Help needed with COMPLEX deal involving 3+ parties (lease option & private money)

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Help needed with COMPLEX deal involving 3+ parties (lease option & private money)

Ray HurteauPro Member
Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes

Hello BP Forum... My partner and I have a potential deal and it's not straightforward... we've never done a lease option, but we're not about to let a little complexity discourage us from this deal.

What will discourage us is if the deal is not a deal or if the potential profit is not worth the risk. Here's a quick background:

There are two parties involved: Party A (lives in subject home as tenant) and Party B (purchased subject home, lives out of state, acts as landlord for Party A).

Party A found the property and their friends, Party B, purchased the property for 240k - they took out a bank loan, it was not a cash purcahse. Party A told Party B they would fix the place and resell it for a split profit. Party B holds the note and mortgage while Party A pays rent to Party B.

This was two years ago. Now Party B wants to get out of the property and get their money back. Party B paid 240k and now wants to sell for 275k (no broker fees for the private sale). There is a signed agreement (not yet reviewed by our attorney) between Party A and B for this sale price and the agreement essentially makes Party A the wholesaler.

Party B contacted us about purchasing the property. They put no money down towards the purchase (to our knowledge), but they have made repairs. They are looking to get 45k out of the deal all said and done.

Party B does not want to leave the house, so they are looking for a buyer who will rent to them. Party B is a married couple and the husband is out of a job, currently looking. They don't have great credit; they disclosed this to us. They also probably have some credit card debt (amount unknown).

They are okay with getting 45k for the work they did along with "sweat equity" and "emotional" attachment.

I'm sure there are a ton of you thinking: RED FLAGS! We recognize it.

Here's our idea...

Purchase the single family home for 320k (today's as-is value is around 400k based on CMA) and finance the 20%, 256k.

Take 275 of the 320 to pay off Party A. Take the remaining amount and use 5-7k to replace the roof, ~10k to pay closing costs, legal fees, pre-paid expenses - unless it can be rolled into the loan - (and assuming we can get a conventional loan, otherwise, this amount may be higher for private money). Use private money @7-8% for the 80k down payment.

We would have the current tenants sign an 18 month lease with option to purchase @389k. No money down, no rent credits. They told us they would want to get some money up front to help with their current credit card debt. Since they are looking for 45k, we were thinking the interest due to the private investor for the 80k down payment would be their back-end non-refundable cost of the option (9.6k). 20-25% of the remaining amount (45k - 9.6k) would come out of the loan proceeds, while the remaining 75-80% would become an unsecured loan between us and Party A payable after closing if they exercise their option to purchase.

If they don't exercise their option to purchase, the remaining amount due to them would become payable upon our sale of the home (whether or not we rehab it or sell it as-is at the later time).

The tenant is currently paying 1800/mo rent - we would increase this to 1900 and would actually be cash flow negative roughly 250/month for the 18 months).

If we ran our numbers properly (and you're still reading this --thanks, btw!), here's how I believe it breaks down:

320k purchase price
64k down payment (financed by private investor @8% simple interest - 7.68k interest over 18 month loan term)
275k to Party B - they are paid off and we then own the property
9.33k (25% of 45k - 7.68k) to Party A
10k closing costs, loan prepayments (escrow)
7k to replace roof
4.5k (negative cash flow - per rent with tenant)
===================================
14.17k positive cash flow - no money out of our pocket

If Party A exercises their option to purchase:
389k purchase price
4k closing costs
27.99k (75% of 45k - 7.68k) to Party A
253.5k - repay outstanding loan principle
71.68k - repay private investor (64k + 7.68k interest)
===================================
31.83k BTCF

In our opinion, we believe this is a deal... If they choose not to exercise the option, we can rehabbing or resell as-is and the numbers still come out at or above the L/O..

We see this as a potential win-win-win-win scenario:
- Party A gets to remain in the home as they wish, make below-market rent payments for 18 months, and has time to fix their credit so they can apply for a loan, as well as get the majority of the money they are looking for - and a home with equity
- Party B gets paid off, plus makes money on the sale
- Our private investor makes money on the loan with us
- We make money on the deal using OPM for structuring the entire deal

Are we missing anything? Is this worth pursuing? How do we handle the agreement between Party A and B where Party A is now in control (pending confirmation from our attorney) - do we have Party A sign an option to purchase contract with us? We also assume if we try to finance this with a conventional loan, the bank will want to see the funds coming from our account and to be seasoned... if we go the HML route, this deal may not be worth the risks and time...

