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

Question

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.

elliot_nakamura · Answer

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.

lucia_ferrari · Answer

The due-on-sale piece is worth answering at the servicer level. Federal preemption arguments are easy to find in theory. The useful question is whether this particular servicer has a pattern of calling notes in memphis or on loans of this vintage. The $22k equity ask deserves harder stress-testing than the rate does. If comps run $178k to $193k and condition pushes the property toward the low end before the $8k of work, as-is value is closer to $170k. Adding $22k on top of the existing $149k balance puts the all-in at $171k before rehab, which leaves almost nothing if a fast exit is ever needed. One more number to pull: what her lender reports as the payoff versus the remaining balance, because those two figures are not always the same.

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

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