All Forum Posts by: Matthew Allen

Thank you Ken. 

I am assuming that even if you strucutred it with a higher purchase price (85% of value) and pre-paid rent it would potentially still be frowned upon. The returns are not as good with this strategy. And taxes on the pre-paid rent could be a nightmare assuming there is no creative accounting way to report the rent. 

Tell me whether this is a good idea or not.

Throughout the year I come across situations where people need to sell there home due to a variety or reasons, job loss, income loss, health, divorce, etc. In other words, they are in some sort of financial situation that is forcing the sale of the home. But they want to stay in the home. Personally I think this is where a lot of sale lease back programs fail the seller. Because jumping from a mortgage to rent does not really solve the problem. They need some time to get back on their feet and recover from what ever has caused the situation to sell in the first place. 

For a long term investor:

Would it make sense if you could buy the home at a steep discount and then let the owner stay rent free for a specific period of time? There would be a lease agreement, just no monthly rent payments.

This also only works for cash buyers willing to buy and hold. 

For example:

Let’s say it is a $450,000 home in good condition.

If you could buy it with a 15% discount: $60,000
And rent discount at $2200 mo. with a 5% increase annually would be: $132,615 for 5 years

You would be buying the home at a 48% discount in this example.

Assuming you sold the home at the end of 5 years

Your NET ROI would be:

0% appreciation: 10.93%

1% appreciation: 12.13%

2% appreciation: 13.33%

3% appreciation: 14.53%

This ROI calculation takes into account taxes, insurance, selling costs, repairs (calculated at $3500) through out the lease.

Now, this would obviously be negatively cash flowing since you would need to pay taxes and insurance. But I think you could take this a step further and instead of charging no rent, your rent could be the cost of the taxes and insurance annually. You would have a smaller discount, but would have little to no out of pocket annually.

Instead of selling the home, you could continue to rent it at market prices either to the seller or a new tenant once the initial lease was complete. But now you could refi, draw out your initial investment and the property would cash flow. (assuming rates are where they are today and rental prices increase during that time)

Now, this may not need to be a 5 year lease. Maybe the seller only needs a year or two. Or maybe it could be a 10 year lease with a 90% discount.

You could also mitigate risk with a surety bond as well.

Am I missing something here?

Is this a horrible idea?

Would you do it?

If it is with HUD, did they foreclose or is HUD servicing the loan?

CE Link is the new subservicer for HUD reverse mortgages.

You are generally going to either buy it at 95% of value or what is owed, which ever is lower. 

You have limited time as well. Whoever is handling the estate needs to contact the servicer within 90 days or they will generally start the foreclosure process. If they have, you extend that time to 6 months from date of death.

On top of that, every month you delay buying the house, the loan balance is going to increase. 

Also, was there a trust, is it going through probate, are other family members wanting to get their piece of equity? 

But to answer your original question - either hard money or a traditional mortgage can both work.