Paying Interest on a Sliding Scale

[Lara Gonzalez]

Hello BP family,

I found a seller who wants to sell their property for what they owe in return to rent the house back. For personal reasons, they do not want to sell and move out of the house even though they have equity. At this price, there is almost $100k in equity. It is a long story but they are in the process of losing the house to a second note on the house. They have paid their mortgage on time and I have reviewed their financials so I am confident they will continue to pay rent.

I am unable to secure a mortgage at this time because I am in the process of refinancing my house and my lender has advise against doing anything. I have found three investors who have expressed interest in buying the property using a conventional loan with me on title. I want to come to a fair agreement where they are making money on their 20% down payment and for their time to secure a loan. I have come up with the following and would love any feedback:

Lara would have the right to buy the property within a two year time span for the set price of what the property was bought for, approximately $253,830.51. Interest paid on the initial payment of $58,579 is on a sliding scale based on how long it takes Lara to refinance the property in just her name. Property taxes and insurance will be paid from cash flow of the rents. The rent payments will go into a joint account between Lara and the Investor. The tenants will pay their rent directly into the joint account. Each partner receives 40% ($150.50) of the cash flow after taxes and insurance each month. The 20% ($75.25) will act as a reserve for any home repairs. Any reserves remaining after the refinance will belong to Lara. Lara will do a cash out refinance for up to 80% of the appraised value of the home. In the event that the refinance doesn’t cover the total owed to the investor, Lara will pay the difference out of pocket. Investor agrees to comply and assist with the refinance.

If paid back within 9 months, investor makes 10% return =

$5,857.90 + their portion of the rent ($150.50 x amount of months).

If paid back within 15 months, investor makes 12% return =

$7,029.48 + their portion of the rent ($150.50 x amount of months)

If paid back after 18 months, investor makes 25% return

= $14,644.75 + their portion of the rent ($150.50 x amount of months).

I have based the interest rates on the fact that the HML I work with charges 8-9%.