Buy and give seller buyback option

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Buy and give seller buyback option

Paolo Ruggieri
Lender · USA · Member since 2015 · 212 posts · 53 votes

here is the situation 

-Seller can't make mortgage payments on her house and is soon going to be foreclosed

- seller owns a rental free and clear

- seller wants a loan... She does not want to sell.. She thinks (hopes) to get $$$ from a new album she is about to market (she is a singer)

Giving her a loan is too risky, as she has no assurance to be able to pay it back

My solution:

-buy her rental for 60% market value of the rental (worth 200k, I give her 120k)... She uses 120k to catch up mortgage on her house and for whatever else she wants (she is "only" 90k behind)

- I keep rental payments, I pay property taxes/insurance/maintenance... As a normal landlord

- I give her a buy back option for 140k within 12 months

If she pays me back I earn 20k (140k-120k) 

If she does not , purchase option expires and I earn 80k equity

I read a lot of forums against buy with option for the seller to buy back ... But they are all for sellers that reside in their home... Do you see any risk for my case?

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  • Jim Keller
    Investor · Riverside, CA · Member since 2014 · 351 posts · 220 votes
    10y
    Originally posted by @Paolo Ruggieri:

    here is the situation 

    -Seller can't make mortgage payments on her house and is soon going to be foreclosed

    - seller owns a rental free and clear

    - seller wants a loan... She does not want to sell.. She thinks (hopes) to get $$$ from a new album she is about to market (she is a singer)

    Giving her a loan is too risky, as she has no assurance to be able to pay it back

    My solution:

    -buy her rental for 60% market value of the rental (worth 200k, I give her 120k)... She uses 120k to catch up mortgage on her house and for whatever else she wants (she is "only" 90k behind)

    - I keep rental payments, I pay property taxes/insurance/maintenance... As a normal landlord

    - I give her a buy back option for 140k within 12 months

    If she pays me back I earn 20k (140k-120k) 

    If she does not , purchase option expires and I earn 80k equity

    I read a lot of forums against buy with option for the seller to buy back ... But they are all for sellers that reside in their home... Do you see any risk for my case?

    I love this..... one of the reasons I come to this site, tell us more!

    Jim 

    0Reply
  • Jim Keller
    Investor · Riverside, CA · Member since 2014 · 351 posts · 220 votes
    10y
    Originally posted by @Paolo Ruggieri:

    here is the situation 

    -Seller can't make mortgage payments on her house and is soon going to be foreclosed

    - seller owns a rental free and clear

    - seller wants a loan... She does not want to sell.. She thinks (hopes) to get $$$ from a new album she is about to market (she is a singer)

    Giving her a loan is too risky, as she has no assurance to be able to pay it back

    My solution:

    -buy her rental for 60% market value of the rental (worth 200k, I give her 120k)... She uses 120k to catch up mortgage on her house and for whatever else she wants (she is "only" 90k behind)

    - I keep rental payments, I pay property taxes/insurance/maintenance... As a normal landlord

    - I give her a buy back option for 140k within 12 months

    If she pays me back I earn 20k (140k-120k) 

    If she does not , purchase option expires and I earn 80k equity

    I read a lot of forums against buy with option for the seller to buy back ... But they are all for sellers that reside in their home... Do you see any risk for my case?

     @Stephen McKee

    This is the post i was talking about...... "one of the smartest guy's on BP"

    JIm

    0Reply
  • Lydia B.
    Realtor® · Denton, TX · Member since 2015 · 46 posts · 5 votes
    10y

    are u financing the $120k you're giving her?

    0Reply
  • Paolo Ruggieri
    OP
    Lender · USA · Member since 2015 · 212 posts · 53 votes
    10y

    you are very kind. 

    In a year from now, when is time for the seller/borrower to exercise the option, I can post you on how it ends!

    0Reply
  • Paolo Ruggieri
    OP
    Lender · USA · Member since 2015 · 212 posts · 53 votes
    10y

    yes... I am giving her 120k at closing ... and she gives me title of the house... normal cash closing.

    1Reply
  • Stephen McKee
    Specialist · Riverside, CA · Member since 2008 · 382 posts · 72 votes
    10y

    @Jim Keller @Paolo Ruggieri Great Method. Options are a the easiest way to make your first million. There's also a no money down method to this transaction without a taking title.

    Buyer purchases a 2 year option to buy the property from the seller for $120,000 after 1 year.

    Buyer offers an investor 10% for a $120,000 loan with no payments for 2 years using the option as collateral (Cost: $12,000 for 1 year)

    Buyer gives the seller the ability to buy back the option for $140,000 within 12 months. (Profit $20,000 - $12,000 = $8,000) with zero out of pocket. 

    Conditions: Seller must keep all payments, taxes and insurance current.

    Seller must sign a 3rd party authorization for all lenders on title. 

    Buyer can not acquire any additional liens or encumbrances (memorandum of option recorded)

    If seller fails to meet these condition the option accelerates immediately. Buyer closes escrow on the property or sells the option to another investor for more profit. 

    0Reply
  • Jim Keller
    Investor · Riverside, CA · Member since 2014 · 351 posts · 220 votes
    10y
    Originally posted by @Stephen McKee:

    @Jim Keller @Paolo Ruggieri Great Method. Options are a the easiest way to make your first million. There's also a no money down method to this transaction without a taking title.

    Buyer purchases a 2 year option to buy the property from the seller for $120,000 after 1 year.

    Buyer offers an investor 10% for a $120,000 loan with no payments for 2 years using the option as collateral (Cost: $12,000 for 1 year)

    Buyer gives the seller the ability to buy back the option for $140,000 within 12 months. (Profit $20,000 - $12,000 = $8,000) with zero out of pocket. 

    Conditions: Seller must keep all payments, taxes and insurance current.

    Seller must sign a 3rd party authorization for all lenders on title. 

    Buyer can not acquire any additional liens or encumbrances (memorandum of option recorded)

    If seller fails to meet these condition the option accelerates immediately. Buyer closes escrow on the property or sells the option to another investor for more profit. 

    Good stuff Stephen, and amazing you have had no comments on it kinda telling.  

    Jim 

    0Reply
  • David Dey
    Investor · Lakeland, FL · Member since 2015 · 344 posts · 606 votes
    10y
    Depends on how you do it. You are right that the biggest issue on a buy back scenario is when dealing with homeowners. The problem isn't limited to just that though. There is plenty of case law where the judge has ruled that the buy back on personal properties, (not as a corporation and not a commercial transaction) as a loan and as a result if the "loan" return is higher than the 18% then it can be considered usury. Take it to your Atty and, at the very least, get a letter of opinion from him/her to base your transaction on.
    0Reply
  • Paolo Ruggieri
    OP
    Lender · USA · Member since 2015 · 212 posts · 53 votes
    10y

    thank you David... Do you have a case when judge ruled on a rental property?

    How would judge consider rent I get /maintenance costs I spend while I hold the property?

    Would judge calculate in the 18% just the difference between price I pay and the option price or also the net rent I received in the year I held the property?

    1Reply
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