We bought a property this week, a sub-to deal… we’ll, we contracted to buy it. Unless it’s a GREAT deal, one with tens of thousands of equity, we make the contract and eventual purchase “contingent upon us finding a tenant or a buyer”. That way, until we get PAID, nothing goes out! Here’s some more Subject-To real estate investing tips.
This is one of our ongoing “A Day in the Life” episodes… where we film us at the property, show you the ins and outs, and give some tips and help as we go. This entire deal is available to our viewers. (if they act fast) For a small up-front fee, they can own this property without any credit check or negotiations.
In the current market, we’re leaning a lot more towards “flipping properties” over long-term deals. There’s so many short sale and REO opportunities out there, that taking responsibility for a property with prices still declining in some areas can be risky business. However, a property with 25k-30k equity, in a good area, and without any risk until we have our tenant, it’s a good enough deal for us to take on.
For those of you unaware, when we take a property “subject-to”, the seller signs the property over to us… so we OWN the property… but we do NOT get a mortgage or pay cash for it. The seller LEAVES their mortgage on it, and each month, we send a check to the lender in the sellers name.
A few states have laws forbidding this… so make sure to check with someone. (only a few that I know of, but do your due diligence!) In these instances you can do the same thing, but with a lease, land contract, trust, etc..
We have multiple exit strategies, and strangely enough, are currently pursuing all three. Remember, only a chowederhead would buy a property without having an exit strategy in place!
See which exit strategies make us the least money, and the most money…
We have several options as to how to exit this property.
1- Assign the entire deal to an investor who’s willing to buy the deal and equity, and wants to hold it “long term” or put a rent to own tenant in the property.
For an assignment fee of $4,500.00, we’ll give the investor the entire deal! She has a 155k property for less than $5k down… NO credit check… and she’s paying around $130k total. She puts Five thousand down, owns a property that she can make a few thousand on now, a hundred to two hundred monthly cash-flow ongoing, then $20k-$25k in the future. (maybe more, depending on when it sells)
Another option would be for the investor just to hold as a rental unit until it’s paid for long in the future.
2- Lease-option to a homeowner. The property is already for sale “rent to own“. We’ll ask for $6k to $10k from someone looking for a place of their own. They get a new home without having to qualify for a mortgage, as well as the pride of home-ownership, and can “buy” the property in the future when their credit is upgraded, or their down payment is ready.
We (or another investor who takes the deal) will get a $6k to $10k option fee up front, make a couple hundred dollars a month in cash-flow, and make $25k to $30k in the future when the property is sold to the tenant buyer. We’ll set the future price at $159,900, due to a similar property down the street that just sold for $160k.
We’ve just created 34k in equity. 
3-We’ll sell the property outright to a qualified home-buyer. We’re getting the property for $125,000. It’s worth in the mid $150′s, so we’ll price it for an immediate sale for around $139,000.00.
If we find a buyer before we find a tenant or another investor who wants the deal, we’ll make around $13,000 to $14,000… or what’s known as “the spread”.
As you see, we have 3 viable exits. Selling to another investor makes us the least amount of $, but it’s the fastest. I’ll take $5,000 for an hour of work and a few ads any time! I’m out of the deal, and PAID!
It’s the least risk, least time… and we make the least. (but a check, is a check!)
The second method, putting a tenant-buyer in forces us to manage the property long term. There’s a bit more risk, (although still no $ out of pocket unless the tenant doesn’t pay rent) and we make the most $ this way. we get cash now, a little cash-flow monthly, then a nice lump sum of $25k-$35k in the future when a tenant buys.
This is the most profitable… but more time, and more work is involved.
The third option, selling (flipping) it will likely take a couple of months to close, so it’s between the 1st two in time. There’s less risk than the long term deal, so we make less money, but since we put in more time and effort than just assigning it to another investor, we make more moolah than option number 1.
Whichever of these scenarios “happens” 1st, is the one we’ll pursue. It’s currently being marketed THREE different ways… and the 1st taker gets the deal!
Nick
