Off market duplex deal?

Question

Location - A

Appraisal -$220k

Duplex house is owned 50/50 by 2 people. The verbal offer is currently $90k to 1 owner for their side, which will be vacant, and then $40k offer to the other sides owner with a rent free, tax free, maintenance free live in clause until they pass away. So making 2 offers to 2 people, one to sell completely and one to allow them to live there forever, but I would be 100% owner of the duplex.

Both sides need renovations at about $50k each. Rent after renovations is $1,500. All cash deal, no mortgage. Thinking of doing a HELOC to cover the renovation on one side after purchase, so I don't have to use cash. No red flags in home inspection.

Thoughts on if the numbers make sense here? Hard to calculate the risk as you can’t determine how long the other person will live. They are 74 in not so great health.

Thanks!

Hailie Shaw · Answer

Thanks, Andrew! Yes, I did consider the no exit strategy for this house. It has been in my family since 1937 so this is a long hold for me. Longer than the life estate. But, if I ever needed to get cash or was in a bind...I could always take out the equity in it was my thought. As there will be no mortgage on it. Or I would sell one of my other 2 properties. Tough to predict the future, huge risk, I agree. I will try to negotiate rent free for 5 years and then at least something for rent after year 5, even if way below market value at $500 a month would really help. Doubt they will be open to that, but I will try.

Taylor Dasch · Answer

This is an interesting way to structure the deal, I am assuming the other side went significantly lower because they will be living for free for the remainder of their life. If your getting a 50k discount on the second side, thats about 3 years worth of rent, so after that it would start to be a negative return on investment if I understand correctly. But if they are in bad health, it may be worth the risk.

Andrew Freed · Answer

@Hailie Shaw - This is a creative deal for sure. Regarding the other side living for free for life, that is a huge gamble. What if they live for 10 years? I would try to build in some rent after year 3 or 4 so you can at least break even on the property while you wait for them to move onto the next life.

Also, if they live there for life, you will be unable to sell the property while thats the case hence that removes an exit strategy. No one will buy it with that agreement in place. Just making you aware. Good luck on the deal!

Hailie Shaw · Answer

Yes, that’s essentially it. Might be worth it to go negative for a few years as duplexes are hard to find and the earning potential after they pass would be $36k before expenses and go up every year with rent. I’d be cash flowing about $600 a month still while the other side is rented out.