Most investors are aware of the standard formula that is used to determine how much they can pay for a house that they are going to buy and flip. Generally, it is considered that 65-70 cents on the dollar, minus repairs is the MAXIMUM you can pay and make a fair profit.

But how much should you pay if you are buying a ‘Subject to’ property where you are going to leave the existing financing in place?

In this case, you don’t have a lot of closing costs, and mortgage broker fees and commissions, so would you pay slightly more for this property – effectively just raising your maximum offer based on this savings?

Would 85% of fair market value be too much? Would 95% be insane?

Not necessarily.

Heck, I have even ‘bought’ properties at more than fair market value and made money!

I certainly structure my deals differently. If I am going to take on a property with minimal or no equity – I don’t take any risk, make any repairs, or pay out any money on the deal – I don’t even make any monthly payments.

If I buy a property with lots of equity, then I may take on the obligations of making payments on the loan, giving the sellers some money, or fixing it up.

Having a formula is a nice, easy way to determine if you want to do a deal – but, you shouldn’t let it close your mind to other opportunities to make some money.

Having multiple methods ensures that you can squeeze the maximum value out of your marketing efforts. Why throw away five or six deals, just because they may only return you $10,000 or $20,000 each – while you look for the one deal that is going to pay $50,000 or more.

Let’s start with an easy example, and leave the more advanced techniques for later tips.

Here is an example for California or a high property value state. However, the techniques are applicable wherever you are buying properties. I used this technique extensively in Texas on $100,000 houses.

Example:
House is worth $500,000 in its present condition (nice).
Seller owes 95% of the homes value or $475,000.
The seller has a fixed rate 6.5% loan.
The seller has a new job out of state. They were just going to let the house go to foreclosure because they didn’t have enough equity to pay for all of the commissions and closing costs and the monthly payments while it sat vacant.

What can you do with this deal?

Most investors can’t do anything and will move on.
Do a short sale (this may work, but takes time).
Use a ‘subject to’ contract with a full disclosure that you will not make any payments, or close on the deal until you have an end buyer ready to take over.
Do two and three simultaneously, so you maximize your opportunities.

Option four will maximize your opportunities – but let’s continue on with just buying the property using the terms under option three.

We enter into a contract with the seller. We have to have a contract so that we are a principal in the negotiations, and not acting as an unlicensed real estate agent. We then turn around and start marketing that property (I will cover this in future tips).

You look for a buyer that has a minimum of 5% down ($25,000) and has been turned down by the lenders to buy the property. You find an end-buyer and close the deal.

The buyer gets the property ‘Subject to’, you collect the $25,000, and the former owner breathes a sigh of relief that you took care of this nightmare for them.

You have engineered a Five Way Win!

A buyer that was turned down by the lenders now owns a home – Win!
The seller avoids a foreclosure – Win!
The neighborhood and community avoided a foreclosure and an eyesore that would drive down everyone’s property values – Win!
The lender does not have another foreclosure on their hands – Win!
You have provided a valuable service to your community and $25,000 goes into your pocket – I would consider that a double Win!

This is a very real scenario, and it can be done by new investors and investors without the cash or credit to do other types of deals.

Of course, since you advertised for a reasonable down payment – a caller might have told you that they have a 10% down payment, which is $50,000 in this case.

Would you have to turn down the extra $25,000 dollars because there is only $25,000 in equity in the property?

Heck No!

You are going to get all $50,000 dollars!

In this case you will make $50,000 from a property that the other investors turned down, because they know that you can only buy properties at 70% of fair market value minus repairs to make money!

If there is only $25,000 in equity – how can you get the extra $25,000? That is a trick I learned from an investor who bought over 2,000 properties ‘subject to’ by the time I was in first grade and will be the subject of a future article.

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