First time Flop. Very Discouraged

Buying & Selling Real Estate
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First time Flop. Very Discouraged

Renata Johnson
Member since 2019 · 36 posts · 15 votes


I'm a 32 year LPN that is just getting into real estate. Before joining Bigger Pockets, I signed a rent to own contract on what I thought I would be a great investment. We are living in it as we rehab. The landlord charged no deposit since we were doing the repairs ourselves. GREAT! We have been rehabbing and I have started using Bigger Pockets calculators. I needed numbers so I looked at my contract and it said 240 principle 240 interest 240 tax and 8% interest but no total price to buy. I looked up the tax assessment as it said 32285. When I asked him for a total price he said 79500 but if I got a loan he'll sale for 60000. I was expected about 50000 for him to make a profit but almost 80000?! I know he has to make money but the house wasn't in the best condition and still needs a lot of work. I have the option to sublet after 2 years but rent is 825 and Zillow has a estimate of 695/mo so even If I charged 900 I only make 75 a month and it maybe hard to charge that amount. I looked at comps and there is one place charging 900 on my street but it beautiful and required a lot of upgrades. Also, he makes me feel very uneducated. I've explained to him that I am using this an investment property. He proceeds to tell me about how impossible it is too get a loan and his way is the best option for me but IF I can get it, the price is 60000. Long story I know I made a bad decision. I am still able to leave the contract without penalty and haven't spent too much on rehab but Ill lose that little bit of money. I'm just a little discourage. Looking for advice, success stories, or anything to keep motivated. About to read a few forums as inspiration

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Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
6y

How did you even get into this deal? There are so many errors I don't even know how to configure a way to explain why. Walk away and start over. Whatever you are doing here is all wrong. Was there an agent involved? Did you have an attorney? Have you done title on the property? An inexperienced off-market buyer dealing direct with a seller is a disaster. Nothing makes sense on the numbers end of what you said.

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  • Ravi P.
    Investor · Schaumburg, IL · Member since 2015 · 219 posts · 104 votes
    6y

    @Renata Johnson

    I had trouble following the numbers on your post. I did not read all the other post, so apologies if this was already said.

    First, you stated this was structured as a rent-to-own with no deposit. How much are you into this deal? Did you excercise your option to buy? If you are still renting. Stop making improvements and fulfill the the term of the lease and then back out. You may lose the money for improvements you have made. However, better than being stuck with a bad deal.

    If you did excercise your option. And you are now the owner, is this currently owner occupied? Any time of lending on Owner occupied homes are a PITA. They should comply with the Dodd Frank act. The Dodd Frank affects consumers of residential properties. Hence why many Hard Money lenders require an LLC to be the buyer of an investment property. However, If I'm not mistaken, if you only lend on a few homes a year you may be able to get away with it. Not sure why there are 2 prices? Seems predatory to me. I would consult an Attorney, that is familiar with lending laws. If the Attorney feels that the Seller violated the law he would have no problem taking him to court. There is also a good chance it may spook your seller, and he may let you out of this deal.

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  • Ryan Landis
    Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
    6y

    @Renata Johnson it may be worth just trying to see if there was any other marketing/agreement/etc. that you might be able to rely on. If he can carry a note, maybe you can do a prepay penalty so that you ensure he gets the number he is looking for but it is through interest down the road. Agents/brokers can't provide legal advice, but someone local may be able to help you out a bit too.

    0Reply
  • JJ P.
    Real Estate Agent · San DIego · Member since 2019 · 177 posts · 185 votes
    6y

    Tough lesson, but never commit to buying anything if you don't know the price.   

    0Reply
  • Cornell Barnett
    Member since 2019 · 1 post · 0 votes
    6y

    @Renata Johnson

    Give this deal up, since you haven’t lost much. But don’t give up on your aspersions. We all have made mistakes in this game. Learn from it at keep it moving.

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Todd Groom:

    I agree with how this scam works. I just purchased a rent to own home but paid cash. the seller was done doing the rent to own. Each person came in paid their down payment plus the rent and fixed up the house little by little. All of them defaulting and turning the house back over each time. I can only imagine how much money he made. This is a way to make money outside of renting it and a lot of people do well. Personally I have a conscious and wouldn't be able to take advantage f people like that.  

