Is This Sale Lease Back Strategy A Bad Idea

[Matthew Allen]

Tell me whether this is a good idea or not.

Throughout the year I come across situations where people need to sell there home due to a variety or reasons, job loss, income loss, health, divorce, etc. In other words, they are in some sort of financial situation that is forcing the sale of the home. But they want to stay in the home. Personally I think this is where a lot of sale lease back programs fail the seller. Because jumping from a mortgage to rent does not really solve the problem. They need some time to get back on their feet and recover from what ever has caused the situation to sell in the first place. 

For a long term investor:

Would it make sense if you could buy the home at a steep discount and then let the owner stay rent free for a specific period of time? There would be a lease agreement, just no monthly rent payments.

This also only works for cash buyers willing to buy and hold. 

For example:

Let’s say it is a $450,000 home in good condition.

If you could buy it with a 15% discount: $60,000
And rent discount at $2200 mo. with a 5% increase annually would be: $132,615 for 5 years

You would be buying the home at a 48% discount in this example.

Assuming you sold the home at the end of 5 years

Your NET ROI would be:

0% appreciation: 10.93%

1% appreciation: 12.13%

2% appreciation: 13.33%

3% appreciation: 14.53%

This ROI calculation takes into account taxes, insurance, selling costs, repairs (calculated at $3500) through out the lease.

Now, this would obviously be negatively cash flowing since you would need to pay taxes and insurance. But I think you could take this a step further and instead of charging no rent, your rent could be the cost of the taxes and insurance annually. You would have a smaller discount, but would have little to no out of pocket annually.

Instead of selling the home, you could continue to rent it at market prices either to the seller or a new tenant once the initial lease was complete. But now you could refi, draw out your initial investment and the property would cash flow. (assuming rates are where they are today and rental prices increase during that time)

Now, this may not need to be a 5 year lease. Maybe the seller only needs a year or two. Or maybe it could be a 10 year lease with a 90% discount.

You could also mitigate risk with a surety bond as well.

Am I missing something here?

Is this a horrible idea?

Would you do it?

[Ken M.]

Quote from @Matthew Allen:

Tell me whether this is a good idea or not.

Throughout the year I come across situations where people need to sell there home due to a variety or reasons, job loss, income loss, health, divorce, etc. In other words, they are in some sort of financial situation that is forcing the sale of the home. But they want to stay in the home. Personally I think this is where a lot of sale lease back programs fail the seller. Because jumping from a mortgage to rent does not really solve the problem. They need some time to get back on their feet and recover from what ever has caused the situation to sell in the first place. 

For a long term investor:

Would it make sense if you could buy the home at a steep discount and then let the owner stay rent free for a specific period of time? There would be a lease agreement, just no monthly rent payments.

This also only works for cash buyers willing to buy and hold. 

For example:

Let’s say it is a $450,000 home in good condition.

If you could buy it with a 15% discount: $60,000
And rent discount at $2200 mo. with a 5% increase annually would be: $132,615 for 5 years

You would be buying the home at a 48% discount in this example.

Assuming you sold the home at the end of 5 years

Your NET ROI would be:

0% appreciation: 10.93%

1% appreciation: 12.13%

2% appreciation: 13.33%

3% appreciation: 14.53%

This ROI calculation takes into account taxes, insurance, selling costs, repairs (calculated at $3500) through out the lease.

Now, this would obviously be negatively cash flowing since you would need to pay taxes and insurance. But I think you could take this a step further and instead of charging no rent, your rent could be the cost of the taxes and insurance annually. You would have a smaller discount, but would have little to no out of pocket annually.

Instead of selling the home, you could continue to rent it at market prices either to the seller or a new tenant once the initial lease was complete. But now you could refi, draw out your initial investment and the property would cash flow. (assuming rates are where they are today and rental prices increase during that time)

Now, this may not need to be a 5 year lease. Maybe the seller only needs a year or two. Or maybe it could be a 10 year lease with a 90% discount.

You could also mitigate risk with a surety bond as well.

Am I missing something here?

Is this a horrible idea?

Would you do it?

Yeah, it can be a bad idea. I have two primary rules of investing 1. No good deed goes unpunished 2. Don't spend the check until it clears
Regulators do not view investors as being altruistic. They look for something called "equity skimming".

What may actually be helpful to a family (stability) is not what regulators look at. They are looking for "who is making how much money under what circumstances".

When you start working with distressed properties, the regulators take a close look. 
And addressing my item #1 comment, almost always, when a "distressed" homeowner is approached, they initially are grateful to have the loan brought current, but before long they forget the circumstances they were in and you become the bad guy that stole their house. Set aside a very substantial legal defense fund if you decide to do these.