Strategy on selling an upside down rental - what do you think?

[Nuhan Demirkan]

The rental I bought while my son was attending college for $170K cash flowed while he was in school and managing the property. Now that he's long graduated and married we would like to sell it. However, it is only worth $124K. I refinanced it (for $124K) at a better rate to lower my monthly payment and paid off a second for $13K. To sell it on the retail market I would have to spend another $5K+ for paint, carpet and repairs. My total out of pocket expense would be $13K + $5K + $11K (settlement expenses) = $29K. The realtor told me that it might take up to 6 mos to sell, so add another $4,800 in mortgage payments. My thought is to spend the $5K, fix it up and offer it "Rent to Own" at $140K. Take 5% non-refundable down payment ($7K) and rent it at $1200/mo (current mortgage pmts are $825/mo) for 5 years (the option period). Once the house is occupied, assign the contract to a cash buyer for $135K. I would then recover my $18K ($13k+$5K), the buyer would collect $1200 mo x 60 = $72,000 in gross rent and sell it for $140K to the tenant at the end of the term. Plus he/she would take the full depreciation during the option period.

Is that a good enough deal for the cash buyer?

Of course I could keep the property myself for 5 years as well.

What would you do?

Thanks for helping out...