Thanks,
Ray

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Nick Aalerud
Rental Property Investor · Woburn, MA · Member since 2011 · 106 posts · 63 votes
13y

Ray & Dan,

Thanks for bringing this up to me last night.

Your party A&B story made me dizzy - and I'm now more confused than I was last night. Did Party B switch roles? I thought they didn't live in the property, but in PA? Or did they move in?

Here's my understanding:

John finds a property, and gets his buddy Bill to finance it for him (for no money down). John then, in turn, gets Bill to do this by saying he'd work to fix the place up, and they'd both split the profits at resale.

Does John pay rent, as WELL as sweat equity? That wasn't made clear.

Bill now wants to sell, and wants $275K (after paying $245K for it in 2011).

John wants to get his $45K in sweat equity back out of the house as a result of the sale too - so essentially, total purchase price is $320K.

HOWEVER - John has no say in the sale, and cannot purchase on his own due to having bad credit and out of a job.
-----

Good so far?

You want to buy is for $320K, and give a full payoff to Bill for his $275K, leaving $45K.
Was this $45K going to be used for rehab? This means you're using either a 203K reno loan, or hard money? Normally this $45K would also be going to Bill, as the closing attorney would enforce... the only way is for Bill to then give you this money BACK AFTER closing (without closing attorney's knowledge).
Otherwise - hard money will lend you 60-65% LTV - if ARV is $400K, they would give you $260K, but subtract out rehab first (so, $45K)... you'd have $225K for the closing, have to come up with $50K + your first contractor down payment.

I guess this was my first confusing statement - I don't understand where you're getting the rehab money from.

I say you buy the house for $275K, pay off BIll totally (unless you CAN get a renovation loan, which would give you another $30K if it's a streamlined FHA) - so you'd buy it for $305K, and have $30K to play with.

THAT SAID:

You now want to "lease back" with an option, to John, who does not have a job or seemingly, steady income.

If their portion IS to pay your private investor the points & interest - I would get it ALL UP FRONT - in fact, I'd say they need to come up with another $10K.

The other problem - would the house really appraise in 18 months, for the $389K? Most likely, if you've done your homework.
HOWEVER - would John's credit and income be acceptable in 18 months? If he still doesn't have a job, than most likely NOT. And then, you may have had them pay for your investor's points & interest for x months, but you're now stuck with the month to month after that - and all the additional rehab you have to do, after they've lived there and "fixed" the house.

You need to remember that even though John has an option to buy from Bill - he CAN'T right now. So unless that piece of paper is good for another 2 years, they're dead in the water, and you'd only be doing them a FAVOR... worth $45K to them? Your call, but I'd say you should treat them as a wholesaler, and pay them based on your end profit. If you wanted to set a base saying any money over $xxx ($15K?) and up to $45K goes to them, than go for it. Or offer them $15k when you sell, flat rate, and they suck up the other $30K they've already spent. They're desperate to keep the equity they've put into this (that's why they are talking to you), and if there's enough profit in the deal, than go for it.

For me?

So even though I LOVE how creative you're being (I find creative investing very SEXY), let's analyze the deal as a deal:
ARV: $399K (your number)
Soft Costs: 5% Resale commission (in case buyer walks or can't perform), 7% holding costs (high due to 18 month hold), 3% Acq & Legal (around $58K)
Rehab: Roof & Cosmetics: $15K Minimum (flooring refinished, paint throughout, upgrading appliances, minor touch up)
Required Profit (mine, not necessarily yours): $30K
Nick's Max Offer: $296K

Not enough juice in this one to keep tenant buyer happy.

ANd I would NEVER, EVER get into a situation with negative cash flow when it depended on another party to live up to their payments / side of an agreement - especially one that didn't have a job or good credit.

You asked for my two cents? That's it. In a nutshell. :) Deal is way too skinny for the effort, but it was awesome how you're trying to work it.

