Does this work and is it legal?

8 Replies

I have located a property for $8k in a small town about 30 minutes from Tulsa. It is small and needs some work which I can do fairly cheap.

I also have a friend that I used to work with. She is currently paying $550/mo rent on an efficiency apartment with yearly leases for the past 6 years. Her lease is up at the end of July.

I was telling her that I may try to buy it and sell it with owner financing on a 5 to 10 year note with a payment between $300 to $400 per month. Now she wants it and says she can come up with a $2k down payment.

If I get this property under contract, can I owner finance it to her then sell the note. I would normally hold it, but being friends I don't feel it would be the best idea.

I don't have the $8k available to tie up right now so I would have to borrow enough to cover the purchase. 

My question is, if I borrow the cash then do a $375 to $400 per month owner finance 10 year note. Would I be able to sell the note for $15k or so?

If I can find a buyer would this be legit and legal?

Hello Wayne!  I hope that you get many answers.  First, let me tell you that I am not a lawyer and you might to hire one.  You might be able to sell the note but you might have to discount it.  It all depends on how god of a deal you got to not have to discount it too much.  Another option might be a "lease option" where you lease the place for a certain amount for a particular time and then sell it for a certain price at a certain date under a separate agreement.

That way you might have an investment that really pays off with a deposit that is non-refundable, a spread between the debt payment and rent, and on the resell.  Sometimes the tenant does not take the option to buy and you just do it again.  It's usually done with good and capable people who were refused for a loan from a bank and are unaware of any options.  They usually take care of the house better because they think they may own it someday.  Good luck to you!

@Wayne Caviness Yes, what you are thinking is legal.  If you borrow the $8K and rehab costs without putting a lien on the house, then you are in good shape. Finding a buyer for an owner finance deal is very easy. I would sell it to the highest bidder for cash. Your friend can borrow the money some other way. Another investor would pay cash for that house once it is fixed, especially if you put a tenant in there.

Originally posted by @Michael Lee :

Hello Wayne!  I hope that you get many answers.  First, let me tell you that I am not a lawyer and you might to hire one.  You might be able to sell the note but you might have to discount it.  It all depends on how god of a deal you got to not have to discount it too much.  Another option might be a "lease option" where you lease the place for a certain amount for a particular time and then sell it for a certain price at a certain date under a separate agreement.

That way you might have an investment that really pays off with a deposit that is non-refundable, a spread between the debt payment and rent, and on the resell.  Sometimes the tenant does not take the option to buy and you just do it again.  It's usually done with good and capable people who were refused for a loan from a bank and are unaware of any options.  They usually take care of the house better because they think they may own it someday.  Good luck to you!

Hi Michael, 

Yes, I thought about the lease option. But I would be borrowing the cash to purchase. I am looking for a quick exit, due to it being a friend. 

With a 5 year note at $375/mo it would produce $22,500. So I assume that $12k to $15k would be discounting the note. If I sold the note for $12k that would leave a $10k profit over the next 5 years for the note buyer. A 10 year note would produce $45k leaving a $33k profit over 10 years. It would take approximately 32 months to recoup the $12k investment. 

I am a bit new to this, so I am not sure. I don't feel comfortable carrying the note myself with her. I don't want to ruin a friendship over a business transaction.

Originally posted by @Wayne Caviness :
Originally posted by @Michael Lee:

Hello Wayne!  I hope that you get many answers.  First, let me tell you that I am not a lawyer and you might to hire one.  You might be able to sell the note but you might have to discount it.  It all depends on how god of a deal you got to not have to discount it too much.  Another option might be a "lease option" where you lease the place for a certain amount for a particular time and then sell it for a certain price at a certain date under a separate agreement.

That way you might have an investment that really pays off with a deposit that is non-refundable, a spread between the debt payment and rent, and on the resell.  Sometimes the tenant does not take the option to buy and you just do it again.  It's usually done with good and capable people who were refused for a loan from a bank and are unaware of any options.  They usually take care of the house better because they think they may own it someday.  Good luck to you!

Hi Michael, 

Yes, I thought about the lease option. But I would be borrowing the cash to purchase. I am looking for a quick exit, due to it being a friend. 

With a 5 year note at $375/mo it would produce $22,500. So I assume that $12k to $15k would be discounting the note. If I sold the note for $12k that would leave a $10k profit over the next 5 years for the note buyer. A 10 year note would produce $45k leaving a $33k profit over 10 years. It would take approximately 32 months to recoup the $12k investment. 

I am a bit new to this, so I am not sure. I don't feel comfortable carrying the note myself with her. I don't want to ruin a friendship over a business transaction.

 Do a sandwich Lease Option.  Your money is out of it as fast as your friend takes over, but you still can have income from it.

Or, just do an option like I said in the beginning, and assign the Option Contract to your friend.  You're out of it as soon as your assignment takes place.

Originally posted by @Joe Villeneuve :

How much dos the original owner  (current seller) owe on the property?  If they owe nothing, then you buy it from them on an option...then sell the option contract to your friend.

 Hi Joe, 

I am sure the property is free and clear. However, the owner wants cash. He already has a lease option offer with a down payment.

It is legal to do this, but for sure you need to talk with a RE attorney to make sure you have the right paperwork and the deal is recorded properly and in accordance with laws.

Also, notes can sometimes be considered a security, which requires licensing and carries super heavy penalties if those rules are not followed - regardless of the size or value of the note. Talk to an attorney. People go to federal prison for messing up with securities.

that note would have to be discounted to much at least to a savvy note buyer to make this worth it plus you run into owner occ issues with compliance and QA laws..