Let me apologize in advance for this soon to be complex issue. or those of you who love crunches like this, this is for you:  I need some advice for a friend... 

Johnny currently lives in a house with a lease option in place.  The lot is around 7000 SF, which might allow for construction of a smaller unit to rent out. Johnny has a tax lien that is holding  him up from getting a loan.  The purchase price on the lease option is super cheap because the house needs work,, but  Johnny will be walking into a ton of equity when he becomes the official owner. 

Johnny has put some money into the house already to make it liveable.  The house still needs paint and yard work. Johnny pays cheap rent to the owner, which is contributing to the  down payment of the purchase price.

The house Johnny lives in  also has a lien on it, because the seller's mother left behind a sizeable nursing home debt.  Once the house is sold, the lien will be taken care of and the seller will walk away with a profit. 

Johnny made a promise to the seller that he and his family would take good care of the home, and plan to live there indefinitely.

Johnny wants to eventually use the equity in the house to invest in real estate whenever he closes. 

THE QUESTIONS:

• Should Johnny get a hard money loan to purchase the home and make repairs, then re-fi 6months later to access the equity and invest?

• Should Jonhny get a conventional loan and wait 6 months to refi and do repairs?

• Is there a way Johnny can acquire seller financing and get equitable title to the property eventho it has a lien on it?
• What would you do if you were Johnny?

@Miles Presha
1. What type of tax lien does Johnny have on him ? Is it an IRS lien?

2. A hard money lender will not lend for a primary residence.

3. Johnny is going to have to get rid of his lien and clean up his credit in order to get financing

The other option is to fix and flip the property but getting hard $ may still be an issue as many still look at your credit and your experience

Thanks for writing back.  It's an IRS lien.  Johnny is working on getting the lien temporarily on hold, and hopefully being able to buy the property then.

Is it a good strategy for him take the equity once he closes and use it to purchase investment properties?

Another option presented was to have an investor buy and rehab the property, with Johnny as a partner, then allow Johnny to rent the property back.  Is that possible or even legal?

Johnny doesn't need to take title individually as sole owner.

@Tom Gimer,  what do you recommend as a strategy for Johnny then in terms of taking title? 

what do you recommend as a strategy for Johnny then in terms of taking title?

Johnny needs to take title in an entity or organization structured in such a way that a FTL will not automatically attach to the property.

It sounds like Johnny should take care of the tax lien, then he will be able to move forward with the purchase. This may require increasing his income for a short time working extra and cutting back on non-essential lifestyle things or improvements to the property, which isn't his yet.

Since he has the option, there is nothing that is on fire here that needs to be rushed. The house isn't going anywhere, so handle the IRS and get them out of your life, then move forward with a traditional loan. It doesn't need to be complicated.

If OP's "friend" can use this opportunity to solve the FTL problem and beyond... that's much more innovative than picking up a part-time job.

Got it, guys.  Thanks for the insight.  I think Johnny will work on getting that lien lifted, and extend the option for the time being.  Once he is in the clear, there will be more options.  Keep ya posted!

@Miles Presha Are we talking about two separate liens; Johnny has an IRS lien and the house also has a medical judgment lien? Or are we talking about just one lien on the house?

Ned, 2 liens.  Johnny has one and the seller has one.  The seller's will be knocked out once Johnny closes on the house.  The problem is Johnny getting a loan approved with that IRS lien.