Anyway to turn my lemon into lemonade?

Question

Hi all,

My husband and I are newbies in investing. Have been reading books and listening to podcasts to educate ourselves before making an investment. However, meanwhile I am having a dilemma! The more I read the more I understand that our primary residence purchase in 2017 was a huge mistake!

We live in Orange County in Southern California... Based on my calculations, our house has a negative cashflow of $800 and looking into its 10-year forecast it will continue to have high negative cashflow. It is also not wise to sell the house at this point because the proceedings will be way less than our initial down payment (20%)

Any ideas how to make this situation less financially hindering?

I really appreciate any help on this.

Thank you all

Joe Villeneuve · Answer

Was this house bought with the idea it was to be an investment property?  If it was, that was your first mistake...not the choice of houses, but thinking any house you live in is an investment.

If it wasn't, then what difference does it make?  If you're living in it, you don't have negative cash flow, and if you're not interested in selling it...at least now...the relationship between the DP you paid and the money you would walk away with in a sale, is immaterial.

Jay Hinrichs · Answer

you have to live somewhere right.. would you rather throw the money down the toilet as a tenant

Laura Williams · Answer

@Negar Aref You should be getting a nice big tax write off since it's your primary residence that should help make up for most/all of the negative cashflow. You might also want to look at airbnb..... maybe rent out part of your house if it's big enough and right layout to do that.  Or if you ever moved out you could turn it into a full airbnb. Some properties that negative cashflow as a regular rental will do great as a short term rental....something to think about.

I wouldn't stress too much. In 10 years I would bet your house will be worth a lot more than you paid and you're in a very desirable area. Just hold on for the long term and you'll be fine.

Brian Gibbons · Answer

The best way to do lease options and avoid headaches is to offer a lease and a ROFR.  see https://www.biggerpockets.com/forums/83/topics/285298-what-is-a-rofr-why-is-a-rofr-better-than-a-lease-option

If you really want to do a lease and separate option,

-Charge market rent and use as strong of a lease as possible without any mention of the option.

-In the option, state length for 12 months only and can be renegotiated in 12 months, no longer.

-If you are going to do a lease option assignment,

1 charge market rent and use as strong of a lease as possible Without any mention of the option to purchase.

2 in the option state the length of the term for 12 months only, and this can be renegotiated at the end of the 12 months, do not have any longer open options than 12 months. Reassure the tenant buyer after 12 months the contract can be extended for another year but it may be in a higher sales price (comps).

For Seller: Enter into a lease and a separate option with the seller, and use a letter of intent to state that you are intending to sign the paperwork for a fee.

For Tenant Buyer: Find a tenant buyer, have them sign an earnest money agreement that states that the earnest money will be placed in escrow for him/her to pay an option release fee. also, first and last months rent are to be deposited into escrow account. The seller gets the first and last months rent, you get the option release fee as a real estate investor. I also have the tenant buyer agreed to have seven days to inspect the property with either a builder or an inspector that’s licensed. Before they move in they have to agree that the condition is acceptable.

Next, once all the money goes in the escrow account, a new lease is prepared between the seller and the tenant buyer, and the seller signs it, and also signs an option release fee document, which allows me to get paid as a real estate investor. A new option to purchase agreement is created and signed by the seller. I tell the seller that I will take these documents and get them signed by the tenant buyer, and the deal is almost closed.

At the title company, I have the tenant buyer sign The new lease with the seller, and the new option purchase agreement with the seller, and as long as all monies are in escrow, and the option release fee document is signed by the tenant buyer, the tenant buyer can plan to move in.

The reason why it is done this way: If the paperwork is being assigned with an assignment contract, many times the tenant buyer will have trouble getting a mortgage, so it is cleaner to have a direct contract between the seller and the tenant buyer with no Real Estate Investor linked to the paperwork.

Brent Shields · Answer

@Negar Aref  just for an example if you had a house that was worth $100k and it would rent for $500.

you could sell it for $120k and the tenant would pay $750 a month, so the extra $250 would apply towards the down payment.

So your making $20k off the sales price, and some times  you can give them a $200 credit each month, so you would be making extra money off the monthly rent as well.

I also collected some money up front, usually $10k to $15k.

@Shiloh Lundahl   I would completely agree with you about things being tenant friendly. Every time I have been to court against a tenant it usually starts out with the judge saying something like everything the tenant says I will just assume is a fact, everything the landlord says is hearsay and needs some type of documentation for proof.

But requiring a foreclosure would be a little stretch even for some of the judges I have seen.

What I do to try and avoid problems like that, is write up the option so that the $10k they put up front is non-refundable.

Then later if something goes wrong for any reason, even if they just say we don't want the house any more. I would start with offering them 50% of the money back. If they had any kind of a reason at all, I would offer them all their money back.

That gives them a pretty big incentive to work with me and not go to court.

Thinking about it most of my deals like that have worked out, they bought the house and were very happy with it, but I have never sold anything on an option before a market crash, that could change things.

Marc Winter · Answer

@Shiloh Lundahl is correct.  By using part of the rent as down payment or crediting in any way towards the purchase in a 'rent-to-own' scheme, the landlord/seller is giving the tenant/buyer some equitable rights.  When things go sideways, the landlord/seller may be required to EJECT, not EVICT the tenant/buyer.

(Google ejectment--it ain't pretty)

The above is totally different from a lease with a separate option to buy.  Neither document mentions the other. No monetary credit is give to the tenant/optionee.  It's cleaner, and easier to unwind, although the success rate for such deals is, imo, sketchy at best.

Good luck.

Joe Villeneuve · Answer

...and you'd be correct.

Shiloh Lundahl · Answer

@Brent Shields have you done many lease options that way in California? The reason I ask is because California is a tenant friendly state and if someone has been paying towards the house and you are crediting their down payment, could they not just say you are created a mortgage for them and then you if you were to need to get them out of the property for any reason, they could just say that they bought the house on seller financing and then you would need to foreclose on them rather than evict them?

I know @Brian Gibbons does lease option and he is from California. What are your thoughts Brian?

Matt K. · Answer

Find a way to make up 800 elsewhere

Tanner Marsey · Answer

Refinance the home of that makes sense. Otherwise, enjoy living in Orange County. Over the years after appreciation, mortgage pay down, increase in rent and inflation.... you’ll be good to go.

Investment properties and primary residences are two VERY different things.

Anyway to turn my lemon into lemonade?

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