Should I take this deal? Alberta

Question

I was informed this morning of someone looking to sell their house privately this morning. I quickly set up a time to meet the owner and discuss why he wants to sell and what he's looking for. I met the owner this afternoon and after talking with him and learning his story, I'm not convinced I should buy the deal. I'm a new investor with one property and this one is a little more unorthodox than I'm used to seeing.

He owned the property for 5 months so far. Bought it for $110,000 and has $6,000 into it. It's pretty much turnkey from the initial walkthrough. Here's where it gets a little more complicated. He currently has a tenant living there with a right to purchase agreement. The tenant is paying $1100 a month with all of that going towards the downpayment. He has 12 months to get financing for the property or the owner takes 50% of the money saved thus far and the contract is extended for another 12 months. The agreement is for $125,000 and the tenant has about half of the required down payment. If he misses a payment, he's out and the owner gets all the capital saved so far.

The current owner wants to sell both because the tenant just quit his job and he's trying to get out of the REI game. He's willing to sell to me at $120,000 but he wants me to keep the right to purchase agreement with the tenant.

So there's already a buyer and if he goes through with financing I make $5000 minus the closing cost. Would I be paying closing costs twice? Transferring to my name then the tenants in 6 months? I'd be making $2000-$3000 then wouldn't I?

Am I missing something here? I've never run into a deal like this before and I'm not really on board with it currently.

Theresa Harris · Answer

I'd pass.  He should be giving the first option to the tenant.  And who buys a place, holds it for 5 months (with a tenant who has the option to buy it), then tries to sell it to someone else?

Elijah Williamson · Answer

@Ockert Kruger

Small towns. They dot Alberta everywhere. I know investors are weary of small centers but they seem great for the new investors with little capital like myself. They're very relationship based too which helps.

Dwayne Poster · Answer

Further to your contemplated deal, rent to own, in my experience, is a promise of a future price, with a lease term that ends with a buy option. The tenant will place a down deposit today, for that future consideration, and over the term of the lease, pay extra, which will accumulate in an account. These monies, plus the dp is what the tenant can take to the bank, or lender, to qualify for a loan, which they would then complete the sale at the end of the lease.

You want to flush this possibility out before considering any assumptions.

Dwayne Poster · Answer

In a rent to own, it is typical that the tenant pays a higher monthly, with an agreed portion being accumulated in an account,  as a forced means of saving for the down, which the vendor manages. Careful that you are not assuming based on that, that it represents typical area rental rates.

I have a couple of spots that I keep a close eye on, and what I’m seeing is that pricing which initially looked strong, is trending towards pre covid, which means a resumption of softening of prices. If oil activity can ignite certain areas, that may be the leverage.

Makes for great opportunity to negotiate discounts up front, where they should be, from an investors perspective.

Ockert Kruger · Answer

I can't help you much with your question but where did you find a property for $120 000 that rents for $1100???

Gregg Cohen · Answer

Hi @Elijah Williamson, I really love the fact that you are going down the path of analyzing opportunities and putting yourself in a position to invest.  Most investors sit on the sideline so going through this exercise is beneficial for you even if this isn't the right deal.

My first thought when reading your post was that there is simply not enough profit potential and too many risks to do this deal compared to your other opportunities in real estate.

It's a lot more fun to invest in real estate if you are rooting for your resident to continue to keep current on their rents and take advantage of their right to purchase agreement. However, in this case, there's just not enough profit to justify if that happens.  You have a potential profit of less than $5k (taking out closing costs on both sides).  Essentially this is a short-term flip deal and your profit potential should be roughly 10-20% of the sales price.

You are also taking on a tremendous amount of risks.  You'll be responsible for maintenance and vacancy costs as well as any eviction costs.  Those can very easily add up to more than $5k.  I see a high probability of break even or even ending up under water in this transaction.

The only way it would make sense to me is if the property were worth a tremendous amount more than $125k and there was no right to purchase agreement with the resident.

Maybe go back to the original seller and ask them to settle the right to purchase agreement with the resident?

Hope this helps!

Stevo Sun · Answer

My original post got removed for 'self-promotion' because I asked if you would want to join a subreddit. But my main message is to keep in mind the carrying costs of the property like property tax, insurance, condo fees, etc.

Yan Sully · Answer

What about the capital that the tenant paid already, how much is that? Is the current seller take that?

If the tenant lose his job, there might be a risk that tenant is not able to pay the rent. So, then what? With this rent to buy arrangement, will you be able to evict him? Will you responsible to return the 50% capital tenant paid in?

I don’t know much about seller finance…not much help here.

Should I take this deal? Alberta

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