    Thats what its sounding like. He said he paid 30000 for a roof but i found out the previous owner did. It was renting at 700 then now its 825 for us. He state he paid for the roof so if he sold it for 60000 he would be losing money. Its ok though. I can say I attempted the deal. I'm proud of that aspect

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  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Ryan Landis:

    @Renata Johnson it may be worth just trying to see if there was any other marketing/agreement/etc. that you might be able to rely on. If he can carry a note, maybe you can do a prepay penalty so that you ensure he gets the number he is looking for but it is through interest down the road. Agents/brokers can't provide legal advice, but someone local may be able to help you out a bit too.

    I'm looking at all possibilities so ill look into to. Thank you!

    0Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    6y

    @Renata Johnson, hi and welcome to BP!

    One theme I see over and over in the responses is "I don't understand the numbers in your deal..."

    I admit, I don't either.  But I do know how these kinds of deals are usually put together, so I have some guesses.

    HEre's what I want you to do, and this will be valuable if you do it.  Go back and READ YOUR PAPERWORK with the Seller.  Then come back here and explain in vivid, no-detailes left out language exactly what the deal is, how much you've paid so far, and what it would take to cash out this deal today and own that house free and clear.

    If you don't understand what the deal is you're into, you'll never understand exactly what went wrong and what it is you're not supposed to do again.  Plus, it will give you a chance to dive deep into whether or not this kind of deal could have been good even if you had bought it outright with no owner financing.

    In summary, I want to know numbers on...

    1) Market value today based on nearby comparable sales, not Zillow or the County Assessor's office.  You might need a Realtor's help to dig into this data.  Pay if needed: it's worth it.

    2) Potential market value after total rehab to retail buyer standards.  Ditto on item 1 regarding data.

    3) Exactly how much principle, interest and other costs you have paid to the Seller.  Check your bank statements as far back as needed and add up the numbers from your contract.

    4) Current "buyout" dollar amount and any pre-payment penalties.

    If you will do this work, even if you end up tossing the keys back to the Seller, your experience will have great value and you can count any money spent as tuition in the school of real estate hard knocks.  We've all attended that school at one time or another.

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  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Erik W.:

    @Renata Johnson, hi and welcome to BP!

    One theme I see over and over in the responses is "I don't understand the numbers in your deal..."

    I admit, I don't either.  But I do know how these kinds of deals are usually put together, so I have some guesses.

    HEre's what I want you to do, and this will be valuable if you do it.  Go back and READ YOUR PAPERWORK with the Seller.  Then come back here and explain in vivid, no-detailes left out language exactly what the deal is, how much you've paid so far, and what it would take to cash out this deal today and own that house free and clear.

    If you don't understand what the deal is you're into, you'll never understand exactly what went wrong and what it is you're not supposed to do again.  Plus, it will give you a chance to dive deep into whether or not this kind of deal could have been good even if you had bought it outright with no owner financing.

    In summary, I want to know numbers on...

    1) Market value today based on nearby comparable sales, not Zillow or the County Assessor's office.  You might need a Realtor's help to dig into this data.  Pay if needed: it's worth it.

    2) Potential market value after total rehab to retail buyer standards.  Ditto on item 1 regarding data.

    3) Exactly how much principle, interest and other costs you have paid to the Seller.  Check your bank statements as far back as needed and add up the numbers from your contract.

    4) Current "buyout" dollar amount and any pre-payment penalties.

    If you will do this work, even if you end up tossing the keys back to the Seller, your experience will have great value and you can count any money spent as tuition in the school of real estate hard knocks.  We've all attended that school at one time or another.

     Thank you so much for the information!

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y

    I've included some of the conversation that have numbers. Some numbers were talked about on the phone so I do apologize. Hopefully, it can clarify on why I'm so confused. Numbers dont add up at all. Maybe its me not being able to see deal in my learning phase. But at least im free to get out of this after a year. It's been 6 months. He said he painted the outside but its dirty and looks damaged in areas. I just had to rewire due to the plugs shocked my kids twice. I know he needs a profit as well but may not be best for me. The picture you see is after we cleaned up the yard and the paint you see next to the burnt outlet and on the house is the supposed 8000 paint job

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y

    rentometer estimate

    0Reply
  • Linda S.
    Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes
    6y

    @Renata Johnson,

    I feel for you,  but the red flags were waving high!  I would just take this as a learning lesson, and be happy you didn't have to put more money down.   These situations are best for people who can't under any circumstances own their own house and get financing,  not investment properties. 

    Eat your losses and move forward, if rent should be $600, no one will pay $825 or $900 unless it's the best of the best, and it will cost you a lot of money to get it to that, and it will be tough to keep someone happy at 50% more than other rentals.  Low income renters don't want to pay more-- they are low income, they want cheap!     

