Building to Seller Finance/Lease to Own

[Joel G.]

First...after a 1 year battle with Cancer my mother passed away...another year has gone by getting our lives back together, kids graduating college, etc. Many of you offered kind wishes and it was well appreciated. The struggles that our family went through have given us even more appreciation of life and the time we have. Thank you to all our friends in the BP community.

That said...we are ready to get busy again. However, I believe I need a refresher....

We still own the rental in Las Vegas ($400+ cash flow/$90k equity) and a house in Sunnyvale, Ca with approx. $250k in equity. We have 401Ks that have approx. $300k, and better than avg credit. 

We are willing to sell, utilize, finance....whatever...to reach our goals.

So....

I want to self contract (GC) a new home in Texas (where we plan to move this year) and then sell it by owner/lease to own.

I can build a small 3/2... ~1500sf ...non-descript...rental ready home for $75k cash (my cost to build including my lot)

Appraised value being approx $150k. (ballpark but VERY close for area to which we are planning to move)

With these givens...

**Can I finance 75-80% of appraised value to capture cash? ie. finance $120k (80%) - $75k cost = $45k cash out 

**Or am I limited to % of build cost? i.e.  Finance $60k -$75k cost = $15k in deal (no cash out)

If cash out financing....

**How long do I have to hold...or rent...property...before I can sell it to avoid regular income taxes and treat the property as an investment vs build to sell...or is it an "original intent" thing?? 

**Does selling on a "lease to own" get us around the holding period for a sale? Or does it even matter?

**I have read that "due on sale" clauses are always present in financing but seldom exercised on performing notes...does a lease option side step that as well?

So (in my head) the plan would be...

Build.....$75k

Refinance...$120k (80% ltv)

Cash in my pocket...$45k

Sell...$150k

Seller Finance...$135k with $15k down pmt (10%) with favorable seller terms 

Results...$60k cash in pocket....small cash flow with no maintenance issues...~some~ tax avoidance?...

The further thought is to use the $60k cash....do this process again BUT this time...pay cash for the project...$15k out of pocket to build...SKIP the bank financing...sell for $150k...take 10% down ($15k)... now my out of pocket is zero...and with favorable seller terms have a substantial cash flow and no govt. involvement?? This would also limit the number of financed properties that seems to be such a problem for budding investors.

That's it. Lather. Rinse. Repeat. 

Six months building time per home...5 years = 10 homes (no land speed records, but moving along)

So....please tell me the parts I have forgotten, ignored, underperformed. Given our resources should we be building multiple homes at once? (That would be a new experience for me...multiple projects going at once...but if it made sense...I'd be willing to make it work)  Are there strategies we should be considering that we have not thought of? (I'm sure there are many)

Anyway...thank you in advance for all of your thoughts on this situation...and thank you again for all the well wishes through our family struggles. 

We look forward to reading your thoughts.

[Bill Gulley]

Sorry to blow your plans, but contractors building new homes are barred from seller financing (rent to own) under Dodd-Frank, best to sell to an investor on a note and deed of trust to lease it.

Texas has specific rules on installment contracts, better see an attorney there. :)