Short Sale… or Subject-To?

I recently marketed to people who have second homes and are either close to being upside down on the mortgage or they are in foreclosure.  So far, I’ve closed on 2 deals from this marketing.  One of the leads owned a house in Sanford:  1,050 sq ft, 3 bedrooms, 1 ½ baths, living room, kitchen with dine-in area, separate laundry room and 1 carport.  The house was in great shape. It was a block house and really only needed about $3,000 to $4,000 worth of work if I wanted to retail it. 

I partnered with one of my Apprentice Students and we reviewed all the facts about the house.  The A/C unit was only a couple years old, it still had a wall furnace that could be disconnected, it had newer vinyl windows and just needed a little TLC.  There was an outstanding mortgage on the home for $29,000 and my offer was $27,500.  The mortgage payment amount was $600.00 a month (PITI), principal, interest, taxes and insurance. 

I really wanted to take this house subject to the underlying financing and keep it as a rental.  I was dealing with an 80 year old Seller, via his children.  They just wanted to be out from underneath the home and didn’t want to keep the mortgage on the property.

After several changes to the contract, we agreed to purchase the property CASH for the mortgage balance ($29,000) and pay all the closing costs.  There was a family member living in the house and we couldn’t close until he vacated the property.  We filed an Affidavit of Purchase and Sale on the Property and chose not to show the house during the time we had it under contract, and we waited until it closed. 

The issue was that the family members just wanted the mortgage out of the Seller’s name and would not consider a subject-to; however, in my opinion, if we would have just walked away from the deal to let it sit for a day or two, they might have agreed to our subject-to terms.  My partner didn’t want to wait and I was still arguing over the difference of my price and their price.  She came into my office and said “Let’s just take it for $29,000 and move on!”  So … we took it for that price.

The comparables in the area ranged from $65,000-$103,000 and we could have decided just to fix it and then retail it.  One determining fact was that, in that price range, it would probably be an FHA buyer.  An FHA Loan requires that the new Seller (us) hold the property for 91 days before signing a contract with a Buyer.  This loan also requires two appraisals to justify the sales price (which meant we needed 6 solid sold comps to justify our price, no more than 1 mile away which I usually will only go .5 miles away).  In light of those guidelines, we decided just to sell it as-is.

Due to the other deals in process, neither of us had the time to hold my Open House Auction that I teach in my Foreclosures Gone Wild Course, so we decided just to list it on the MLS with a 3% commission to selling agent, when I normally only offer 2.5% commission on this type of deal.  We priced the house at $56,000 and received multiple offers and asked for the highest and best offer.  We ended up with a CASH offer at $57,100 which we accepted.  We purchased the property in January and then closed in February, which was a total of 18 days. 

Our gross profit was $23,000; however, we broke it down further as to how many letters we mailed out, how much we paid for labor, supplies, postage and the cost of the money plus holding costs including utilities.  In the end, it was a total of $18,000 true profit split between the both of us.  This did not include the 2nd house that we did take subject-to in Oviedo for $143,000 that will sell for $210,000 in June with the current tenants paying $1,500 a month with a management company.  This house has a negative cash flow of $400 a month, needs minor repairs and will soon bring us a profit of $50,000 after all expenses are paid off.

When looking at all types of deals, especially pre-foreclosures, you should know how much it costs to bring a mortgage current and see if there is any way that you can bring it current and profit more on a subject-to, versus the cost of private or hard money.  Also, you need to have two exit strategies, either fix it up and rent it or sell it “as-is.”  Look at all of your holding costs and how long you will have to hold it to get a buyer.  I would always suggest using a 4-month holding costs number, as FHA Buyers are the bulk of our buyers right now and seasoning is an issue for a Seller using an FHA Buyer.

Just remember when you are marketing, you may come across a deal that you might be able to offer terms and cash.  Always figure out your holding costs and make a win-win situation.

Please keep sending me your questions and topics that you would like to hear about, so I can be sure to keep feeding you with the information that you need in order to move confidently through 2016 and bring your Real Estate Dreams to Life!

Happy Negotiating!

Kimberlee Frank