Deal or No Deal in Irvine CA

3 Replies

Hello BP Community,

I had an odd deal come across my desk and I wanted to gain some insight as to how to value it.  Long/short, a homeowner needs some upfront cash and is willing to sell their property at 480,000 when it is easily worth north of 1,000,000.  Owner is willing to carry the note at 0% for 20 years with the stipulation that they are able to live rent free.

Owner wants 30K upfront, $2000/mo and live rent free for 20 years.

I ran this through the BP rental calculator and obviously the CoC ROI is horrible (-2700/mo PITIA). However, if you take $1M with a 2% return for 30 years it ends up with a value of 1.8M. With no down payment, this is a 25% annualized return for those 30 years.

Do you guys see alternate terms to the deal?  I've considered potentially using the immediate equity to buy an out of state multi that produced enough cashflow to pay the 2nd position debt plus offset our holding costs over the years.  I'd be interested in hearing other views/thoughts.

Appreciate the help as always



This is almost like a reverse mortgage with your upside tied into the eventual acquisition and sale of the property in 20 years. You should view your risks from the standpoint of a bank. There is no guarantee that the real estate will be valued at 1.8 in 20 years, but it likely could be. What if the owner trashes the house and you have to invest $100,000 into it? Since you aren't a bank, can you afford to pay this guy $2,000 a month for 20 years? If you default once, does he regain possession of the house and you lose the 10+ years that you have paid him the $2,000 a month?

@David Friedman

Yes you are correct, it is almost like a reverse mortgage and yes there is a huge element of speculation to assuming a 2% increase in property value for the next 30 years (although it is in Irvine near the University!).

The risks I saw to purchasing the home with the seller carrying the note and living rent free is that liability now shifts to me as the landlord.   I am also trying to account for the eventuality that he could trash the place or a major capex item comes up while he is living rent free.

Do you see other alternatives to structuring the deal where I shift liability and also reduce holding cost?

One of my thoughts was a long-term purchase option.  Some lump-sum up front for a 5 or 10 year agreement to buy the house at a set price down the road (helps avoid liability but retains upside).

Any other ideas on how to structure the deal



I think the option you proposed is a much better one for you.

But, let’s look at this reverse mortgage situation a little further. If you could keep those same terms And charge a reverse mortgage interest rate for the use of your $2000 a month, then it would really be worth it! There’s no reason why he/she should be receiving cash flow without him/her having to pay interest on the backend.