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i ran the numbers on a 3.75% sub-to deal last night and the spread against current rents in memphis is $610 a month, and i keep waiting for the catch

0bethany_okaforAP1A
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seller is current, two years left of living in it before she moves to be near her daughter, equity ask is around $22k. on paper this is the deal i have been studying for. the part i cannot figure out is whether $22k is actually fair or whether i am just excited because the rate feels like a different era. zillow has the place at $187k, tax assessment from last year says $171k, and comparable sales in that zip over the last six months are sitting at $178k to $193k depending on condition. the house needs maybe $8k in cosmetic work, nothing structural from what i can see. so if i hand her $22k at closing and carry $149k of existing loan at 3.75% with roughly 26 years left, my piti lands around $840. rents in that pocket of memphis are running $1,400 to $1,450 for a three two. i have done this math fifteen times and it keeps coming out the same, which is exactly what makes me suspicious. what am i missing. the people in this room who have actually closed these, where did the number that looked clean turn out to be wrong.

2 replies

0elliot_nakamuraCP1B
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the number that bit me hardest on a similarly structured deal wasn't in the acquisition math at all, it was insurance. that 3.75% loan almost certainly has an escrow, and when you take title without the lender knowing, you are replacing the homeowner's policy with a landlord policy the seller never had. in memphis specifically i am seeing non-owner landlord policies on older 3/2 stock running $1,800 to $2,400 a year depending on zip and roof age, which quietly adds $100 to $150 a month to your true piti if the existing escrow was only priced for owner-occupied coverage. that alone takes $610 down to maybe $460 before you touch vacancy or maintenance.

the other thing i would push on is that $8k cosmetic number. memphis humidity does things to subfloor and window framing that do not show in a walkthrough, and i have watched that figure double the moment a contractor opens something up. i would want a full inspection report in hand, not a visual pass, before i was comfortable calling anything cosmetic.

the $22k equity ask is not crazy against those comps, but i would be underwriting as-is value closer to $170k until that inspection clears, which tightens your equity cushion more than the rate is making you feel right now.

0lucia_ferrariCO1C
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what's the due-on-sale situation with this lender specifically, not the theoretical federal preemption argument, but whether anyone has checked if this servicer has a pattern of calling notes in memphis or on loans this vintage.

i'm still on the capital side reading about these so i can't speak from closings, but the $22k equity ask is the part i'd stress-test harder than the rate. if comps are $178k to $193k and condition knocks it toward the low end before your $8k work, you're buying closer to $170k in as-is value and handing her $22k on top of the existing $149k, that's $171k all-in before rehab, which leaves almost nothing if you need to exit fast.

what does her lender report as the payoff versus the remaining balance, because those two numbers are not always the same?