Does this deal make sense?

Question

Hi, my uncle and his partner bought a rehab property with cash for 50k, rehabbed it and now its worth around 120k.  I'm looking for a rental property, so they have offered me this deal:

Sell it to me for 100k.  So they will increase the loan for 110k, so that 10k goes into my pocket.  Give me 5k each of their profits because they couldn't find anyone with good enough credit to purchase the property.  And also put a tenant in the property for me.  I think the area rents for 1200/mo.

So "supposedly" I will end up making 20k just for purchasing the property and potentially have a tenant in it paying around 1200/mo.

Thanks for all responses!!

Michael Rossi · Answer

RUN, don't walk, RUN FAR AND FAST FROM THIS DEAL!  It's a BIG LOSER and you will lose your butt on this "deal".

Here is how I see this deal:

Gross rent:  $1,200
Operating expenses:  $600
NOI:  $600

Mortgage ($110K, 30 yr, 7% NOO): $732

Cash flow:  $132 LOSS!  (Ouch!)

To make matters much worse, failing to disclose money back at closing is LOAN FRAUD.

What you need to do is find a deal like your uncle did and rehab it yourself.  Don't pay a middle man big money to do the work for you.  That is exactly what makes this deal so bad (besides the mortgage fraud, that is).

Good Luck,

Mike

J Scott · Answer

There's not enough information here to evaluate the deal, but one thing is clear -- you're bordering on mortgage fraud by increasing the loan amount above the sales price and pulling cash out.

If the cash-out part of the transaction is not disclosed on the HUD (or made clear to the lender), you could potentially face some serious legal issues if you get caught.

As for the deal, what are the anticipated rents?  That information will go a long way towards knowing whether the property will cash flow and if so, to what degree.

J Scott · Answer

Whoops...thanks Mike, I missed the $1200/month rent number in the original post...

Yup, loser all around...and potentially illegal...

Kellen M · Answer

Thanks for the feedback.  My initial feeling was that this didn't sound right.  I wanted to do it the traditional way (buying and rehabbing), but like I said this offer was just brought to me and I needed some outside advice.

Thank you lots for the info!!!!!

Does this deal make sense?

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