Posted by Dan C (MI) on December 23, 2002 at 08:09:41:
JT-IN,
This is exactly the kind of feedback I was looking for. Thanks for the info and link…
Owner wants to SELL and STAY as Tenant - Posted by Dan C (MI)
Posted by Dan C (MI) on December 20, 2002 at 11:46:53:
I am currently negotiating with an owner who is in foreclosure and their redemption period is coming to an end. They are willing to sell me the house at a discount but WANT TO LEASE IT from me with the option to purchase.
My question: Is there anything I need to be careful of outside of them actually being able to pay the rent?
Details of the deal
FMV = 225K
Purch Price = 180K
Seller owes bank 150K, walks away from closing with 30K
Lease should cover my expenses, T/B has option to buy at 205K within 1 year.
Thanks in advance for your advise!
Happy Holidays!!
Sincerely,
Dan
Re: Owner wants to SELL and STAY as Tenant - Posted by KC Questions
Posted by KC Questions on December 20, 2002 at 15:30:29:
If the house is worth $225k now, why would you be giving your tenant buyer an option to buy it for $205k in one year?
Do you expect the house to decrease in value by $25k during that time?
Hopefully the house should appreciate in the next year, and your option price to your tenant should be higher than the current value to reflect that.
Also, I see what the buyer is getting out of this, you are bailing them out of their situation, giving them $30,000 cash, supplying a place for them to stay for the next year, obligating to sell it to them at a discount if they so choose to buy over the next year, and their only obligation is a 12 month lease.
What are you getting out of this? All I really see is that you are getting someone to keep the place from being vacant over the next year. You will have received no option consideration from them for their lease option from you, so what happens if they never pay you? If you are forced to pay the mortgage for the next year, without receiving any rent, how much of your $25k “profit” would that eat up?
I think the question you should ask yourself is, would you give a lease option on your $225,000 home to this same person if they weren’t the seller?
While I think that it is nice for you to try to be the savior for the seller, you should make sure to look out for yourself and your family’s best interest too, since noone else is going to do it for you.
P.S. My Grandpa always says that, “If you don’t control it, it controls you.” So, who has the control in this particular deal?
Re: Owner wants to SELL and STAY as Tenant - Posted by wm-pa
Posted by wm-pa on December 20, 2002 at 13:24:27:
If they didn’t pay the bank, what makes you think they will pay you?
You also have to watch out for usuary laws, or preditory lending laws.
Re: Owner wants to SELL and STAY as Tenant - Posted by gerald (tx)
Posted by gerald (tx) on December 20, 2002 at 12:13:30:
In theory, this is a good plan. Your seller has good intentions of extricating himself from his problems and will be in good shape a year from now. In reality, it seldom works out this way. He will pay off his creditors from the $30k, his situation will remained problemed and the outlook inevitable.
So I would look past the immediate solution and focus on the question, “would I purchase this home for $180k if there was no foreclosure involved?” This answer alone should determine your actions.
Re: Owner wants to SELL and STAY as Tenant - Posted by JT-IN
Posted by JT-IN on December 20, 2002 at 12:03:54:
Dan:
There are a few “Pros” here and lots of “Cons” to this idea/approach. I will not attmept to go into those here, as this has been debated at length recently.
The one comment that I would have is that I would not give them their 30K in cash… and allow them to stay. I might give them 5K, and take the other 25K in the form of a purchase moeny 2nd mtg. The advantage here is that you will have their attention if they choose to leave or not treat the landlord well. The other advantage of this, and probagly the largest one is it will keep them from spending their cash so that they will have neough equity in the proerty to refi later, in order to exercise as the T/B…
Of course they may not be open to this, but you may not be open to it otherwise… should you choose. That is what I would do…
Just the way that I view things…
JT-IN
Re: Owner wants to SELL and STAY as Tenant - Posted by Dan C (MI)
Posted by Dan C (MI) on December 23, 2002 at 08:00:55:
No, I don’t expect the house to decrease in value. It is only a couple of years old, lake property in a good area.
I get $25K if the T/B exercises his option. If he doesn’t I make $45K less selling/re-leasing cost.
If they don’t pay the lease I evict them. That may eat up $2K + a couple months vacancy until re-leased or sold should only total 5-6K. I certiainly wouldn’t be paying the mortgage for a year. Anyway, the T/B suggested to pay 6 mo’s rent in advance. I won’t argue with that.
The T/B has around $20K of equity at stake. If he is really serious about keeping the house that should motivate them to be good tenants.
Sincerely,
Dan
Re: Owner wants to SELL and STAY as Tenant - Posted by JT-IN
Posted by JT-IN on December 20, 2002 at 13:50:58:
Wm:
Are you aware of any specific cases, or case law where usuary issues have been invoked in a sale lease-back deal…? I recently posted a request for anyone to post specifics of instances where this has been the case, and to date have had no one post one case that correlates to this potential risk. My sense is that there have been many warnings about this being possible, but the warnings are thick and the evidence is thin… IMHO. I would like to see some solid case law.
The one case posted (Oronfrio vs. Rice) was so frouoght with stupidity on the part of the RE investor/broker that I would dismiss it as anything close to a straight forward sale and lease-back. However, I do appreciate Jim V beinging it to my attention.
You can read the posted request below:
http://www.creonline.com/wwwboard/messages/41166.html
Thanks,
JT-IN
Re: Owner wants to SELL and STAY as Tenant - Posted by KC Questions
Posted by KC Questions on December 23, 2002 at 17:56:27:
I hope everything works out as you plan.
Good luck and keep us updated on the outcome.