How Should I Structure This Deal?

14 Replies

Looking for advice/opinions...

I'll ignore the details in this first post to keep this simple, but assume the situation is this:

I have a property that I can control for 9 months (the seller is willing to do a lease-purchase, an option or anything else similar without me having to take title now), and I want to sell that property at the end of the term to a retail buyer (homeowner). The retail buyer I expect to find is likely to be getting an FHA or a conventional loan, and is very unlikely to be paying cash.

My concern is that a conventional lender may have an issue with the buyer taking over a creatively structured contract in my name, so I want to structure the deal in a way that will allow me to "sell" the property to the end-buyer at the end of the term with as little complication as possible.

How should I propose structuring the deal with the seller right now to make this as easy as possible to resell or assign to a conventional buyer down the road.

I'll post immediately after this one with more details on the transaction, if that matters...

For those wondering or who need more information, here are the details on the situation above:

I'm getting ready to tear-down my personal residence to build a new house. We're currently living in our personal residence, so we need to move out for 6-12 months while the house is being rebuilt. We'd love to live rent-free during those 6-12 months (obviously :).

I found a house that would make a marginal investment (after rehab and all costs, we could essentially break even or perhaps make a little bit of a profit). It needs about $15K to make it move-in-ready.

Since we could resell for breakeven or a small profit, this would work perfectly as a place to live for 6-9 months while our house is being built. We'd agree to move in, pay $15K for the fix-up (he'd want $2000/month as a rental, so that number is about right), and then find an end-buyer on the back end. But, I want to structure the deal in a way that I can easily transfer the contract/option to a retail buyer at the end with their lender getting freaked out because their taking over an assignment or doing a double close.

Sure, we could buy it outright today, but then we'd be tying up a lot of cash for the next year. The seller is willing to seller finance, but has $100K left on his mortgage, so I'd still have to be out of pocket at least $100K to take title (I don't think he'd want to do a subject-2/wrap).

The other issue is that I'm not positive that we'd be able to resell at breakeven or a small profit, as the comps are a little weird. So, controlling the property (even for a small price) is a better solution than buying it outright. That way, I can shop around for an end-buyer and if I can't find one at my price, I can take my loss of option fee or lease payments as the cost of rent for that time period.

Happy to answer any questions...

Hi J. Given the variables you listed, I'd use a lease agreement to spell out the term, rents and improvements. And a straight option-to-buy agreement for the purchase. The option agreement has an underlying purchase agreement that spells out all the terms of the purchase should you or your buyer decide to execute the option.

Your concern about your end buyer's lender is a valid one. Assigning your option to buy to a buyer going conventional shouldn't be a problem. The way to address that, of course, is to direct the buyer to a broker who can get the loan done with the option assignment. You're good at team building. You have 9 months to find a good broker. :)

Agree with Kristine Marie Poe except the purchase agreement you'd be assigning wouldn't be including the $15k or so in rehab, and $15k or so in rent you're trying to recover....which means the buyer can't finance it as part of the purchase price, and would have to come out of pocket with an extra $30k or so, plus whatever closing costs/profit you're trying to cover. I'm assuming something like $200k purchase price for you, and guessing your resell would be $240k or so. The wrap seems the best idea for reselling-at least for the end buyer getting financed.

I just reread your posts again. Is the seller willing to transfer title? What about just a regular old seller financing deal with a 12 or 24 month balloon? Use a promissory note secured by a mortgage. Negotiate a down payment and terms that replace the income the seller would have received with a lease. That way you control the property while you live there, and benefit from any equity you create and any appreciation.

The capital gains thing applies. But since your goal is to live there rent free and you're hoping to break even on the re-sale, I'm thinking you could come out with little or no capital gains. If you get the deed now, and sell a year from now, your buyer's lender shouldn't have any issues.

This is a tough one. Conventional lenders usually do not lend to LLCs so you can't buy the property through an LLC and then later on sell that LLC to your buyer (who then needs financing). If you can find a portfolio lender open to that...getting the property via an LLC (and then assigning or selling the LLC to your buyer) might be the way to do it.

Another way to do it...is add your buyer as a tenant/buyer with you. Then have the buyer refinance you out. However, you are looking at 6 months minimum for seasoning with conventional lenders. Unless, again, a portfolio lender is amenable lending the money to your buyer without seasoning.

Originally posted by @Wayne Brooks :
Agree with @K. Marie Poe except the purchase agreement you'd be assigning wouldn't be including the $15k or so in rehab, and $15k or so in rent you're trying to recover....which means the buyer can't finance it as part of the purchase price, and would have to come out of pocket with an extra $30k or so, plus whatever closing costs/profit you're trying to cover. I'm assuming something like $200k purchase price for you, and guessing your resell would be $240k or so. The wrap seems the best idea for reselling-at least for the end buyer getting financed.

I wasn't suggesting a wrap. A mortgage broker who knows their stuff should be able to find a lender that has no issue with an assignment of an option agreement. At that point it's just a straight purchase for the J's buyer. J can sell the option for the same price negotiated with the seller. Or he can sell it for a mark up.

Kristine Marie Poe

I didn't think you were suggesting a wrap. My point was that the end buyer can only get financing based the Purchase Agreement, that is being assigned. It seems like J. would need $30-40k above that as an assignment fee, and I don't know of any lenders that would include that assignment fee as part of the purchase price, or credited as down payment.

Lease-Option, put the rehab money down as the option price, contract with the owner to have the work done. Same thing except the seller deducts the improvement you make and you have your down payment.

I would not try to add any future buyer to an existing contract as a co-buyer as that is simply fraud when that end buyer presents that contract to a lender indicating their interest in that contract.

