Newbie Needs Some Advice

General Landlording & Rental Properties
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Newbie Needs Some Advice

Michael Penny
Investor · Smyrna, GA · Member since 2016 · 58 posts · 16 votes

Here is my situation.  I have a friend whose uncle would like to sell his house and has offered to sell it to him for 80K, even though it is worth around 100-105K (that is the value that I have given it looking at comps).  Unfortunately, my friend does not have credit to buy it.  However, his uncle is willing to let someone else buy it for 80K, if they will let his nephew buy it from them once he can get a loan.

So it looks like there is an opportunity to enter into a lease option arrangement with my friend, but I am not exactly sure how to go about this.  I have a line of credit on my personal residence and that is the only way that I will be able to use any of my own money for financing or going the hard money/private money route.  I have also considered seeing if the uncle will seller finance and then do a lease option with my friend.

Any advice would be greatly appreciated!

Some other pertinent details:

  • Property is free and clear
  • My friend is currently paying $850/mo and can pay $950.
  • My friend is willing to bring in someone else as a roommate and I should be able to charge 1150-1250/mo between the two of them.
  • My friend has $3000 dollars for a downpayment/option
  • The property is apparently in really good shape (newer HVAC, newer roof, etc.), I am going to try and go there tomorrow to lay eyes on it for myself
  • I don't believe that the uncle needs all 80K in one lump sum.
  • I have considered the BRRR method as one of my strategies

Thanks BP family,

Mike Penny

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Skylar Simpson
Specialist · Salem, OR · Member since 2015 · 86 posts · 54 votes
8y

Hey Michael. So creative financing is my specialty but I have a few questions for you. The first thing you should find out is how much of that $80k does he really NEED and WHY he needs that specific amount.  

This is probably the most important question right now so we know what kind of deal structure would work in his and your best interest.

So find out that answer and I can help you with the rest if you'd like.

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  • Skylar Simpson
    Specialist · Salem, OR · Member since 2015 · 86 posts · 54 votes
    8y

    Hey Michael. So creative financing is my specialty but I have a few questions for you. The first thing you should find out is how much of that $80k does he really NEED and WHY he needs that specific amount.  

    This is probably the most important question right now so we know what kind of deal structure would work in his and your best interest.

    So find out that answer and I can help you with the rest if you'd like.

    1Reply
  • Tyler Hockett
    Accountant · Houston, TX · Member since 2016 · 23 posts · 1 vote
    8y
    Originally posted by @Skylar Simpson:

    Hey Michael. So creative financing is my specialty but I have a few questions for you. The first thing you should find out is how much of that $80k does he really NEED and WHY he needs that specific amount.  

    This is probably the most important question right now so we know what kind of deal structure would work in his and your best interest.

    So find out that answer and I can help you with the rest if you'd like.

     I would like to know when should you use lease options and how do you create one? 

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    What's the upside to you? If you buy it today and lease it to your friend, you could get some cash-flow for a while but eventually the friend is going to buy you out. Will you be able to sell it to him for a profit or do you have to sell it to him for $80,000? What if the friend is unable to qualify for a loan for ten years and then decides to buy it for $80,000? Are you obligated? What if the friend changes his mind and decides he doesn't want to rent it or defaults in the terms or the uncle decides he no longer wants to sell?

    I see a lot of complexity and not a lot of upside. This would look better if you built in some protections:

    1. Add some profit to the sales price since you're the one taking the risk;

    2. Put a deadline on everything. Don't sit on the house for 10 years with an agreement that the friend can buy it at any time. I wouldn't carry it for more than three years, at which point his opportunity to buy it goes away and you can buy it through a traditional lender.

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  • Vince Mayer
    Wholesaler · Arnold, MO · Member since 2013 · 348 posts · 183 votes
    8y

    It sounds like the Uncle wants to sell and you have a fear of taking that first step.

    So, if you have a line of credit, buy it with 20% down and lease option to your friend. I believe you can count 75% of the rent as income but ask a tax attorney. (You should use an attorney) A 2 to 3 year option but price the house at what it's worth plus inflation. Use a Mortgage Loan Originator and put your friend through a credit repair program. 

    Your lease payments should be for what the market rents are in the area. There should be two agreements, a lease agreement and an option agreement. The down payment would be towards the purchase it's pretty close to a FHA down payment.

    You should have some nice cash flow, a little bit of cash up front and a really nice back end profit.

    By the way, If your friend doesn't buy, you can do it all over again or just use the house as a rental.

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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    After reading all that I believe I wouldn’t get involved . Has bad news bears written all over that deal
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  • Michael Penny
    OP
    Investor · Smyrna, GA · Member since 2016 · 58 posts · 16 votes
    8y

    All, thanks for the replies!

    I spoke with the “uncle” last night.  He is not the uncle and never agreed to sell his property for 80k.

    Not sure what is going on, but looks like I won’t be involved with this deal anymore.

    Sorry to have wasted any of your time reading my post and typing out your responses.

    Seller financing and lease option are still some strategies I want to look into, so I will probably be giving some of you a call to chat.

    Thanks again,

    Mike

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  • Dick Stevens
    Rental Property Investor · Haverhill, MA · Member since 2017 · 290 posts · 185 votes
    8y

    Don’t get involved.  He won’t be your friend anymore after this all plays out.

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