Subject To: or Lease-to-Own or Other

[Dustin Little]

Let me start with a bit of the background story first.  I am active duty military and obviously I know a few active duty service members.  One colleague of mine offered to rent me his house some months ago for same amount of as his mortgage payment.  I initially was going to go take him up on his offer, but I was still a few months away from moving.  So, he ended up renting it for 1300 a month, his mortgage is around 750+/-.

Here we are present day, about 8 months later, and I am looking for rental properties to purchase.  I thought of my colleague and decided to give him a call.  Turns out he is not liking the stress that comes with being a landlord from out-of-state.  So, I asked him if he would like to sell it.  He said I could have it for what he owes, so long as he does not have to pay anything.  I did my research and as good as it may sound the price/rent ratio is not quite where I would like it.  But, the biggest issue is I do not want to put $30,000 down.

After some more thought, I offered to assume all responsibility of the property and give him $5,000.  He loved the idea.  I went on to tell him to discuss it with his wife and that I would talk to an attorney to figure out the best approach to developing a legal contract.

Turns out, in North Carolina real estate attorneys shy away from Subject To: financing.  But, after about 15 mins and my eighth attorney's office I found one that would stay on the phone long enough to find a solution to the scenario.  Which is what I would like everyone's opinion one.

In order to avoid any risks associated with Subject To: financing I will be looking at a Lease-to-own agreement.  I am initially think $3,000 clean and clear money for my colleague as a token of good faith. My right to buy the property will be good for 5 years, and the purchase price will be for the balanced owed on his mortgage at the time of purchase.  I am curious if this purchase price agreement is feasible.  Perhaps, to simplify things I could simply agree to a price for each year that passes in attempt to match the balance of the loan.  Should be simple enough to accomplish with an amortization calculator.  The tenants would stay in place and I would collect the rent.  I would pay my colleague the exact amount of his mortgage payment during the life of the agreement.

It may seem to good to be true.  Tenant in place, rent is nearly double the mortgage payment, down payment is only $3000.  To top it all off the house was built 5 years ago and my colleague has a home warranty that covers all issues to include appliances.

Worst case scenario I assume the loan through the lender.  From what I understand this comes with no down payment.  The cost to me will be the transfer fees due to the bank.  The downside is the balance will go against my debt/income ratio.

Please chime in with advice and/or concerns.  My experience is limited in this sort of agreement.  I have a couple rental properties and looking for more.  Soon these will need to be the types of deals I will need in order to continue expanding.  Why not start now is what I am thinking.