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Updated almost 3 years ago on . Most recent reply
Is this a realistic strategy I can use to help others?
Hey all,
My business partners and I are considering a potential strategy we found matching our long-term business plan. We are young and currently do not have much capital or equity. Our goal is to earn initial capital to invest with later. Here is an example of what we are thinking:
Example: A house is getting foreclosed on and for sale at $80,000. We know the property is worth around $150,000. We would buy the house for $80k and rent to the current owners who would pay interest payments with an optional balloon payment in 2-3 years if they would like to buy the house again after being able to obtain a mortgage. We would carry a land contract with the intent to sell back to them later if all works out.
I understand the risks with foreclosed tenants and how careful we would have to be with picking the right tenants. This strategy provides an opportunity to help others by not forcing them to move out and letting them stay in their home. Our collective thinking leads us to believe that we have these alternative strategies:
1. Rent to the family using the strategy above
2. Sell if the owners would NOT rent
3. Potential to flip if the numbers and market work out
4. If our current owners can not obtain a mortgage in 2-3 years, we could still sell it later for a great deal or keep renting if we are still making money.
If you have any comments about risk, strategies, or additional insight we are greatly appreciative!
Most Popular Reply
I did hundreds of these leaseback deals to homeowners in foreclosure prior to the housing market crash in 2008. I learned that the former homeowner/s (now tenant/s) will:
1. Never gain the financial stability to buy the house back from you.
2. Will most likely be unable to make timely rent payments because of their current financial trouble.
3. Will become very angry with you when they get evicted from "their home" for not paying rent or being unable to obtain financing to buy it back.
4. Will either leave you with a giant mess or worse sue you for taking advantage of them in their fragile financial situation.
It is a lose/lose for you and the former homeowner/s and all you are doing is enabling them to prolong the inevitable (losing their house to foreclosure).
If you can, as Paul mentioned, buy the note then great! You're the bank, not the owner of the property so you can proceed with a foreclosure if they don't pay.
But I do not recommend the leaseback strategy. It's better to just get the homeowner out of the house so that you can either flip it or keep it as a rental.
Hi @Trevor Bond
You could buy the debt first and try to get the borrower back on track before foreclosing. That way, you're helping them stay in the property if that's what they want to do. This is a really common strategy in the real estate note space.
If they are already are already foreclosed on, it's extremely unlikely that they will stay in the house to rent it.
You can definitely do this strategy, you'll just want to buy the debt first and then foreclose if they don't want to work something out.
I hope that makes sense!
I did hundreds of these leaseback deals to homeowners in foreclosure prior to the housing market crash in 2008. I learned that the former homeowner/s (now tenant/s) will:
1. Never gain the financial stability to buy the house back from you.
2. Will most likely be unable to make timely rent payments because of their current financial trouble.
3. Will become very angry with you when they get evicted from "their home" for not paying rent or being unable to obtain financing to buy it back.
4. Will either leave you with a giant mess or worse sue you for taking advantage of them in their fragile financial situation.
It is a lose/lose for you and the former homeowner/s and all you are doing is enabling them to prolong the inevitable (losing their house to foreclosure).
If you can, as Paul mentioned, buy the note then great! You're the bank, not the owner of the property so you can proceed with a foreclosure if they don't pay.
But I do not recommend the leaseback strategy. It's better to just get the homeowner out of the house so that you can either flip it or keep it as a rental.
Thanks @Marty Boardman and @Paul Riley
I appreciate the advice and insight from both of you. I will continue to discuss this with my business partners as it seems we have some obstacles to work around and alter our strategy.
Thank you for the help and I wish you the best of luck in your journey!