Need Help to analyze this Deal! Lease Option Sandwhich

2 Replies

Alright BP, I could really use some knowledge here or other eyes to determine if this is a worthy deal to put time into. I have recently been studying on lease option sandwhich deals and I think there is some value there. 

Here is the scenario:

Motivated seller from Craigslist

Her brother apparently helped to get the seller into a bad deal. They overpaid what the property is worth. 

Property is a 1000sqft 2/2 Condo located in a 55+ Association.

She currently has a mortgage out for $104,018

She owes $82,818 Principal Balance

Monthly Mortgage: $708 according to seller

HOA: $338

Total Monthly Expenses: $1,046

Doing some comps I came to find that the ARV is about $75,000

So she really cant afford to sell traditionally without going under forclosure as she does not have the funds to close. 

What I am looking to do is take over her mortgage and get a Tenant Buyer in there and rent it to them with option to purchase for 90k-100k. 

Renting it out would be about $1,100 per month, but I figure if I am helping out a 55 year old with not so good credit I could market it Rent-to-own with higher rent, but at least they will be able to buy in the future at a set price. Maybe $1,200. 

I'd like some feedback here to see if this is a deal here. Let me know if I am missing something please. I will be inspecting the property tommorow! 

Hello.  I see no on else has responded, so I will, but take my opinions with a shaker of salt.  I only do straight buy and hold...none of this tricky stuff you are talking about.

That being said, I'm wondering why you are interested in a property where you would be paying above ARV. Also, why are you so confident you could get $90-100k if it's not worth close to that?

While I'm sure the lady who currently owns the property would LOVE to sell it to you, I'm not sure you're doing yourself a favor.  But like I said, I do straight buy and holds, so maybe I'm missing stuff here.  I'd love to learn more about your thoughts and experiences on this as you obviously see some value and benefits I don't.  You clearly are into some exciting things.  Rent to own?  I never would have thought of that.  Interesting idea!  I have a place that maybe I'll consider doing that to as I wanted to sell it anyway.

Oh, wait, you think you can get so much more for the property through rent to own because by the time they have paid it off, the value will have gone up, right?  I feel smarter already.  lol  Like I said, I don't do that sort of thing.  :-)  Anyway, I'd love to learn more about what you're doing/planning.  It sounds very interesting!

@Leo Maldonado I do nothing but payment take over deals, but I agree with @Jody Schnurrenberger this is going to be a tough one.

TL;DR I'd suggest doing this as an assignment, not as a sandwich.

This deal has several things going against it.

1. It's underwater.
2. The payments are high.
3. It's in a 55+ Association.

First things first. You need to read the Association charter and find out if renting is even allowed. If not you can't use a lease option. That doesn't mean the deal is dead, you can use some form of owner financing, but you need to know what the rules are before attempting to move forward.

Next, you need to have the seller sign a Mortgage Verification document (that's what it's called here, I don't know if it has a different name in Florida). This authorizes you to speak to her lender and verify the mortgage details.

Once those 2 things are done you will know if the seller is telling you the truth about the loan, and you'll know what form the deal can possibly take.

Now comes the hard part. How to turn this into a win-win-win transaction?

You might as well forget about trying to sell the place for $90-$100k. It's already underwater by 10%. There are all kinds of things wrong with trying to sell it for upwards of 25% above market value, not the least of which is the Dodd-Frank lending regulation that makes it most likely outright illegal, but I'm not an expert on that.

"Market Value" is an imprecise and moving target that's typically +/- 10% (more in a sellers market, less in a buyers market). So if the average sale price is $75k it's not unreasonable to sell this property for $82,500.

The payments are already high as well. Currently 30 year fixed mortgage rates are under 4%, but this lady's mortgage is over 6%.  I don't like to charge more than 3 points above current rates, so that would be 7%. On the full $82,500 that's $791/month. So you would have a cash flow of $83/month. You might want to try to push these numbers, but I've been in business for 17 years, so I do have some experience with what the market will bear.

You also have the issue of only being able to sell (and possibly rent) to people who are over 55. This will make finding a tenant or buyer much more difficult.

Given all these factors going against the deal. I'd recommend putting the deal together to buy at the mortgage balance at the time of closing (so that the buyer benefits for principal reduction instead of the seller), and payments equal to the Principal + Interest + Insurance + Taxes + HOA. And assign the contract to an end-buyer for $2,500. That way everybody gets something. The seller no longer has this albatross around her neck, the buyer gets in for less than they could buy any other way, and you make a few bucks for helping them out.

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