Can you help me with a deal?

Question

Hi everyone... I'm in the middle of a deal over the next week and wanted some input from you guys:

I'm purchasing a single family home (SFR) for buy and hold - to rent out. I have all the numbers crunched and it's a great investment. Here's the issue: the Sellers are having difficulty finding a home but want to sell, so they are asking if they can sell but stay for 6 months and pay PITI (principle, interest, taxes and insurance) at which point I can raise it by $100 every month until it flattens at $1,400 for 6 more months. I need to be at $1,550/mo on rent to meet my NOI/ROI. What are your thoughts?

Essentially they are asking to pay all costs of my new mortgage payment for 6 months (so really no cost to me) and then rent from me for 6 more months at $1,400/mo after which point they will sign a lease for the rent amount I choose or move out.

How do you guys see this? a good deal to make the sale go through or should I counter? and if so what other options can I give them?

Any input would be appreciated.

Alex

Jennifer Beadles · Answer

Alex R. If you agree to let the sellers stay, you are missing out on monthly cash flow, plus what if something breaks down while they're living there, and since you are not getting cash flow you'd be going negative by fixing whatever needed to be fixed. It doesn't sound like a fair deal for you.

If it were me, I'd offer to let them stay for 6 months paying whatever fair market rent would be, along with a security deposit of course, and if they find a home sooner you could write in the lease that you would let them out early. This way it would be a win for you, and a win for them.

Jennifer Beadles · Answer

Alex R. I see.. I didn't catch that you were still negotiating. Do you think it's a deal breaker for them to not pay fair market rent?

Not sure if you can legally have tenants reimburse for repairs. Maybe you can?

Not sure what your monthly cash flow would be with fair market rent, but if you split the difference or had them pay $150 over your PITI to cover repairs that would probably be cleaner. Just my opinion..

Michael Totman · Answer

Why take the chance? Do you know what their real problem is as to why they want to sell so bad without a new house lined up? Why won't they pay market rent, is it because they can't afford it so they essentially want to refinance, but their credit is too bad, so they found you to buy at a lower price and they offer to pay the lower PITI as rent and then they end up squatting for a year? Are you sure you're comfortable with this? The entire time they live there their minds will be thinking "this is OUR home, we're not letting THAT guy tell US what to do..."  If they really want to wait until they find a place why not sell you an option to buy with a 12 month expiration? I understand that ruins your financing plans but it may be your cheapest option overall.  This deal just smells odd to me from where I sit.

Robert Wilson · Answer

If you can make the numbers work on the rent in the short term it could be a nice deal.Over the course of the year they would be getting the property for about $3000 below market rent.So... I would do the deal for a $3000 reduction in purchase price.Maybe everyone meets in the middle.

Ricardo R. · Answer

@Manuel Prado I was thinking about that Manuel. The only issue is that in setting a closing date, for instance 3 months out, would mean I would have to go through most of the loan process again and then I would have put every other future deal on hold until this one closed. I know.... what a pain.

Manuel Prado · Answer

What about if you only put the house under contract with a closing date far out to where you/they think they will be in their new home? Maybe use this strategy to see if they are trying to hide something behind scenes (maybe running late in their mortgage payments and getting close to pre-forclosure)

If the numbers don't work out for you by letting them stay in the house while they find a new place then is like renting to tenants at a price that doesn't fit your needs, which I don't think is what we look for. As good or as bad as you want this deal to put under your belt, make sure the numbers work out for you and not for them.

Ricardo R. · Answer

@Jennifer Beadles yeah that's thing want to make it fair but don't want to break the deal if I don't have to. Well... my cash flow it to be honest with you would roughly $450/mo. with market rent. But I think I like your idea along with @Varma Adduri in just keeping it simple and charging 100-150 over PITI. Another option I was thinking of was to have them pay 25% closing costs ($1,000) and just have them pay PITI over 6 months... and then I would just have to figure out repairs and stuff like.

Can you help me with a deal?

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