Potential Investment - Take low rent for good purchase price?

Question

Hello,I have a real estate opportunity and wanted to get people’s thoughts on the risk/reward.This is the deal:- A homeowner hasn’t paid her HOA dues for several years and the HOA started the process of foreclosure.- The homeowner reached out to an investor and he put the property under contract. The deal was that the investor would pay the back HOA dues , penalties and legal fees (probably $3k) in exchange for a good price on the house and agreeing to rent the house back to the homeowner for 3 years at a discounted rent. The rent is $800 per month and market rent is $1,200 per month.- I’m not sure how much the house is under contract for but I’m guessing it’s $110k because that’s how much is left on the mortgage. The home is worth $150k. It’s located in area that will see some price appreciation but nothing major. - The investor is willing to assign me the contract for $120k. - I toured the house briefly. It’s in decent shape but I’m not allowed to get an inspection and I’m not allowed to speak with the homeowner. A state form lease has already been signed between the investor and homeowner. - I don’t think the homeowner knows the investor is assigning the deal. - Property is located in North Carolina. I’m ok in concept with accepting discounted rent for 3 years to get a good deal on a house. My concerns are:- If the homeowner couldn’t pay her HOA dues then how is she going to pay $800 in rent? Let’s give her the benefit of the doubt and say she had temporary money problems and couldn’t pay the HOA dues and then got too far behind to catch up. She’s owned the home since 2007 and has been paying the mortgage for over 10 years (which is probably around $800/month). So, I would think the fact she’s paid her mortgage that long is a good sign. - Given the previous point that she’s been paying her mortgage for 10+ years, why would she walk away from $40k in equity? Why wouldn’t she just sell her house and move? She’d be able to pay the back HOA dues and have money in the bank. The fact that she is willing to stay in her house and lose the equity makes me think something else is going on. Maybe she recently started to get behind on her mortgage, maybe she is just very unsophisticated, etc. - I could go into this deal knowing I will have to evict the tenant and the deal would still make sense. The problem is, when she goes from a homeowner to a tenant I’m sure the upkeep will decline. Also, given that it appears she really wants to stay in the house, if I evict her she may intentionally trash the place. If fixing up the house takes more than $15k it’s starts becoming a bad deal in my mind.- Even if she pays her rent, she could be very difficult to deal with and I’m stuck in a lease with her for 3 years. I don’t know anything about her and won’t be able to run a credit check or background check. I think it’s fair to say she has bad credit. - If it was a good deal, why wouldn’t the investor take it? I’m hoping it’s the innocent answer, that he mainly does flips so it doesn’t fit his business strategy. Please let me know your thoughts. Thanks.

Marcus Auerbach · Answer

@Michael Kramer you are asking the right questions and you are comming to the right conclusions - you just don't like the answer. Real Estate Investing is mostly about controlling an asset. Inherited tenants usually spell trouble, in this case it's even one level worse, because they are the former home owner. That transition will probably not go over well. And you are not allowed to speak with the tenant? Red flag right there. I would not buy an investment I have no control over and the numbers are not very amazing either. Interesting case, but you can do better.

Adam Schneider · Answer

@Michael Kramer The short story is that I'd walk away from this "deal" for the reasons you mentioned. If you were interested in making the deal work, I'd counter with:A. Need to meet the seller/tenant. The tenant is going to start off being fired up at being deceived about the transaction if you don't meet and discuss this situation with the person ahead of time.B. Create a lease. Just saying the person can live there for 3 years at $800/month is okay as a starting part of a discussion, but the devil is in the details. Security Deposit, Default Language, Rent Increases, etc.C. Shorten the lease period. By the way, any lease that is at lease 3 years in length needs to be recorded.D. On the inspection part, the wholesaler's likely concern is the time frame of the transaction. That can be negotiated by providing an agreed upon Due Diligence fee. The other concern from the wholesaler standpoint is that the wholesaler has not been upfront with the seller, and may have told the seller that he/she is not going to have a home inspection done.

Michael Kramer · Answer

Good advice. Thank you.

Michael Kramer · Answer

Thank you both. Very helpful.

Thomas S. · Answer

3 year lease, undermarked rent, owner turned tenant. The investment is not crazy just stupid. It's a guaranteed loser no matter how you frame it. Walk away.Even at full rent ($1200) it is too low for a property worth $150K. It does not matter what you pay the important factor is what it is worth. The value of a property has a direct relationship to cost of repairs and cap expences.