    Sorry, this was just poor planning, use it as an expensive lesson learned, and move in 6 months.   The owner didn't do anything wrong, he-- along with everyone else-- is just out to make money, nothing wrong with that!   It's VERY common to see people buy houses for $30K here and do owner financing for $70-90K.

    Don't let it set you back, cough it up as a bad decision and move forward, just a small bump in the road!

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Linda S.:

    @Renata Johnson,

    I feel for you,  but the red flags were waving high!  I would just take this as a learning lesson, and be happy you didn't have to put more money down.   These situations are best for people who can't under any circumstances own their own house and get financing,  not investment properties. 

    Eat your losses and move forward, if rent should be $600, no one will pay $825 or $900 unless it's the best of the best, and it will cost you a lot of money to get it to that, and it will be tough to keep someone happy at 50% more than other rentals.  Low income renters don't want to pay more-- they are low income, they want cheap!     

    Sorry, this was just poor planning, use it as an expensive lesson learned, and move in 6 months.   The owner didn't do anything wrong, he-- along with everyone else-- is just out to make money, nothing wrong with that!   It's VERY common to see people buy houses for $30K here and do owner financing for $70-90K.

    Don't let it set you back, cough it up as a bad decision and move forward, just a small bump in the road!

    Yes thank you! I didnt know the about rent estimators or anything before bigger pocket. so it was def a bad decision. I can honestly say im wiser and more prepared for my next deal which will be a success. Im claiming it! All the knowledge on here has help. He definitely needs to make money I only posted the pics to hopefully provide clarity on numbers. But i know I don't want this to be the type of company I run.

    1Reply
  • Linda S.
    Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes
    6y

    @Renata Johnson,

    Don't beat yourself up, it hasn't cost you a ton!   I agree, I can't do that, but there is obviously demand or else he wouldn't be in business, so for each their own.

      Think about it like this-- how happy are you that you asked the questions and stuff NOW vs. 5-10 yrs down the line?!   You have a place to live, so all is not lost!   Also, give yourself a pat on the back for taking a risk, so many people are stuck worrying, no one has the guts to jump.. so it's all good, you learned something!  

    If you're going to do rentals, focus on the renters perspective-- why would  I pick this place?   what makes it different?  what matters most to me?   Is this the best value/use of my money vs. other rentals?  Feel free to directly PM me if you have any questions!   

    Keep your head up, everyone here has made mistakes!

    0Reply
  • Fred Cannon
    Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
    6y

    @Renata Johnson

    Before you buy or escape the deal get the house appraised by a professional and also inspected by a professional. You really don't know for sure if it's a good deal or not. I do know that 8% interest is about twice what the bank or mortgage company will charge you but they would need an appraisal and inspection as well. Early on in the game you need to have a team to work with. I have a mortgage broker and appraiser and a home inspector plus maintenance people that I always deal with. They know I am a repeat customer so they are looking out for my best interest as well as their own I also research recent sales and current rent for the area. Don't get too discouraged. You make have a diamond in the rough. Just do you due diligence. I think the owner sounds a bit suspicious but can't really tell with the unknowns.

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Fred Cannon:

    @Renata Johnson

    Before you buy or escape the deal get the house appraised by a professional and also inspected by a professional. You really don't know for sure if it's a good deal or not. I do know that 8% interest is about twice what the bank or mortgage company will charge you but they would need an appraisal and inspection as well. Early on in the game you need to have a team to work with. I have a mortgage broker and appraiser and a home inspector plus maintenance people that I always deal with. They know I am a repeat customer so they are looking out for my best interest as well as their own I also research recent sales and current rent for the area. Don't get too discouraged. You make have a diamond in the rough. Just do you due diligence. I think the owner sounds a bit suspicious but can't really tell with the unknowns.

     Awesome advice

    0Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    6y

    @Renata Johnson, okay...there's been a lot of other good advice offered so I'll offer a little more (but use their advice too).

    The whole "you have to have perfect credit and put 20% down to get a loan" is a flat out LIE.  Maybe it's a little more difficult now due to uncertainty with c-19, but as little as 3 months ago banks were making mortgage loans with less than 3% down to people with low 600 credit scores.  Some were getting into homes with scores in the 500s, but that is where higher downpayments come into play.  Ask around and see what the real deal is before trusting this person.

