Potential 1st Deal - Feedback please

[Tyler Hodgson]

Hello everyone. This has potential for my first deal so please chime in and let me know your thoughts.

I stumbled upon a property that currently has tenants in it, who want to buy the house, but do not qualify for a mortgage right now do to credit problems. They had some late mortgage payments two years ago in Alaska before they moved to Texas. The listing agent is also the property manager and said that they are great tenants and have never been late on rent.

I put in a $205,000 offer with $2,000 in seller paid closing costs. The tenants are currently under lease until August of this year at $1650/month rent. 20% down conventional mortgage will be $1250/month for the mortgage, insurance, and taxes. The tenants have agreed to sign a lease for 2 years at $1750 and $1800 rent for each year. They want to buy the house and have agreed that they will buy the house in two years at the greater of $220,000 or the appraised value. They have agreed that they will be responsible for all repairs and maintenance during their lease.

Here is my cash flow summary:

$41,000 down payment + $2,000 in closing costs = $43,000 investment

Difference of rent less mortgage payment = $450 * 26 months = $11,700

Minimum sales price ($220,000) less closing costs ($2,500) - less mortgage payoff in Sept 2018 ($158,800) = $58,700

$58,700 + 11,700 - 43,000 = $27,400

This would be a 63% return (before taxes) on my money in 26 months. Not a bad return for a 2 year investment. Other benefits would be tax deductions for mortgage interest and depreciation during the hold period. And it will be low risk with the tenants accepting responsibility for all repairs and maintenance since they will be purchasing the home. 

Thoughts? Suggestions? Thanks!