Deals That Sound Too Good in Real Estate – Local Records Office

LOCAL RECORDS OFFICE – We have all heard the term “you make your money when you buy and collect it when you sell”. It is like a job, you work all week and than you go pick up your paycheck. What if you got paid when you bought the house AND when you sold or rented it? There are several ways to accomplish this. Because I have been focusing on subject-to investing I will walk you through how to use that strategy to get the seller to pay you to take the deed to their house.

 

Taking Over the Payments

 

I think it is wise for me to at least mention what a subject-to is. Subject-to is literally taking title to a house and taking over the payments without signing on the loan. You own the home while the previous owner still has the loan in their name. I know what you are thinking, “that is illegal” Trust me it is not and is done every day. In fact I recommend you close this type of transaction with an attorney or Title Company so you know it is done legally and correctly.

 

We probably all agree that for most homeowners this is not a great way to sell their house but for some it is a great strategy and it sure beats drowning in a payment or worse, losing the house to foreclosure.

 

If the homeowner agrees that it is a good strategy for them and you can show them that it is cheaper to sell it to you then to hire a realtor and sell it traditionally they may be willing to pay you to handle the house today. “Sign today so you can move tomorrow” That has a nice ring to someone that really wants or needs to sell their house.

 

These Are Example To Show You How it Works

 

Let’s say you find a nice house in Los Angeles worth $120,000. Let’s keep it simple and say the seller also owes $120,000, which might actually be generous in this market. The key to this strategy is that there is little to no equity in the house. Many people don’t have equity today, which makes this market prime for this strategy. For our example the seller is desperate to sell so I would simply walk the seller through a traditional transaction so she could see what that looks like.

 

$120,000 (sold price assuming a full price offer)

 

–         $3,600 (3% seller paid concessions)

 

–         $6,000 (5% commission)

 

–         $1,200 (1% seller paid closing costs)

 

= $109,200

 

–         $120,000 (loan payoff)

 

= $10,800 (total cash needed to sell the house)

 

As I go through the numbers with the seller I point out that this is assuming a FULL PRICE offer which is rare and I explain that the loan payoff is actually more than the principal balance because of how interest is calculated. I would then explain that this is assuming she closed on the sale today and that by the time she actually found a buyer and closed it would probably be several more months with several more mortgage payments and there is no guarantee she will even find a buyer.

 

I would finally say something like “you can pay $10,800 or more in 5 to 6 months if you are able to find a buyer OR you can pay me $10,000 (or whatever your offer is) and never make another payment.”

 

Often times they won’t have the full $10,000 so you may need to accept this in payments.

 

Collect Upfront Payments

 

I also want to point out that this deal can get even sweeter when you collect upfront option money from you new tenant buyer on a rent to own. I would only get involved with a subject-to deal, even if I am getting paid to buy it, if I can rent it for enough to break even or cash flow after vacancies and maintenance.

 

The last deal I did like this, the owner of the house refinanced it right before we worked out a deal so I had almost two months with no payments. They gave me $7,000 and I got another $5,000 from my tenant buyer. I was able to find a tenant within a few weeks so I collected one rent payment of $1,200 before my first payment. The total cash to me to buy this cash cow was $7,000 + $5,000 +$1,200 for a total of $13,200!! It cash flowed $200 per month.

 

Fixing to Flip

 

The house did need some work which is part of the reason the seller gave me $7,000 but I did no repairs and sold it to my tenant buyer as a fix up special.

 

I am a big believer in having plenty of liquid reserves if you are going to hold rental property. Things go wrong and you want enough cash in the bank to handle them. Ask me how I know this… Because you can actually get your reserves from the seller when you buy, you can start building a rental portfolio without any cash right now. And because you will be taking over their current loan you don’t need credit either.

 

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