Buy/Leaseback= Instant Tenant

[John Thedford]

I just closed on #13. Seller was in a bad position and needed to sell fast. He agreed to sell well below market and didn't want to move. So, my concession was to lease back for a year. I am giving up some FMV rent, but the discount far outweighs the concession. This also was attractive to the seller because of their situation. I have found purchase/leaseback to be a great way to get sellers to consider an offer.

I did another one last year that was in foreclosure. Seller is a friend and agent. The house was in bad shape. At the time, I really didn't want to have to throw a ton of money into rehab so we agreed to a leaseback. I didn't put more than a couple hundred dollars into needed repairs for the first year of ownership. Yes, deferred CapEx--but worked well as far as timing was concerned and I didn't have to go tenant shopping as well.

No doubt all purchase/leasebacks may not work well because you are still dealing with tenants! They got into a financial bind for some reason, and you are taking them on hoping they keep their end of the bargain. If they fail you could very well end up having to evict them. Is purchase/leaseback viable? In some cases. 

[Jody Schnurrenberger]

OOOOooo...Interesting idea!  THANKS!  I can see how you could end up having to evict them, but it does seem worth the risk.  So, how do you structure your rent?  Obviously they couldn't afford their mortgage in the 1st place.  Are you just getting a better mortgage rate and borrowing a lower amount so your mortgage is lower and thus they can pay a lower rent?  Or are you just taking a small loss the 1st year in hopes of making it up in the future with the great deal you made?  

I love this idea!  Thanks for sharing!

[John Thedford]

Originally posted by @Jody Schnurrenberger:

OOOOooo...Interesting idea!  THANKS!  I can see how you could end up having to evict them, but it does seem worth the risk.  So, how do you structure your rent?  Obviously they couldn't afford their mortgage in the 1st place.  Are you just getting a better mortgage rate and borrowing a lower amount so your mortgage is lower and thus they can pay a lower rent?  Or are you just taking a small loss the 1st year in hopes of making it up in the future with the great deal you made?  

I love this idea!  Thanks for sharing!

 I got about a $50,000 discount on the purchase price I will not have any net income on the property for about 1 year I borrowed private money and I will pay off the entire amount in 3 years

[Jody Schnurrenberger]

@John Thedford

HOLY CRAP!!!  YOU'RE MY HERO!  I totally want to be Colleague!  I don't know what that means or even how to do it, but I want to glom onto you like a freaking lamprey eel!  Hahaha!  GREAT JOB!

[John Thedford]

@Jody Schnurrenberger

Thanks:)
So here are a few thoughts: sale/leaseback is common. You often see it in commercial where an operating business wants to free up capital to expand and they have lots of cash tied up in their RE. Maybe they want to open another location, buy new machinery, whatever...sale/leaseback can free up tied up cash.

Now, in residential, this worked well for me in the two examples I posted. In one, I didn't want to be forced to rehab right away and tie up more cash, and nobody would consider renting the premises in the poor shape they were in. So, I leased it back to the seller for a year, she was happy not having to move, and it helped me out. I just rehabbed it a few months ago and brought in new tenants. In the other example, I was getting a great deal on the property and offered to lease it back at a discounted rate to appease the seller. I am probably giving up between $3600 and $4800 in rent for a year. That is still significantly less than my discount at purchase time. I borrowed private money to finance 85% of the deal. So, for the next few months I won't be showing any profit, but that is fine, I am getting writeoffs for interest, etc, and depreciation. 

If you are trying to purchase residential, and know the needs of the seller, offering a leaseback may be beneficial to making the deal. Good luck. 

[Jody Schnurrenberger]

How do you know how much to charge them?

[John Thedford]

Originally posted by @Jody Schnurrenberger:

How do you know how much to charge them?

 Rent? I offered this guy about 25% off market rent. That is always negotiable. The bigger discount you get, the lower you could charge but making a profit is the motive so I would suggest not giving away more than you must. 

[Jody Schnurrenberger]

I'd be scared they couldn't pay, but I guess either way you got a GREAT deal!  :-) 

[John Thedford]

Originally posted by @Jody Schnurrenberger:

I'd be scared they couldn't pay, but I guess either way you got a GREAT deal!  :-) 

 ANY tenant doesn't pay you have at least two ways to cure:
1. cash for keys
2. evict

Neither is a win/win but that is part of being a landlord. Option #1 may be less painful:)

[Jody Schnurrenberger]

And this is why I use property managers.  I'm just too nice.  lol  Plus, I was in the military until last year, so I needed someone local to take care of things for me.  :-)

[Mindy Jensen]

@John Thedford , this is an idea I had not considered. I know a person who could potentially fit this bill, and I had not considered this as a strategy - I had just written off buying their home. Actually, I can think of about 5 houses this could work for... Thanks for sharing.

[Jody Schnurrenberger]

YEP!  He's a GENIUS!  :-D

[John Thedford]

@Mindy Jensen

You are welcome. Sale/leaseback is common in commercial. Residential investors may be able to use this strategy to close a deal. My biggest benefit to the house pictured here is that fact that NOBODY would have rented it. DISGUSTING!...but the current tenants were happy..so it saved me from having to throw 20K at a rehab for a year. This is not a new idea...but maybe not considered by some. Everything helps:)

[Jody Schnurrenberger]

That's a BEAUTIFUL home!  I'd want to live there!  :-)