Seeking advice on a pre-foreclosure for my first deal.

[Monique Morrow]

Hi, I live in Oklahoma City, OK and have been interested in property investment for a while. I am new to this and currently looking for my first deal with no money down. I have a neighbor who advised me she is behind on her mortgage payments and her lender is going to foreclose on her. Would I want to offer her to do a lease/purchase deal with her, and I rent her house out to someone else for profit while she keeps it in her name as I have no money down. Thanks for any advise and tips in advance that I may receive.

[Steven Skinner]

Monique,

You should know firstly that there is a very strict difference between a lease-purchase and a lease-option. In your case, unless you have every intention of purchasing the property at the expiration of your lease, you'll want to use a lease-option wherein you'll have just what the title implicates, the option to purchase the property upon the lease's expiration, rather than the obligation provided by a lease-purchase. Speak with your neighbor and figure out what their mortgage payments are, then subtract that amount from what you'll be able to rent the property out for to find your cash flow number:

• e.g., $650 rent - $392 mortgage payment = $258 cash flow.

Beyond that, you should know also that this may or may not save your neighbor from foreclosure. It's difficult to know (unless they tell you) how far into the foreclosure process they are, or how far behind they are on their payments. Not to mention the possibility of delinquent taxes and insurance. If you do have the money to pay an option-fee, which typically ranges from 1-5%, then your neighbor may be able to use that money to catch up their mortgage payments and then thereafter rely on you to rent out the property so that they may henceforth keep their payments current. Remember, you'll want a lower option-fee percentage on your lease (A-B) than you're going to implement on the sub-tenant's lease (B-C), so that if you pay, we'll say $1,400 as an option-fee, you'll be able to collect $2,100 or more from the sub-tenant; this way you'll be paid back your fee plus an upfront profit. Ultimately, though, the option-fee is not required and will only be applied at the seller's discretion; but may, in this case, be a necessity to avoid foreclosure due to outstanding mortgage payments.

It will depend on negotiations between you and your neighbor whether you use a fixed lease or a performance lease. With a performance lease, you won't have to pay your neighbor unless the sub-tenant pays you first. Whereas with a fixed lease, you'll be required to pay whether you receive payment from the sub-tenant or not, such as with a traditional lender. Either way, as long as you don't default on your end of the lease and approach grounds for early termination, you're protected from foreclosure. Since 2009, lessees are allowed to make use of the property until the expiration of their lease, despite foreclosure proceedings.

My advice is to get with your neighbor, figure out where they are, then discuss options based on their position to see what will prove beneficial to the both of you. But anyhow, that's all my brain can conjure at 2:00 AM, so I hope it proves useful to you. Best of luck!