    Btw, the statement that "your payment can go up due to taxes and insurance" only matters if the Seller/Owner is paying taxes and insurance for you today.  Is that the case?  The only reason a bank loan "goes up due to taxes and insurance" is if the city increases your taxes or your insurance provider increases the rate for your policy: that happens almost every year regardless of whether you are paying the Seller/Owner or the bank, so it's kind of a "duh!" statement meant to confuse you. Bottom line: who is paying the taxes and insurance?  I'd be sure to find out that they are being paid and by whom.  Owners sometimes "forget" to pay insurance or taxes.  Wouldn't it stink if your house burned down and the owner "forgot" to pay your insurance policy?  Or what if you tried to buy out the contract, only to find the property is behind 3 years on taxes and about to be auctioned off by the county for delinquent taxes?  Yep...you would be out of luck!

    I don't care what he PAID or how much $ he put into it: what's the market value, "as is", today?

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Erik W.:

    @Renata Johnson, okay...there's been a lot of other good advice offered so I'll offer a little more (but use their advice too).

    The whole "you have to have perfect credit and put 20% down to get a loan" is a flat out LIE.  Maybe it's a little more difficult now due to uncertainty with c-19, but as little as 3 months ago banks were making mortgage loans with less than 3% down to people with low 600 credit scores.  Some were getting into homes with scores in the 500s, but that is where higher downpayments come into play.  Ask around and see what the real deal is before trusting this person.

    Btw, the statement that "your payment can go up due to taxes and insurance" only matters if the Seller/Owner is paying taxes and insurance for you today.  Is that the case?  The only reason a bank loan "goes up due to taxes and insurance" is if the city increases your taxes or your insurance provider increases the rate for your policy: that happens almost every year regardless of whether you are paying the Seller/Owner or the bank, so it's kind of a "duh!" statement meant to confuse you. Bottom line: who is paying the taxes and insurance?  I'd be sure to find out that they are being paid and by whom.  Owners sometimes "forget" to pay insurance or taxes.  Wouldn't it stink if your house burned down and the owner "forgot" to pay your insurance policy?  Or what if you tried to buy out the contract, only to find the property is behind 3 years on taxes and about to be auctioned off by the county for delinquent taxes?  Yep...you would be out of luck!

    I don't care what he PAID or how much $ he put into it: what's the market value, "as is", today?

     Thank you so much for your advice! I've been researching and learned that a flat out lie. I did credit repair i Texas and help 2 friends get home loans.  I got really upset today and decided to throw in the towel. I have a legal plan under my work insurance and seeing if they can look into it for me. I spoke with him today about a water leak under a leak. I wasnt asking for him to fix or anything. He was just informing him since its still technically his property and covid made it hard to find a plumber. He told me I knew I had to do repairs and that i had no business purchasing a rent to own. He overtalked me and I was almost unprofessional and held my cool. I contacted my husband and he stated he will be dealing with him. My husband stated he doesn't respect women. Anywho, long story short now that my husband told him we were seeking legal advice and no longer pursing the property, he is sending a plumber with no charge but im already made a decision. But i know I can do it, so this will not be last venture.

    0Reply
  • Renata Johnson
    OP
    Member since 2019 · 36 posts · 15 votes
    6y
    Originally posted by @Ravi P.:

    @Renata Johnson

    I had trouble following the numbers on your post. I did not read all the other post, so apologies if this was already said.

    First, you stated this was structured as a rent-to-own with no deposit. How much are you into this deal? Did you excercise your option to buy? If you are still renting. Stop making improvements and fulfill the the term of the lease and then back out. You may lose the money for improvements you have made. However, better than being stuck with a bad deal.

    If you did excercise your option. And you are now the owner, is this currently owner occupied? Any time of lending on Owner occupied homes are a PITA. They should comply with the Dodd Frank act. The Dodd Frank affects consumers of residential properties. Hence why many Hard Money lenders require an LLC to be the buyer of an investment property. However, If I'm not mistaken, if you only lend on a few homes a year you may be able to get away with it. Not sure why there are 2 prices? Seems predatory to me. I would consult an Attorney, that is familiar with lending laws. If the Attorney feels that the Seller violated the law he would have no problem taking him to court. There is also a good chance it may spook your seller, and he may let you out of this deal.

    Thank you for the information! We were trying to utilize the buy option but he wasn't 78000 unless we pay cash or loan then 60000. We have stopped all repairs and saving the money for our next venture. I let him know in writing we will be leaving in October. He's trying to work with us now but I'll pass and count as a lost. I'm working on my LLC in georgia now.

    0Reply
  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    I'm just curious, where is it located? 

    0Reply
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