Help Me, Help Them. Option lease, Seller finance?

6 Replies

I’ve found a home owner who’s in a bit of financial trouble and I’d Iike to see if I can offer him a solution. Basically he’s gotten into a cash flow issue and is having trouble keeping up with his house payments and some other bills.

I’m new to investing so this will all be new territory so I’m looking for some insight or advice from those that may have been there already. I think I may be in a position to help him and make it a good deal for myself as well. Looking for a win - win here.

Several months ago he purchased the property for $39,500 and put about $3k down. His current payments are about $500/mo. (Really High, He has terrible credit) like I mentioned he’s having trouble keeping up payments and I’m considering offering to purchase the property in order to help his cash flow problem.

I'm thinking to purchase the property for around 41k with either a conventional loan or possibly some private money (open to BP lenders if anyone is interested), ARV should be around $50k to $55k. I would then lease option or owner finance the property back to him.

My 1st thoughts were to lease option the property back to him. The deal I had in mind would be a 2 year lease option at $450 per month with a sale price of $50k and $50 each month going to the final sale price. This would lower his monthly payment by $50 but more importantly it would put around $4000 back in his pocket immediately. Not a huge gain for me here at these numbers but I’m looking to help him out and not make huge profits.

I also considered owner financing but not sure what a good deal for each party there would look like.

If I finance the deal with either conventional financing or possibly some private money, depending on interest rates with 20% down my monthly payments should be around $315 to $350. Leaving cash flow around the $130 to $100 range per month but a small profit upon the sale. If the sale goes through it should be about a 40% return cash on cash. If he’s unable to purchase at that point we can restructure.


let me know if any of this seems to make sense or better yet does it sound terrible? Coming from someone who’s never been there, this is all theory at this point. 

Like always I appreciate and input you guys can offer.



None of it makes sense.

First, a Lease Option is a form of Seller Financing.  Your proposal isn't a lease option...it's a Land Contract Purchase.

Second, using specific numbers, can you explain how you think this is doing any of the following:
1 - Helping his CF problems
2 - Making you any money now...and in the future
3 - How you plan on financing this if you're buying it at $41k if you need to come up with 20% for traditional financing...that's $8200 in cash.
4 - If you are doing a Land Contract to buy it, with payments from you around $450/m, how is the seller going to cover his current $500/m payments...and taxes and insurance?
There's more, but at this point the added problems with your idea would just be piling on.

Run all the numbers as they will be...not guesses, and don't leave any number out.  THis is a terrible deal.

Haha I’m sorry I probably wasn’t very clear. Bear with me here. I’ll just answer your questions directly, But 1st let me clarify something. I don’t plan to do a land contract to buy the property. I’d like to put 20% down of my own cash ($8300 like you mentioned) and finance the rest. This should make my payments around $315 to $350 at the most depending on interest rates. From there I would seller finance back, via a Land Contract Purchase according to your statement. I’m sorry I wasn’t familiar with that term.

To your questions..

1. It would lower his monthly payment by $50 but like I said more important he would be receiving about $4000 in cash after I purchased the property.

2. Proposing a Land Contract Purchase back to the original owner at $450 a month it would cash flow at min $100 a month short term and at $50k purchase price it would be a $9k gross at the sale date.

*For questions 3 and 4 I think I’ve already explained they wouldn’t apply.

Thanks for the response.

We never let the seller stay in the property. Heard too many stories about the seller forgetting the agreement after their situation improves, sometimes claiming investor took advantage of or cheated them in some way. It can get ugly.

It sounds like you have really good intentions, but a lot of people have found themselves in jail for buying someone's house and then renting or selling it back to them.  It's basically mortgage fraud, so I would avoid that scenario completely.  I know you want to help and it's noble, but buying it from them and then selling it back is not the answer. Sounds like they shouldn't have gotten the original loan. If them moving out of the house is a non-started, I'd keep moving and look for the next deal.  However, if they want to avoid a foreclosure and are willing to move, you can work with that.  Good luck. 

This sounds like a feasible plan. I work out of Illinois, and I think the biggest hurdle is probably getting the bank to sign off on the deal. Since he only bought the property several months ago, he might very well be under-water, which would really make things difficult for you, because the Bank is going to want to receive a percentage of the debt on the property rather than its FMV.

Joe from Plymouth hit on a great point here, that what you're really suggesting is either a seller-financed transaction or a Land Contract.  These come with outsized risk that you may not be analyzing correctly.  How exposed are you if this tenant who is having a hard time paying $500/mo can't pay $450/mo?  What does this do to your available lines of credit?  Do you actually want to own this property if it is vacant?  What's your exit strategy?

If you want to keep the current occupant of the property on as a "reliable tenant," you have to know most banks are not going to allow the person who sells a property while it's under water to reside in the property after they complete the sale (at least, in Illinois).  Depending on the structure of the transaction, you might be proposing mortgage fraud. Mr. Stanoev hit on this as well for you.

I really think the analysis is "how does this make me money?"  I don't know how it does.  You're paying really close to a 100% basis in the property if you're paying $41,000, closing fees and repairs to get a property that you believe is worth about 125% of that.  If you spend $1,000 on the closing and $5,000 on repairs, you're in a $53,000 property for $47,000?  I think you could do better than that, especially with all the hurdles you'll have to overcome to make that happen.

I'm not licensed in Texas, so don't take what I say as the gospel, but I know I wouldn't recommend this transaction to a client of mine in Chicago.

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