What would you do if you had this possibility

Question

Chris Sukala · Answer

@Carson Wilcox I agree with you in the Human Factor. We definitely will use a Lawyer and treat this as a business deal and nothing less. Our thought process was if they put down the 20% (14,000) then they would have an incentive to make the deal happen in 3 years and make sure things are done right.

@Thomas S. Yes definitely be using a experienced lawyer, we have a mutual friend who is a contractor and maybe I could put in contract the he must inspect all work that is being done. He works on all of our properties and I trust him 110%.

@Bill F. @Russ Draper Account Closed They are not in my inner circle of friends, He bought a lawn care company this year and of course they(bank) want 3 years of income statement. We already work together, he mows a couple properties for us. I agree with the Rich dad rule, In fact we were burned by a friend but did get paid eventually. This is why I figured we would be straight forward and tell them hey, you came to us and here are the stipulations and we will be treating this like any other rental, this is business and we will treat it as such. Honestly this should not effect any future purchase, we would rent it possible for 900-1000, payment should be around 480 a month or so. I think the banks take 75% of the rent for income so that. The neighborhood he lives in now is going down hill, so he thinks he would have to short sale this house he lives in now or try and rent it to break even.

I don't know maybe it is not worth it. I was thinking, heck if I do not have to pay out anything, no maintenance, no rehab, no down payment, and possible make 200-500 a month could we make this work.

Thank you all for your incite. This would happen for several months, I have a duplex that we gutted and hopefully be finished soon. I will let you guys know if you move forward

Russ Draper · Answer

What's that rule from the Rich Dad series?  Don't invest with family/friends...  I personally would pass just on that and no other reason.  I've heard people pay back friends slower than any other method so you're lease likely to get your money back.

Why are they looking for a new home?  That might play into it.  Definitely pull credit on them.  If you really want to lend to them, make sure it is worth it.  They are going to you because they can't use a bank, so the rate should be much higher than a bank.  This will also entice them to refinance out as soon as they can later.  I think hard money is around 9% now.

Bill F. · Answer

@Chris Sukala It will mostly come down to the personal intangibles of your friends and you. If something goes sideways somehow could both of you work through the issue to a mutual acceptable solution? Do you think they will be able to repair their credit in three years to a point where they will qualify for financing? Do you think you have the ability to make a judgement call on this. I wouldn't do a lease option without pulling a credit report on the person; will they let you pull their credit?

In its simplest form you plan on executing a lease option with a friend. If you don't have any issues with doing business with a friend then do you and your wife feel comfortable with the risks of a  lease option. @Carson Wilcox laid out some great worst case scenarios. I don't think any of those issues are insurmountable with the proper planning and controls in place. You both can agree on a purchase price; if they want to remodel maybe have them wait until they own the property since any improvements will increase the price of the house and make financing that much more difficult, particularly for someone who struggles with credit.

I'm not a lease option expert, but a lot of people on BP are and can help you out.

Thomas S. · Answer

Partnering with anyone having poor credit is high risk. Many rent to own agreements will end up failing and some o end in court action. Make sure you have both the rental and purchase agreement contracts drawn up separately. Use a experienced lawyer, leave nothing to chance and outline every detail/expectation. As noted you are allowing someone to work on your property without guarantees. It would be best to not allow any work till they take ownership in 3 years.

Carson Wilcox · Answer

Some sort of lease option type deal.... my worry would be the gap between their desires, and expectations vs Reality...

You are going to own a home, with 20% of THEIR $ in it in some backdoor way... then you are going to hold it for 3 years, while they remodel it (insurance issues for days here) then they  buy it.  What is the purchase price?  Today's value?  appraised value in 3 years? (but they did all the remodel)...?  What?  appreciation?

Seems shady as hell, and a lawsuit waiting to happen.  What if they do a garbage remodel, or F it all up, and in 3 years go nah...we are moving.  And you are left with 6k in profits, but a 30k remodel/fix of their work...?

Your numbers seem ok, but the human factor here... dang.