could consider using a partner who would put up the $7k in exchange for a share of the profits. That would probably be your best bet at this point. After all, getting half of a $21k profit is better than getting none of it.

Brian (NY)

Archives and More - Posted by Gary (WA)

Posted by Gary (WA) on June 29, 2003 at 04:13:51:

Here are a few ideas I have. First, you might need more than 12 days to do a short sale. Better plan ahead a bit more for that one. Additionally have you checked title to make sure there are no additional liens. I recently did a deal similar to this, and there were an extra 15,000 in liens I had to clear up. Not to mention an extra 3,000 in Water and Light bills that were left behind.
If you search the archives for “simultaneous closing” it will bring up a few different results, read the one by Ben Innes-Kerr.
Hopefully that will put a new spin on things for you. Secondly you are purchasing a house “subject to”, so if you are buying it “subject to” then aren’t the original sellers, “selling subject to”. And if so, then what’s to stop you from doing the same? So let’s do what successful people do. Work backwords, You need 7,000 to “cure” the loan, or Re-instate it. So you can either do it yourself, or Sell the house with “seller financing” after all that’s how you bought it. But lets say you find someone who would like to purchase a 160,000 home with 10% down. So 16,000, less the 7 to reinstate leaves you with 9. So your sales price is 148. Leaving them with the loan balance 132. Or some other variation of this, with something where they must refinance in a years time, or two years. This couples on the idea that "when they are easy to buy they are easy to sell."
Sometimes it’s better to make a quick nickel than a slow dime!
Let’s go on to the next step. Perhaps you bring this thing current and hold it until you find a tenant buyer or buyer to go and qualify for new financing. How will you market the property, if you list it, chances are you won’t make very much money. You will have holding costs now. Or you can just let the house go back into foreclosure, but that’s your call. As some of the other seasoned investors on here will tell you, “the top 20 % doesn’t even count.” Meaning that the top 20% of equity can quickly dissipate with negotiations, excise tax, commissions, fix up cost (if any), and othere things you may not have seen.

Not trying to give doom and gloom, just being realistic. I think it was Ron Starr who said “It’s like the dog chasing the car, what’s he going to do when he gets the car?” And Ron LeGrand who said, “You must know the way out, before you ever go in.” Once again Working Backward.

As for me I’d go with “seller financing.”

Hope it helps.

re: Need help on first - Posted by Stewart Preston

Posted by Stewart Preston on June 28, 2003 at 23:48:02:

I can’t really help, since I haven’t done anything, but I guess the question is can you get the foreclosure to stop a second time. I would guess you can if you have a signed contract but from what I know this couldn’t be a subject to deal which generally doesn’t notify a lender so that wouldn’t stall things. And if you did notify a lender that would be the same as letting you assume the current mortgage. I wonder if anyone has done that in a preforeclosure? Also, from what I have read, most wouldn’t touch this with so little for a possible flip. Seems only answer is to buy it yourself and l/o but that kinda defeats the purpose of doing a “deal”. All this coming from someone who is having a hard time getting to first base :slight_smile: so take it for what it is worth.

Re: Pass. - Posted by Sheri

Posted by Sheri on June 30, 2003 at 08:16:31:

Thanks for your feedback. I was really hoping to make this deal work. The house is brand new and in an appreciating area. However, now I can see that there really isn’t enough profit in it for the short term - everyone that’s responded to my message seems to agree on that. It’s nice to have a reality check. I’ll keep looking!

Re: 12 days… - Posted by Sheri

Posted by Sheri on June 30, 2003 at 08:36:54:

I’m moving on! Too risky, not enough time for me to make this happen, and not enough profit. Thanks.

Re: Archives and More - Posted by Sheri

Posted by Sheri on June 30, 2003 at 08:26:57:

Thanks for your valuable insights. I think I’ll work harder on determining my exit strategy. I can see that there really isn’t enough profit margin in this deal for me, and time is a limiting factor. I’ll keep looking till I find a less risky first deal.

Hmmm. No, wasn’t me said that. - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on June 29, 2003 at 11:16:33:


You say: 'I think it was Ron Starr who said “It’s like the dog chasing the car, what’s he going to do when he gets the car?” ’

No, that was somebody else said that. I don’t remember who. But it warn’t me.

Good InvestingRon Starr*