I need Advice on Seller Financing to Acquire a Rental Property.

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I need Advice on Seller Financing to Acquire a Rental Property.

Jarred Black
Fairview Heights, IL · Member since 2013 · 31 posts · 5 votes

Im looking to get some advice on a deal I have. I'm not sure if my plan is even possible so I would appreciate any feedback.

I have a well kept 3bed 1bath 950sf single family home under contract for 16K with an out-of-town seller. Instead of wholesaling it, I'm actually wanting to purchase the property because its in such good condition and it rents for 600-650. The house does need a new hot water heater, outdoor A/C unit, stove, refrigerator, carpet and paint, and some cosmetic upgrades = $3500-4000. I already have a qualified tenant that wants to live there. I was thinking of entering into a bond for deed or lease option with the seller, then sub-leasing the home to my tenant. I would use the rent to pay my seller and collect the cashflow. After a year, I would be in a much better position to finance the property and purchase it from the seller while keeping my tenants in place.

I would initially propose the same 16K sale price, 350-400/mo rent (considering the necessary repairs I will need to make) and 100% of rents going towards the sale price. (I understand this will be negotiated with the seller and I) Once I have a signed lease (option), I would then make the necessary upgrades and sublease it to my tenant for atleast a year. After that year, I would exercise my option to buy and purchase the home for the remaining balance.

I understand this is all subject to the terms I can negotiate with the seller.

I'm looking for any feedback. Are their any holes in my plan or anything I am not accounting for?

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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y

@Bill Gulley I think you both are confused here.

Jarred wants to buy using seller financing and then rent/lease to a tenant(without an option). Unless I missed something all of his comments on LO ect were in regards to him using that as the purchase strategy and leasing the property out to a tenant, and then in 1 year exercising his option and owning the property. He didn't speak of any option or sale to the tenant.

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    Hi @Jarred Black

    There are new laws w Dodd Frank that prevent people that rehab res properties to seller finance to an Owner Occupant.

    @Bill Gulley might want to comment.

    You might want to have some other party rehab and sell to you (cash or terms), then you seller finance once you own it.

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  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    If you're going to buy, and right now you're plan is to get the owner to owner finance why do a lease option? If you can get him to agree to the terms of a LO a straight sale with similar terms should be no different.

    I personally would do a straight sale and take control of the property now, also you will likely need that because it is doubtful you will be able to find a loan for such a low amount. The big lenders are all saying nothing under 50K though small credit unions will do lower amounts. But after Jan 10 with the QM coming out the smaller loan amounts will be even more difficult to do.

    Personally like I said lock it up now on a straight sale not a LO and then you'll be able to hold it and not worry about trying to get financing next year.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Jarred, Where have you been man? 5 years ago that'd be a plan, nit a good one, but a plan (LOL) Now, you're on your way to jail!

    Okay, some exaggeration, maybe, maybe not. As a contractor or rehabbing the property, you have a few special considerations under the SAFE Act, none good, you'll have some issues with showing what you did, costing it out, show the profits and see an MLO to see if your improvements are repairs or if you'll be considered a rehab/construction project which is pretty well banned from seller financing by an individual that I can tell so far. I have just kept seeing, except contractors not eligible.

    You can't do a rent to own thing either. Need to search here "Rent credits" should do it, as you'll find that's not they way to go.

    Hope you didn't spend much on the guru book, you can use it in the fireplace tonight and get warm, I think our weather is headed your way.

    All in all, no to everything you have going up there. Best advice, put it on the market and sell it. Sorry, but study up on the SAFE Act here on BP! :)

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  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    @Bill Gulley I think you both are confused here.

    Jarred wants to buy using seller financing and then rent/lease to a tenant(without an option). Unless I missed something all of his comments on LO ect were in regards to him using that as the purchase strategy and leasing the property out to a tenant, and then in 1 year exercising his option and owning the property. He didn't speak of any option or sale to the tenant.

    1Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    Hi @Matt Devincenzo

    Paying to improve a property that you do not own on a lease option is risky, dont you agree?

    0Reply
  • Jarred Black
    OP
    Fairview Heights, IL · Member since 2013 · 31 posts · 5 votes
    12y
    I think the straight sale is in order
    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    @Brian Gibbons absolutely, that's why I suggested he do a straight purchase, taking title to the property and scrap the LO idea entirely. :)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    You're right Matt! I didn't read it closely!

    SAFE Act still needs to be studied as well as the lease-option and issues with rent credits.

    If that property is owner occupied the seller may be exempt from the SAFE Act issues, but I suggest you still stick close to requirements, they will be in your favor as the buyer.

    I'd add in my note the right to lease with an option, eliminate the due on sale clause making a special arrangement.

    You'll still have issues with any installment.

    I'd say ask the seller to allow you to add someone to title, where they can buy out your interest while paying the note, you remain responsible on the note.

    Buying out the interest of a co owner may wiggle past the issues, especially if the property is placed in an LLC and you and your tenant buyer can be member partners, then buy out the business interest.

    In doing an LLC, you need to continue conducting other business in that LLC, you can lock out other members in critical areas so they can't incur debt for example, but this would probably be a test to see if this were simply used as a transaction to circumvent the rules under the Act. This is an idea, not saying go devise this yourself, but take it to an attorney!. It's the route I'd go if I were doing this buy-seller finance-rent-sell by assumption type deal.

    In fact, I might put that together and run it by the CFPB to see what they say! ? ! ??? :)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y
    Originally posted by Jarred Black:
    I think the straight sale is in order

    I'd agree!!! At least you got me thinking.......I'm iced in and in a daze being on this all day! :)

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