I say buy it from the other guy at $275K (ensure you can raise the additional $15K Rehab + $4K closing costs, and have enough $$ in escrow to hold for 6 months), tell John "you'll do your best to help him out," tenant has to leave (OR... pay him $20K to relinquish his option... you're still below the $296K max mark), he's out of the picture. Rehab and sell it, make $30K, and anything above that, you can give to him.

That's MY plan. :)

Good luck guys!!

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  • Nick Aalerud
    Rental Property Investor · Woburn, MA · Member since 2011 · 106 posts · 63 votes
    13y

    Ray & Dan,

    Thanks for bringing this up to me last night.

    Your party A&B story made me dizzy - and I'm now more confused than I was last night. Did Party B switch roles? I thought they didn't live in the property, but in PA? Or did they move in?

    Here's my understanding:

    John finds a property, and gets his buddy Bill to finance it for him (for no money down). John then, in turn, gets Bill to do this by saying he'd work to fix the place up, and they'd both split the profits at resale.

    Does John pay rent, as WELL as sweat equity? That wasn't made clear.

    Bill now wants to sell, and wants $275K (after paying $245K for it in 2011).

    John wants to get his $45K in sweat equity back out of the house as a result of the sale too - so essentially, total purchase price is $320K.

    HOWEVER - John has no say in the sale, and cannot purchase on his own due to having bad credit and out of a job.
    -----

    Good so far?

    You want to buy is for $320K, and give a full payoff to Bill for his $275K, leaving $45K.
    Was this $45K going to be used for rehab? This means you're using either a 203K reno loan, or hard money? Normally this $45K would also be going to Bill, as the closing attorney would enforce... the only way is for Bill to then give you this money BACK AFTER closing (without closing attorney's knowledge).
    Otherwise - hard money will lend you 60-65% LTV - if ARV is $400K, they would give you $260K, but subtract out rehab first (so, $45K)... you'd have $225K for the closing, have to come up with $50K + your first contractor down payment.

    I guess this was my first confusing statement - I don't understand where you're getting the rehab money from.

    I say you buy the house for $275K, pay off BIll totally (unless you CAN get a renovation loan, which would give you another $30K if it's a streamlined FHA) - so you'd buy it for $305K, and have $30K to play with.

    THAT SAID:

    You now want to "lease back" with an option, to John, who does not have a job or seemingly, steady income.

    If their portion IS to pay your private investor the points & interest - I would get it ALL UP FRONT - in fact, I'd say they need to come up with another $10K.

    The other problem - would the house really appraise in 18 months, for the $389K? Most likely, if you've done your homework.
    HOWEVER - would John's credit and income be acceptable in 18 months? If he still doesn't have a job, than most likely NOT. And then, you may have had them pay for your investor's points & interest for x months, but you're now stuck with the month to month after that - and all the additional rehab you have to do, after they've lived there and "fixed" the house.

    You need to remember that even though John has an option to buy from Bill - he CAN'T right now. So unless that piece of paper is good for another 2 years, they're dead in the water, and you'd only be doing them a FAVOR... worth $45K to them? Your call, but I'd say you should treat them as a wholesaler, and pay them based on your end profit. If you wanted to set a base saying any money over $xxx ($15K?) and up to $45K goes to them, than go for it. Or offer them $15k when you sell, flat rate, and they suck up the other $30K they've already spent. They're desperate to keep the equity they've put into this (that's why they are talking to you), and if there's enough profit in the deal, than go for it.

    For me?

    So even though I LOVE how creative you're being (I find creative investing very SEXY), let's analyze the deal as a deal:
    ARV: $399K (your number)
    Soft Costs: 5% Resale commission (in case buyer walks or can't perform), 7% holding costs (high due to 18 month hold), 3% Acq & Legal (around $58K)
    Rehab: Roof & Cosmetics: $15K Minimum (flooring refinished, paint throughout, upgrading appliances, minor touch up)
    Required Profit (mine, not necessarily yours): $30K
    Nick's Max Offer: $296K

    Not enough juice in this one to keep tenant buyer happy.

