How would you structure this lease back / lease purchase option to best protect myself ?

Question

Home Value as is $125 K

Purchase Price - $70 k

The owner I would be purchasing it from is losing it to the bank and wants to continue to rent with the option of purchasing the house back in 5 years or less for 90 K.

I have never done a lease back ; what should I put in my lease with the renter to protect myself down the line if she was to struggle with payments ; damage the home ; etc ?

Thank you in advance

Steve Vaughan · Answer

I remember an old guy out of Denver who had this niche called the 'help program'. Jan something. Goes like this:  as long as there is equity of 3x as much as is needed to cure the bank default, he will catch the bank up in exchange for the deed.  He holds the deed and doesn't record it.  The 'seller' then makes their normal payment to him (which he sends to the mortgage co) and they owe him a fee equal to the amount of the default he covered + 50%, due within 6 months.  One 6-month extension is allowed, under the same terms (another 50% fee).  At the end of the 12 months he records the deed and moves em out if they haven't satisfied the payback.   This isn't a loan, but don't know if it would breach equity skimming or DF or whatever newer laws are out there.  Just an idea.  How much is the seller behind Michael K.?

Rob Golob · Answer

If all above is accurate and you want to keep "keep a clean conscience" you should tell her to sell it for $125K to someone else.....

Bill Gulley · Answer

Try a hundred dollar lunch! A good finance attorney can well be in 5 digits an hour, what we speak of here is pretty elementary and I've obtained good advice on the phone, but then, you need to have your ducks in a row and not waste their time, too. :)

Bill Gulley · Answer

She probably won't buy it back, that is my guess.

If you have 18K for a down, you should have 250 for an attorney.

I don't see anything wrong with buying from the bank, if they get it and going that route. You can't lease back to an owner who has a short sale, this isn't a short sale.

You certainly don't want her do and repairs, that gives her an equitable interest in the home. You also can't have tenants doing that in residential due to tax code violations!

Rents need to cover PITI + M/R + profit, so estimate the costs expected.

You probably need to move on this before you are a Realtor, you could complicate things after licensing. I'd suggest having her sign a disclosure of your intent to obtain a license and your RE education toward that goal, not required but a good idea. :)

Steve Babiak · Answer

@Brian Gibbonsis giving good guidance. In some locations, this sort of lease back arrangement has ended up in front of a judge, with the judge ruling the transaction to be a loan in disguise. And your problem then becomes - you don't have the proper agreements in place for a "loan".

You can google search for that sort of thing. And even if your location hasn't yet had a judge rule this way, they tend to look at other similar cases from elsewhere to help them reach a ruling.

Brian Gibbons · Answer

I worry about sale leasebacks, buy it andd find another house for the owner to lease 2 own

Equity skimming laws

Account Closed · Answer

Home Value as is $125 K

Purchase Price - $70 k

The owner I would be purchasing it from is losing it to the bank and wants to continue to rent with the option of purchasing the house back in 5 years or less for 90 K.

Keep the owner in the property as a tenant, but don't make a long term commitment without having a good real estate attorney draft up a contract that will protect you.

That would be the easiest fix in my opinion.  Pay a couple hundred dollars to save you thousands.

Good luck!

Westin Hudnall · Answer

Bill Gulley

I have a technical question for you bill.

On this property ; a friend of mine is purchasing the property than selling / deeding it to me and my cash funds are coming from another investor who is acting as the banker. The banker/investor wants a few items before loaning me the funds.

She wants a mortgage file of record ; to hold 1st lien position ; and wants a promissory note.

Do I write up a seperate agreement between myself and her to include these items ; does an attorney do this or a title company ?

I want to provide her with these items im just not sure how to proceed on doing so ;

Please advise

Thanks :)

Westin Hudnall · Answer

@Steve Babiak

Bill Gulley

You guys bring up some great points. I have never done a deal like this so I'm deffinately clueless as to the ramifications ; what I do know is the deal is too sweet to pass up so I'm trying to find the best way to do it. What can be illegal about buying from a bank for a deal that they agree too then selling it down the road back to the original owner ?

I personally don't want to sell it back to her as it needs no repairs and is sellable for $125k conservatively as is (picture an older couple who turns their car mats upside down to not let them get dirty and takes care of their house the same) ;  the sell back price would be $90 k so obviously them moving on makes the most sense to me but terms have to work for them as well if I want the deal or if I want to keep a clean conscience. She is really nice and I want to do the right thing so the suggestion to help her find a new place might be a great option as I should have my real estate license within the next month or two anyway.

If I do sell it back ; my plan would be as follows

Pay in cash in the next week :

Get an adjustable rate loan at 75% of appraisal in the next 30 days (around 90k after loan fees) and pocket about $18 K in the next month.

Rental price has not been agreed to but my thoughts were to have her pay for all needed repairs and maintenance to offset the low purchase back price that I would be agreeing to up front.

Would you 2 Gurus do this deal ?

How would you structure this lease back / lease purchase option to best protect myself ?

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