Would you?

Question

Would you be willing to sell a property on a wrap to a tenant ? The tenant wants the property and cannot qualify due to a bankruptcy from a pervious marriage 2 years ago. However, the tenant has a great paying job and in the past 2 years has saved up 30k with the plan to use it as a down payment for the house.

The property is a 0 cashflow every month, but I do have a good chunk of equity in the property.

The tenant has always paid on time in the past 2 years as well.

I was thinking that with 30k down I would be able to find a property that I could cash flow on and also the tenant would benefit by owning the property. I would have an attorney or title company or whomever I need to service the loan for me.

If you would sell this way . What would you feel is a fair interest rate? My current interest rate is 4%.

Aaron Junck · Answer

@Peter MacKercher That is my plan :). I definitely don't want to mess it up for either of our sakes.

Aaron Junck · Answer

Bill Gulley  Would you do anything different considering my state (SD) is a mortgage state not a DOT state. Therefore, if a foreclosure would take place I would have to proceed through the judicial system...

Aaron Junck · Answer

@ Bill, Do you recommend me putting it into a revocable trust prior to minimize the risk of DOS?

Bill Gulley undefined

Aaron Junck · Answer

Bill Gulley Thats exactly what I am saying. You always have some good insightful views. :)

To clarify more for you.

This house was my personal house for until nov of 2012. I built it back in 2006.

The housing market was soft when I wanted to sell it so I put it out for a lease option and found this tenant. At the time he went through a divorce and his ex supposedly messed up their credit by stop paying on things they had jointly. He told me he would be willing to put 10K upfront for the option to buy it but he wanted a long term lease bc he knew he would be filing for bankruptcy in a few months to be able to start over. ( Yes, I know I shouldn't do a long term lease). The price we agreed upon was just shy of 250k this was from an appraisal I had when I refinanced in 2009 , it also is right in line with the tax assessed value. Seeing what properties have been selling for in that neighborhood I would be hard pressed not seeing it sell for worst case scenario 265+

We wrote up the lease and option and all has went well. He has paid on time ever since.

I am not 100% sure if he can or cannot qualify conventionally yet. I know he is self employed (I know how hard that is to qualify in itself) . He said his bankruptcy will have been 2 years come June so he is not sure if he could qualify yet bc of that , but he does have close to 30k saved up now he said.

Back when I did the lease option for him rents were lower and a 250k house was not moving in any parts of my city unless it was a steal. ( I wasn't about to give up my equity just to dump the property) That is why it cash flows 0. In my head I would get L/O it out and in essence have a savings account from what principle is being paid down every month.

My initial thoughts were this. Let him see if he could qualify from a lender . He has 10k in option consideration and his close to 30k saved up . on 250k thats roughly 16% down.

If the mortgage company won't do it I would have a RMLO qualify him based on debt to income not his credit score. Keep in mind I have had him for 2 years making timely payments already. I am ok doing a new appraisal if need be or do you think I could get a BPO and that would suffice? Either way the option agreement states the just under 250k for an agreed upon value so if it comes in lower than that I guess I would have to adjust accordingly (which I can't see happening). The beauty of this is by going to a 7% interest rate I would make money on the spread in interest since I am at 4%.

Any ideas on how a servicer charges? Do I pay them a 1 time upfront fee or is it a monthly fee?

Oh and to enlighten on the good chunk of equity... I would still have about 10k left in this property if he put 30k down. To some that is not a lot, to me anything over 10k is a good chunk of change. So as it sits right now, based off of the option , 250-10-30= he would be at 210 I owe right at 200 for it. Like I mentioned above I refi in 09 so I left some equity in the property .

Aaron Junck · Answer

Bill Gulley  What are your thoughts. I always love hearing what you have to say :)

Bill Gulley · Answer

A mortgage is a note and security agreement as a single agreement, unless there is a boiler plate form in SD, you may need an attorney to draft the mortgage as an all inclusive obligation giving the seller a secured position.

Use what is customary and acceptable, don't take advice off the internet, get your information from a closing/title company as to what is usually used or your attorney, or both. :)

Jerry Padilla · Answer

@Aaron Junck is your tenant doing anything to improve his credit or working with a lender to ensure he will qualify when his bankruptcy is over? You should ensure he is putting himself in a position to be able to qualify when the time comes.

Aaron Junck · Answer

Well maybe you could clarify or send me in the direction to find out if SD allows deed of trust. I seen 2 conflicting sites . 1 says no and another states you can.

Bill Gulley · Answer

I wouldn't, a servicer really helps in such situations, but if you would feel better and the buyer agrees to purchase from the Trust, have at it! Do Good!  :)

Bill Gulley · Answer

Well great, my guess was wrong, I expected the run of the mill rental :)

I suggest you move that deal to a note and deed of trust, all inclusive DOT, take it to a attorney and a RMLO. Have the RMLO order an appraisal, the buyer pays for it. This keeps both of you out of influencing the appraisal. If he can qualify, sell it. If not, carry your note for 3 years, that puts him 5 years (4 1/2) away from financing.......if DF does not apply, if it does, follow the RMLO's requirements. Before you let him make that note, get a loan servicer, give them the details and agree to set up servicing from settlement, you, he or both can pay the servicing fees. You need the servicer prior to settlement as you will have APR disclosures and have the servicer figure the override of interest, an RMLO may not be able to do that, I don't know their abilities or software used. Run it past your attorney.

He should get to 20% down to avoid PMI, his credit history will be easier to take that way.

Show your deposits from his past 2 years of rental payments, they can't just take your word for it that he paid as agreed since you have something to gain. Hope you deposited rents in a timely manner. Just see the RMLO.

That's how I would approach it. Good luck! :)

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