Helping out a tenant?

Question

I have a pretty unique opportunity that I'm having a hard time saying yes on.  I have a tenant that has been an "OK" tenant for a year.  I say "OK" as they have been late on their rent, but have always be very forthcoming about it and have paid the late fees and/or bounced check fees (3 times in the last year).  They have had some health issues that have been at the root cause of the late payments.  The wife has a pretty decent job and the husband is on disability. They have had their daughters living with them for the last year and are now moving out.  That leaves my tenants unable to afford the $1000/mo rent.  Their credit is messed up and can not get a loan for a home of their own, but are slowing working to clear up their credit.

They came up with the idea of having me buy a house they they pick out and they rent from me for a year, then they buy the house from me.  Either via a conventional loan or I finance it.  I agreed to the concept, but told them it would depend on what the return on my money would be.

They have found a house that they like.  It's a short sale priced at 66k.  It is in good conditon and comps are coming in at about 78k.  Rents in the area are in the 800-900 range.  I would probably rent it for 850.  That would give me a net of about 350/mo after PITI but before any long-term expenses.

They are asking me what price I would sell them the house next year and I'm not sure I know right now.  There are just too many variables that might crop up over the next year to be able to agree to a price right now.  They want it close to the original purchase price and I, of course, will want it closer to market price.  My fear is that I will need to put more money into the house (i.e. water heater, furnace/ac, etc) that will eat up any kind of profit that I might have.

So, finally, a couple of questions.  Is it realistic to put a price on the house now that it would sell for in a year?  Also, does this even sound like a workable deal?  I see the potential for a little profit, but it certainly doesn't seem to be a slam dunk.

Jon Holdman · Answer

Spending $66K for $850 in rent isn't a great deal. Add in that there is no doubt work needed (its a short) and its definitely not a great deal. Then you're going to turn around and sell it to someone with owner financing? Who has already proven to have a bad payment record? Someone who knows what you paid and will be looking for a "good deal" from you.

Have you lost your mind? Or are you starting a charity?

Have you lost your mind?  Or are you starting a charity?

Joe Bertolino · Answer

They have paid you late and bounced checks... Why would you even consider doing something like this?  This is a good deed for which you would be severely punished.

Kevin Yeats · Answer

Jeff, make a list of all the downside factors that could impact your bottom line profit over the next year.  Others have mentioned several.

Repairs
Market value of the property in one year compared to what your tenants can/will pay.
What if rents on other properties decline and the tenants move elsewhere, will the house still be a good value?

Now compare all of these factors to what else you could do with your money.

Jon, as usual, has hit some key points ... and dumped a bucket of cold water on the situation.

James H. · Answer

At today's rates, you could buy a unit at 66K that rented for 850 and it would cash flow about 150/month. If you put 20% down, you will get about 175/month cash flow and COC of about 16%. You could acutally pay a little more and have a profitable unit.

I'm not a believer in lease options, but you could set up a lease option. If they end up not working out - which they probably won't, you still have added another profitable rental to your portfolio. If you don't want the hassle of another rental, don't do it for these folks.

Ed O. · Answer

This would not be a prudent move, like the others have said.

But, that's why the boards are here, to vet things we're uncertain about. I'm sure lots of people have been in a similar scenario. Unfortunately, these situations are very likely to not work out and then you're stuck.

Jeff B. · Answer

LOL!!!!  I guess I deserved that!!  Hopefully neither!  And definitely not the second!  Loosing my mind is up for debate.

I keep trying to see the value to me in making this work for them, kind of a "pay it forward" type of thing.  But the facts keep smacking me in the face saying don't do it and don't put my money at risk.  There's not enough of a return to warrant the potential risk of crap hitting the fan.  I think I need to listen to the facts and keep my money in my pocket.

Thanks for the sanity check folks!!  Sometimes I need one!

Loretta A. Steele · Answer

Jeff, your first sentence states that you are "having a hard time saying yes on."  There is a part of you that knows that this is a very risky undertaking.  Possibly financing a loan, uncertain pricing a year from now and tenants with credit problems is asking a lot for you to invest in.

The house that your tenants picked out, would you have purchased this short sale if they were not involved?  Or was it only because they liked the house?

What is your tenant's FICO Score?  Can they really clean their credit in a year?  What if they change their minds about the house or the arrangement?  What if housing prices drop in a year?  What are the  true  repairs and maintenance costs on this short sale house?  Are you willing to tie up your money financing this house?

The big question is, why are you willing to consider this plan?  What about it makes it possibly?  Just from what you have stated, this is not a good investment.

Kyle J. · Answer

You are taking all the risk in this scenario, and your tenants are taking none and making a lot of requests. They even get to pick the house? I'm not quite sure how you benefit from any of this or why you would agree to their terms. Especially when they are just an "OK" tenant.

David C. · Answer

If they can't afford 1000 in rent, and you are only able to get them down to 850/month.  How will they be in the position to buy any house in a year?

Also, what if market prices drop, they will want market price as well and they will need you to sell to them at a loss - no bank will loan them for an over-the-market purchase, right?

I'd tell them that you are happy to be their landlord and you will buy that house and rent it to them at 850, and you can talk in a year about buying it - but you'll have to consider it when the time comes.

Helping out a tenant?

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