Help With LC We Hold

[Paul Jamgotch]

Hi all. I'm hoping that someone can give me some creative ideas to solve an issue which I have created for my wife and I.

In early 2010 we became 'investors' with a family organization in our area who were buying REOs with investor money, renting them out, and promising 10%/year return to investors. I was smart enough (I think I was smart) to structure our three homes as lease-options. We had 25% down financing on two of them and paid $37,500 for each. The company did not perform as promised. One unit got sold when trouble started and we became landlords on our other two SFHs when this company quit performing and we had to take them back. I did not have time to properly manage and we ran into an early, long eviction. I became an eager seller. One sold on LC with great terms for us and it will be totally paid off in 24 more months.

I made a mistake on the remaining property which was in a tough neighborhood and needed 5K in rehab. Having a 5.5%, $25K mortgage, I sold to a young man in Feb. 2012 on a LC for $36K net after $2K Home Depot card kick-back. The note was for $34K @ 7.5% with 5-year balloon. He lives in the home by himself. Everything is going OK and he pays like clock-work. However, based on a 30-year amortization he basically has cheap monthly rent ($385) if he chooses to walk away after five years. We have the risk of mortgage being called early (due-on-sale clause), market selling off, and/or dis-repair. We net only about $70/month for all of this time. In hind-sight, I should have done this on a 10 to 15-year amortization to get him more quickly vested in purchasing after the five-years. I've offered to pay his closing costs to get his own fresh mortgage but he says he is fine with what we have in place. I believe it would appraise for $42K now. Its a no-brainer to me as 4% money is much better than 7.5% and he has interest-rate risk. Given his lack of interest to improve his financing, I am suspicious that this will be a problem for us in 2017 when the balloon is due. Any ideas on how I could convince him to re-finance? I don't think the risks warrant discounting 30% to a contract buyer. However, I am facing a career change at 46 and don't want to pony up $24K cash to pay off mortgage should it get called (it's with a local CU so its possible they find out).

Thoughts and ideas appreciated. I am curious if others have input on what my risk of 'due-on-sale' trigger is? We have that much cash with this CU so they know we could afford to pay it off. Admittedly, I can be quite a worrier. Thanks for reading.