$30,000 in Equity on First “Subject to” Deal

I just closed on my first “subject to” deal (my third creative real estate deal) and I now have 30K in equity!

The seller found me from one of my bandit signs I placed on a busy road. The seller has a house she bought from HUD. She lived in it for three years, then let her son move in and take over the mortgage payments. The only problem was he forgot to make them.

She called and told me she was three months behind ($1,760 + penalties = $3,250), which I paid to mortgage company just prior to closing. (Yes, very risky to do so.) She just wanted some equity out of the house. She owed $26,530 on the house that comps for $75,000. There was a gas utility lien of $700, and I said no problem.

So I figured I could get this house for $3,950 cash, plus some equity for seller. I went to her house and gave her three offers:

Offer #1- $10,000 cash in 14 days subject to existing financing
Offer #2- $12,500 cash in 3-6 months subject to existing financing
Offer #3- $20,000 cash in 12-24 months on a lease option

It took her 30 seconds to choose Offer #1.

Now I know what is at stake equity-wise, and so does she. She asks me right away, “Do you think you could give me $12,500 total (extra $2,500) because I have a family member who will give me this sometime in the future.” I know I should have stuck to my guns, but I said okay.

In return, I told her I can only give her a portion of this at closing and the rest in a note due in 3-6 months. She asked how much I could give her at closing, and I asked her what was the lowest she would accept, knowing I am giving her an extra $2,500. She replied, “How about $6,000?” I said, “No problem.”

At closing today we found two liens that seller was not aware of. A gas lien for $1,100 and a water lien for $400. I said I would only pay for the original $700 gas lien and she was responsible for the remaining $400 on the gas lien and the $400. She can pay for the liens from her $6,000 payment today.

She reluctantly agreed to this. I walked in to closing with a check for $7,700 and walked out with $30,000 equity! She walked out of closing with a check for $4500 (after transfer tax and extra liens) and a promissory note from me for the $6,500 balance, no interest, and due in six months).

I will lease option the house for $75K at $800 with a cash flow of $430 per month (HELOC for 45K for 30 years at 6%= $270 per month plus $100 per month for taxes and insurance).

Here are the numbers:

Lease option price $75,000
Mortgage -$26,530
Repairs -$ 2,000
Seller’s equity -$12,500
Back payments -$ 3,250
Lien -$ 700
Sub total $30,020
cash flow ($430×12) $ 5,160
Total profit $35,160

If I made a mistake with my calculations please let me know. I went over this 1,000 times prior to closing, so I hope I am right. I put in about three hours of my time, so that’s about $10,000 per hour! I can’t wait for the next one!

By CREOnline Contributor

A content contributor to the original CREOnline.com.