Help me analyze this deal? Yey or Nay?

[Dimitar Yankov]

Hello all,

I need your advice and help with analyzing a potential "creative" deal. Here is some background info: I have been approached by realtor in PA that I know. A client of his was recently about to close on a house, but his financing fell through last moment and was unable to close. Now the client has a new born, his wife no longer works and as they are on a single income for the time being, they may not be able to qualify for a mortgage. They need a new home as the current apartment they rent is too small for them. The client is in the construction/contracting business and can rehab houses with his colleagues who are licensed contractors. Also keep in mind that I live about 4 hrs away from that town.

The details: Note that numbers are hypothetical and for easy math to help illustrate the scenario!

The idea is that the client will find a SFH that he likes, in need of updating/repairs (possibly distressed property) for around $90k. I will buy the property, and he will reimburse me for the entire down payment, closing costs plus $5k on top because I will use my credit history to leverage the property. At this point I will be $5k ahead of the game and will have full ownership of the house.

The client will become a "vested tenant" however he also wants to invest another $30-$50k into the house to rehab it. ARV should be around $170k. The client (at this point my tenant), will start paying off the mortgage (principal, interest, renters insurance and taxes) and will pay me extra each month. For example, he will pay $1000 per month, $700 will cover expenses, and $300 will be my monthly cash flow. He may also make accelerated payments to pay off the principal quicker (in 10-15 years). Once the mortgage is paid off, I will transfer the property to his name, and he will pay me another amount which will be equivalent to the appreciation over these 10-15 years (on average 2-3% annual appreciation).

The catch is that he will have all the equity in the house (the principal he paid off during this time, and the forced equity from his rehab). I will only benefit from the $300 monthly cash flow over 10-15 yrs and the two payments (one when I buy the house and one when I transfer it to his name). I will also keep it as an investment, so I will get to write off depreciation, however I will have ZERO $$$ investment from my end.

Of course, I want to have have a solid contract that outlines everything including his responsibility and his risks. If 5 yrs down the road he decides not to buy the house, he would effectively loose it and I will have a full ownership of the rehab house plus all equity (this is his risk). Since he is vested, this guarantees zero vacancy and zero maintenance expenses on my end as he will be responsible for everything (it is essentially his house).

Has anyone done a similar deal? This is somewhat similar to Rent to Own deal. What are the possible legal, contractual, financial complication and possible risks for me as an investor? Any thoughts and opinions would be appreciated.

Should I pursue this deal? Yey or Nay?