creative financing question

[Nicholas Spohn]

So I am stripping linoleum tile adhesive off of beautiful wood floors (yeah people are stupid) getting my rental property ready to rent and listening to the latest BP podcast on creative financing and got an idea and would like some ideas on structuring this deal.

So awhile ago I was looking at a beautiful old house right on a main street across from a park, 3/1 with a 2 car detached originally listed at 109 k. Never met with the sellers on price (not even close). Well, a friend ended up buying it for 95k after 8 months on the MLS, it should rent for $1200 easy. She hired a terrible property manager, its been vacant since thanksgiving she now has a listed at 110? and just wants to get rid of it.

I have college students fighting over the house I am working on now and could put 3 of them in this house probably on a 2 year lease with 2400 security deposit.

Possible deal structure; $5,000 downpayment on lease option for a purchase at 90k in 5 years. I pay her mortgage over that time, she gets to write off depreciation and capture the equity. I get 1200/month in rent for 5 years, with 2400 back in security deposit. After 5 years I get to buy at 90k? Its her first home and she has a good job so presumably a good interest rate and terms. Is there enough margin in here for me? I would never pay that much for a conventional deal, but using her financing and a low downpayment might make sense. Would she go for it? Thanks! and great podcast.

[Account Closed]

If it were me, I'd skip the whole lease option thing. Get the deed subject to the existing financing and pay her as little as she'll accept for the deed. This assumes that her mortgage is worth taking over. Do you know the balance and terms? If favorable, negotiate to keep the financing in place as long as you can, 3-5 years. When negotiating, it's good to remember there's nothing in it for her except walking away with a little cash and getting rid of a headache. Any seller not on drugs should be asking about the benefits and risks of keeping a mortgage in their name when they don't own it. So make sure you're able to spell out the benefits and that you can show proof (credit, proof of emergency fund) if she balks or wants reassurance that you can do what you say you can do.

You also have a listed property to deal with. Or rather the seller does. She would have to wait out the listing agreement or get the agent to agree to cancel it before she sells it commission free.

Sub2/Due-on-Sale Warning. This is for everyone on BP who wants you to know the risks of getting a deed and leaving a mortgage in place, and will be sure to tell you if I don't. Getting the deed and leaving the mortgage in place may trigger the Due on Sale clause in the mortgage. The lender has the right to call the loan due if the borrower transfers the property to you. Chances are small, but it happens. Plan for the call and have a Plan B (payoff, refinance, or sale) if the lender calls the loan due.