Got a 65 yo widow. Husband ran retail business in location and rented two 3 br apartments above. He dies, no interested heirs to take business. She's clueless about RE.

She enters into a 5 year with a commercial retail tenant who promptly files bankruptcy in 1st year. He skips from OH to FL, effectively abandoning the property and lease. She thinks that because it's still in bankruptcy that she's stuck.

She hates screening tenants so residential is empty. She doesn't want to mess with it because it "drags her down".

FMV is $190-200K very near major university and university med center.
Student housing market is definately a consideration for comps.

My offer:

She's willing to entertain a year option to purchase for $2K cash because she's worring about coming up with the tax payment. She's entertaining a $170K option purchase offer.

She's willing to enter into separate master lease with sublet rights for $600/month.

The property seriously needs cleaned up and could use a coat of paint on the exterior, but is otherwise in halfway decent shape and very structurally sound.

After cleanup and residential rents, FMV should be $220K. In the university area, 3br apartments would be in the $1K range.

She will give me a $1000 clean-up credit towards purchase price.

The strategy is to get the residential rented by advertising on bulletin boards at the med center (grad students/interns).

Then advertise the property for sale as follows:

FREE RETAIL SPACE FOR YOUR BUSINESS NEAR UNIVERSITY.

or

Distressed seller. Cash flowing building with tenants.

Sell option to buy for $20K to qualified buyer. Or exercise based on purchase price after finding retail tenant.

Ohio permits self-help for commercial. Risk of adverse possession claim very low because of relocated deadbeat to FL.

Any thoughts? What am I missing?

I like what you wrote. This could be a winner given the motivation of the seller. The skeleton appears to be solid and the fine details can be dealt with as you go.

Rather than comment on the specifics, I am curious about your motivation.

Why sell? Why not hold for long term income?

John Corey

I could certainly buy and hold that but it's not my first position.

The more I get into option deals, the more I like them.

My very first position on this deal is to sell the option to another investor within 30 days for say, $10-15K. Let them exercise the option. All upside for me.

My mid position is to find a buyer and sell at retail.

My last position is to buy and hold because it ties up liquidity. I am more inclined to do so on this kind of property because it's a C-1 retail zoning, vs. R-1 residential. Much easier to finance through the LLC and get no-recourse.

I am actually making the exact same kind of offer on a SFH today.

I found a property in a little village right off I-70 on a very heavily travelled state route near the Indiana border. There is a huge $200M effort to develop the exit interchange by a large Columbus Ohio-based RE development firm. It could take 5 years, but it's going to happen.

The house is a vacant turnkey 3/1, 1100 sf. with deattached garage. The auditor has it listed as 100% FMV of $55K. Taxes are about $370 a half. The listing agent is not actively marketing the house, just letting it sit in the MLS.

The owner is absentee, living in South Carolina. It's listed in the MLS for $43K, but the listing agent said that the owner owns it free and clear and would probably take a $25K offer. It's been on the market for over a year.

My offer is $1000 cash for a one-year option to purchase. Exercise price is offered at $29K. I have two 3 month extensions at $250 each. If I exercise purchase, they apply the option fee to the purchase price. Option must be assignable at my option to whomever I choose. I asked for a $500 cleaning credit because I intend to do some minor curb appeal work.

I also offered an assignable master-lease agreement as a separate contract to rent the house for $300 a month. I have sublet rights. The house will reasonably rent at a market rate for $500-$600 a month.

My intention is to initially market the purchase option for $5K to other investors in my local REI club. If I can't get a flip in 30 days, I will shop for a lease-option tenant. I have a year to make that work, and if it does, I get around $14K net for the effort.

Bottom line position is to exercise at the $29K minus my $1K fee and the $500 cleaning option for a total of $27,500. At 8.5% I drop my monthly to a $215 mortgage payment but I pick up the $61 a month tax bill and another $40 a month for insurance, so it's a wash as a self-liquidating asset with maybe $100/month positive cash flow.

Best case scenario is I get $5K for about 2 hours worth of real work.

So-So scenario is that I get $14K in a year after some work screening and placing a solid lease-option tenant/buyer. Work could be maybe 50 real hours in a year's time.

Worst case scenario, I walk away after a year and a half and completely lose my option fee and some time.

Assuming you like options...

Use your IRA funds to buy options. When you sell the option the money goes back into the IRA without tax at that point (maybe no tax ever).

John Corey

We have self-directeds which we have invested in MMHP Management, LLC entity.

Do you think there's any disadvantages to using options over assignable purchase agreements for wholesaling?

Originally posted by "anothermikeinoh":
We have self-directeds which we have invested in MMHP Management, LLC entity.

Do you think there's any disadvantages to using options over assignable purchase agreements for wholesaling?

No real view one way or the other for wholesaling.

When I suggested an option I was mostly saying that the option can be held by the IRA and the option consideration can be paid out of the IRA. When you sell your option or otherwise recognize the profit that profit goes into the IRA.

The key being that with an option you can get the same leverage effect without needing the IRA to take out a loan.

Any contract that you can later sell for more could produce the same results.

John Corey