How to structure this offer, Is there a deal here?

Question

I found a home that is FSBO. Comps show it is worth about $400K sellers will accept $330k, needs about $10k in repairs as it was a prior rental and some remodeling was in progress but the owner passed away. It is vacant and they are absentee owners and they do not want the house. Here is the kicker, the heirs want to do a lease with option to buy as they can't sell the house until it goes through probate. They also want 10% down for the option.

Questions; Is this a reasonable down payment request? Can they put it into a lease with option to buy if it is probate? Is it possible the probate could be dragged out if a relative or other party lays claim to part of the estate?

The plan was to tie up the proerty for 12-24 months(negotiable), finish repairs and rent for market rate(which would cover mtg paymnets) and create a small cash flow until the home comes out of probate. Than either purchase outright at the agreed upon price or sell to another investor. Ho wwould you write the offer?
I am a former realtor but a newbie with the investment side. Any help will be appreciated.

Sharon Vornholt · Answer

Patrick -

As I see it, there are a couple of issues here.

I would never give them $30K. I NEVER give the seller any money. In most cases, you will never see it again regardless of what happens with the house. Until the estate in settled, they can't have possession of that money anyway; it has to stay with the estate.

If they insist on some type of a small deposit, mine is always $100 or less, and I make that check payable to the closing attorney; never to them.  Protect your cash.

And secondly, I think that is too much money for the house. Even if the 10K repair estimate is correct (which seems low for a big house that has been a rental and is having some renovations done), that means you are at about 85% of the ARV if that ARV is correct. My next question is about the ARV. This should be a middle of the road number, not a best case scenario.

What is going to happen if you get the actually get the property and are forced to sell it quickly? I don't know a single investor that would buy that house with those numbers. From where I sit, you are going to be looking for a retail buyer most likely. In my area, that house would be too costly to be a rental. It would never cash flow here.

Anything can happen in probate. I have never done anything but an outright purchase on probates, and that has to be with the executor or PR who is the only person that can act for the estate. The heirs have one goal; to get the cash that is sitting in the house. They are interested in anything creative. They just want the cash. They are often the ones that hold out for more money.

You need to consult a real estate attorney to see if a LO is even legal in these circumstances.

Sharon

Brian Gibbons · Answer

Probate makes it not easy to do options, but you can try.

An Equity Split may work:

1. You lease and option with the ability to assign and sublease.
2. You exercise price is $330
3. You give the sellers an option to buy 50% of the equity for 10 dollars.  That option is in escrow with the title clouded with a Memorandum.
4. You get $10K from a private lender IRA with a return of 50%, no payments until the property is sold.  A lien is placed on the property to protect the private lender.

So you improve it, llease option from seller, and lease option to a strong tenant buyer for top sales price.

Pay the sales costs, and split the balance with the seller.

I think that is the a win win because probate does not care to improve the property for retail resale.  Sellers get top sales price with no work.  You make half the profits.

What do you think Brandon?

You may want to ask @John Jackson or @Bill Walston.

I still cant do that @ thing!

Ben Leybovich · Answer

Patrick Martinez  I would not do a lease option of a probate house, even though I can see how the numbers might work OK.  Only the rightful owner can give an option.  Owner is dead.  Who would your option be with while the house is in probate – the estate?  This is really messy for my taste.  Besides, probates can take a long time and a lot of things can pop up.

10% would be OK for down payment, but this is not a purchase – it’s an option, if you chose to do it.  10% is too much for the option consideration in my opinion.

Rick H. · Answer

I see several issues here:

What make a deal?  Your numbers don't thrill me, but might be ok for you

Tying up property is fine however, recording a Memorandum is not an effective strategy sufficient to cloud title in CA, at least as far as ALTA & CLTA insurance policies go.

Most important of all, your principals do not have CPA's.  That stands for capacity, powers and authority to sell the property and would only be in a position to assign their respective beneficial interests in the decedent's estate.

I would rather have more motivated principals, more equity to split, a more obvious catalyst and more control with a different approach to documenting the deal.  Lastly, heirs don't get my money until they've given me fully signed docs, possession and final consideration upon receiving insured, marketable title.

Sharon Vornholt · Answer

Brian Gibbons.  You are right. That's all the heirs want; the cash that's sitting in the house. And, usually another "something else" to seal the deal. That other thing is usually my offer to clean out the house so I include that. Since I am a wholesaler, my buyer cleans out the house.

I love probates. I just submit the offers and send the accepted offer to my closing attorney. He takes care of the rest. If there are any problems they are handled by him. Easy peasy!

Sharon

Patrick Martinez · Answer

Thanks Brian Gibbons and Sharon VornholtI will study that information. I hear you all loud and clear.

Brian Gibbons · Answer

Sharon Vornholt great article!

Probate takes specialized knowledge with PRs, intestate, heirs challenging wills, etc.  See http://en.wikipedia.org/wiki/Probate#Steps_of_probate

Heirs want their money fast and not complicated seller financing creative ways to sell.

So get a really cheap price (defend your numbers to the heirs) and submit an offer.  Can't hurt!

Sharon Vornholt · Answer

No problem Patrick. Sometimes it takes another set of eyes for all of us myself included.

Never take the seller's word for anything.  You need to check everything yourself. I would double check the work needed and those repair costs (they will always be more and take longer than you think), and then go back and re-negotiate the deal.

Good luck and let us know how this one turns out.

Patrick Martinez · Answer

Sharon Vornholt Thank you very much for your analysis! Great learning opportunity for me. I appreciate it.

Patrick Martinez · Answer

Thanks Brandon Turner, Brian Gibbons, Jade Atwood. Cool I got the @ thing down. Great video on your site Brian.
Thank again for the advice everyone.

How to structure this offer, Is there a deal here?

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