You can make the contract to your company or individually, irrelevant for the end lender as either you or your company assigns the contract. The end buyer can show in the contract addendum a fee paid to obtain the contract. The end loan is made on the buyers' total cost of acquisition under that contract, that is his sale price. You shouldn't have an issue assigning the contract, it would be better to have consent of the seller to assign but you don't need to indicate the higher price. You can assign your option price as well, that will justify part of your price to the lender, the lender will work off of the buyer's money down and can then finance that part of the option price transferred. It zeros out. You can add to your fee as well, but you know it's subject to appraisal. Will this fly with FHA in 9 months? I have no idea, very possible, the issue will be seasoning, time of contract to close and the amount you add for rents being reasonable, a conventional lender, I'm sure you can but with the same add on for rents, much will depend on what the appraiser says.

Now, second way and cleaner, aren't you a contractor? Get a contract to do the work, pay costs, place a workman's lien on the property not a mortgage. Do a straight lease and option. 60 days before you want to sell, convert the option to a purchase agreement, assign that agreement, or if you find a buyer and can work with the seller, you release your option for a fee allowing the seller to contract with the buyer, there is no assignment issue. Your lien is paid off, your release fee shows on the HUD as a buyer expense, the buyer has a clean purchase agreement.

If this is a problem, I can add more ways to skin your cat, LOL. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

First, thanks to everyone for comments and advice!

K Marie - The issue with transfer of title now is that the seller owes $100K on his mortgage, so I'd need to put down $100K so he could pay off his mortgage. It's not a horrible solution, but I'd love to not be out of pocket $100K for the next year. Also, I'd love to avoid a second set of closing costs, especially given the ridiculous transfer taxes around here (2% of purchase price, for the most part).

K Marie, Wayne, Bill - Sounds like a lease + option is the way to go, but I'm still a little concerned that there would be issues on the backend. Worst case, I could purchase myself and resell, but with the extra closing/transfer costs and extra holding costs (since there would likely be a seasoning period), I could end up spending more than I save.

As I mentioned, this is pretty much a break-even deal to avoid paying rent...it may be easier just to eat the rent payments and not have to deal with the possible issues with this one...

Originally posted by @J Scott:
First, thanks to everyone for comments and advice!

As I mentioned, this is pretty much a break-even deal to avoid paying rent...it may be easier just to eat the rent payments and not have to deal with the possible issues with this one...

So if you are there 12 months, you'll spend $24K in rent and $15K in fix up, for a total housing cost of $39K. Is that right?

So, does it look to you like there is no equity in the house? If it were me, I'd still get the option. After your fix up and a year of possible appreciation, there may well be a way to recoup the $39K. If not, you don't exercise the option.

Originally posted by Kristine Marie Poe:

So if you are there 12 months, you'll spend $24K in rent and $15K in fix up, for a total housing cost of $39K. Is that right?

So, does it look to you like there is no equity in the house? If it were me, I'd still get the option. After your fix up and a year of possible appreciation, there may well be a way to recoup the $39K. If not, you don't exercise the option.

Working off of your numbers above, there may be about $40K in equity in the house after all commissions/fees/taxes, making it break even (and saving 6-12 months of $1500 rent payments somewhere else). But, I don't really want to risk the $40K in order to try save $15K in rent payments, as I'm not confident enough about the numbers on this one.

We ultimately offered to partner with him (he keeps title, we do the rehab while we live there, we sell it in 6-12 months and we split the profits)...but he didn't like that option for various reasons. So, it looks like this one isn't going to work out.

I have a strong feeling this is going to be one of those few deals that I'm going to regret not doing. But, given that we need to move next week, we'd have to make some quick decisions that I'm not comfortable enough making. I think I'm just stressed about the upcoming upheaval and I'm looking for a reason not to move forward on this one...

Btw, the guy is planning to do the rehab himself and list it with a Realtor in the next month or two, so I'll find out soon enough if I made a bad decision (once we see what it sells for)...

Btw, I just noticed that @Brian Gibbons voted for my post above. That reminds me that -- especially after this thread -- I need to start studying up a lot more on creative deal structuring. Had I been prepared, I may have been able to turn this opportunity into some profit...

I may be giving you a call, Brian! :-)

@J Scott Brainstorming creative solutions with sellers is what I love, but you have

  • a DIY guy as the seller, meaning DIY rehabber.
  • Your issue with your residence and really "not too motivated of a seller" and
  • a thin deal

makes this a "not too intriguing" deal.

One of my teachers taught me a JV with Credit Partner this way:

1. Use that JV "Cash - Credit Partner" to put up all cash for purchase and rehab costs, he owns it 100%. Talk to Doctors.

2. You have a recorded option to buy 50% (or some percentage) of the re sale proceeds for $10.

3. Do the rehab, resell it.

4. Pay back all the JV Credit partner's capital contribution of rehab and acquisition costs, split net profits, does not have to be 50 50.

---------------------------------------

For a minor rehab, don't buy it, JV with the Seller.

1. Offer to pay all rehab costs, tell seller you will supervise the job, hopefully its vacant. Use private money and do the rehab.

2. In the JV agreement, agree to have JV rehab costs, interest on private money, and your JV fee of say $10K, place a note and a mortgage against the property. You get paid when the property sells.

3. Agree to list the property in the JV agreement for .95 of CMA, Do a listing agreement at the time of the JV. Get a SPOA for just the sale of the house.

4. Your profit and repayment of loan is assured with the note and mortgage, and the net profit for the seller is greater than the 65% of ARV less costs model. You can market yourself as a true problem solver, like the HGTV "Holmes on Homes" guy, the Guy That Fixes Bad Rehabs.

http://www.hgtv.com/holmes-on-homes/show/index.html

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

J: Actually your offer to partner with the seller was about as good an offer as he was going to get. That was plenty creative IMO.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you