What would you do? I have a seller who wants to get out of his 4 plex. Willing to do a lease option - I take over his mortgage payments for 2-5 years until I can refi in my name.

Question

Property is worth 80,000 - 90,000

Original loan was 100,000 with a property value of 120,000

I would be taking over at 82,000 due on loan at 7.5% (just taking over payments on his mortgage as I can't get conventional or private money)

Net income is $1550 monthly

After expenses it cashflows about 280 a month

Problem - He is 3 months behind on mortgage

He has owned the property since 2000 and done a lot of work to it. He is willing to just sign this easy (for me) deal. What am I missing. It seems to good to be true.

Jon Holdman · Answer

If you do this as a lease/option, you won't be able to refi later. Strictly speaking, you're talking about a "master lease/option" because you're leasing the entire building, then subleasing. If you want to be able to refi, you want to do an actual purchase "subject to" the existing loan. That way you own it right away. The mortgage is left in place and you start making the payments. There is risk, but the risks are the same with the option part of any lease/option deal. You would do the transaction at a title company just like any purchase.

Do a search on "subject to". There's a lot of discussion about that, including a very recent thread where the lender called the note due. Don't be fooled, though. An option violates the due on sale clause just the same as a purchase.

Do a search on "subject to".  There's a lot of discussion about that, including a very recent thread where the lender called the note due.  Don't be fooled, though.  An option violates the due on sale clause just the same as a purchase.

Tyron McDaniel · Answer

It's not too good to be true...

It will cost you 3 months plus ($2,000 or more) repairs to get it fully rented out. If he is behind 3 months, I'm sure there is some vacancy and disrepair but it looks to be a nice deal although it seems to have really cheap rents which depending on the area and condition, with some updating you should be able to increase the rents.

Gabriel Meerzo · Answer

You're right @Tyron McDaniel, it does need some things.

Tyron McDaniel · Answer

Hey Gabriel, the $2k is an estimate for handling the paperwork and minor repairs needed; I have yet to see a situation where a motivated seller of a multifamily property has gotten rid of a property that needed next to nothing but maybe this deal is one of those.

Jay Hinrichs · Answer

@Jon Holdman

having had to foreclose unfortunately on my share of borrowers during the crash I got educated in the small print where my first 25 years or so lending I never even read the small print.. its when things go wonky that the small print matters  :)

Jon Holdman · Answer

You're correct @Jay Hinrichs.  I reviewed a couple of samples and the Deed of Trust (used here in CO rather than Mortgages) do indeed contain this clause.

Gabriel Meerzo · Answer

Thanks guys! Your insight is much appreciated!

Jay Hinrichs · Answer

@Jon Holdman

alienation clauses are in the Mortgage not the note... generally... note is promise to pay and spells out the terms of repayment etc... of course some have dual purpose language but mine that I do all have the alinenation in the mort or deed of trust or deed to secure debt that is recorded giving the world notice that if title is alienated that that is an event of default and at my sole discretion I can call all sums due and payable.

Jon Holdman · Answer

Yes, this is a standard clause in most mortgages.  Only way to know for sure is to read the promissory note (which you do want to do if you're going to take over this loan.)  Its possible this is a commercial loan, and those sometimes allow assumptions.  However, if you have issues with qualifying for a new loan, you may also have issues with an assumption.

If this clause is there, there is no way around it.  Folks tell tales of using trusts and other gimmicks.  At best, these try to obscure what you're doing.  There is no way to absolutely insure the lender won't call the loan. If you head down this road be ready to refi if the loan does get called.  Especially if you have significant money invested.

Also be very sure to disclose to the seller that there are risks and you may end up trashing their credit if the deal goes south.

Jay Hinrichs · Answer

@Gabriel Meerzo

you don't have much if any risk save a few thousand bucks.... worse case scenario the loan gets called on the sub too or alienation of title.. and if you can't refi its the seller who is going to get burned... not you... you could lose your investment but you really had no cash in it any ways. your just buying 300 a month in come and will work for that income by landlording it.

What would you do? I have a seller who wants to get out of his 4 plex. Willing to do a lease option - I take over his mortgage payments for 2-5 years until I can refi in my name.

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