    ANd I would NEVER, EVER get into a situation with negative cash flow when it depended on another party to live up to their payments / side of an agreement - especially one that didn't have a job or good credit.

    You asked for my two cents? That's it. In a nutshell. :) Deal is way too skinny for the effort, but it was awesome how you're trying to work it.

    I say buy it from the other guy at $275K (ensure you can raise the additional $15K Rehab + $4K closing costs, and have enough $$ in escrow to hold for 6 months), tell John "you'll do your best to help him out," tenant has to leave (OR... pay him $20K to relinquish his option... you're still below the $296K max mark), he's out of the picture. Rehab and sell it, make $30K, and anything above that, you can give to him.

    That's MY plan. :)

    Good luck guys!!

    2Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    Ray, I'm with Nick Aalerud. I thought I understood it until it appeared that A & B switched roles - maybe even twice.

    Can you go back and re-read, paying particular attention to the A/B references, and see if there is an error? I got lost also.

    1Reply
  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    I think A and B are correct. I don't think that is the elephant in the room though.

    First, the plan you have includes borrowing the money to purchase the home and to use as down payment. This is clearly and investment property. You will not be able to borrow money and use it as a down payment in a conventional loan. The underwriting process will source and season the funds you use as down payment and for closing costs, those funds are supposed to be yours (borrower/entity).

    The current deed holder, Party B, who also owes on the current mortgage encumbering the property wants $275k.

    Party A, who fixed the property has nonpossessory interest in the property, they are a tenant. To some extent the repairs or improvements they made to the real property was not done in a smart manner. They made repairs to a property which they don't own. Not usually a good idea if you want to get your money back.

    With the $57k they want, they really have no merit to capture that money from the property. The property is not theirs, it is Party B.

    I would remove the negotiations with the tenant, no matter what relationship or level of integration into the deal they think they have. They are not of major consequence to you. Your deal is with the Seller who wants $275k. And that is what I would pay, not a penny more.

    Purchasing the property for $320k does not put money in your pocket. That is a kickback. If you purchase the property for $320k, the Seller (Party B) gets the net of that sale price. I don't know why you think a purchase money mortgage let's you pull cash out, it does not.

    In addition to that concept, why would you pay interest on $57k which is money you wanted to give to someone else. This means you pay more than $57k. Again not a smart idea, IMO.

    We can see you are trying to appease the tenant in some fashion. Great that is nice no stop it is making the deal way to complex. The tenant is a tenant, when you are the owner you can negotiate terms with them at that time. Trying to mix that into some deal with the title owner of the property is just creating confusion. The tenant doesn't have a title interest in the real property.

    I would review the lease agreement that is in place and ensure it says something about tenant does not have permission to make repairs or that the landlord is not responsible for reimbursement for unauthorized repairs and look the current owner of whether a formal authorization was given. If one was not, I would condition this from the seller, a signed affidavit. This takes the legs of the tenant out from being able to come back later and try and sue for the rehab money.

    I would offer the tenants an opportunity to rent and buy the home and maybe a reduction of that sale price which would in a sense recapitalize their rehab cost back to them. That idea cost you nothing and is performance based on the tenant. I wouldn't pull cash out and give it to a tenant.....ever. I would put a new and strong rental agreement in place to also protect your future interest in the property.

    Your deal is with the owner of the property and that is it. You are the only two that enter into contract with binding terms. The tenant doesn't have a say so who the owner sells to nor can they demand terms outside of their current rental contract. I don't care for situations where folks approach a sense of entitlement and in this case I can easily see the tenant walking up to that line. Clearly they could not live up to the first arrangement which was fix the property and refinance the current sort of straw borrower out. While past performance is not indicative of future results, it should not be ignored because people are nice or make a lot of noise.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    I'm pretty sure A and B switch meanings:

    There are two parties involved: Party A (lives in subject home as tenant) and Party B (purchased subject home, lives out of state, acts as landlord for Party A).
    ...
    Party B contacted us about purchasing the property.
    ...
    Party B does not want to leave the house, so they are looking for a buyer who will rent to them.

    At first A is the tenant and B is the landlord. Later B is the living in the house.

    You're making this WAAAAY to complicated. Its simple. You're buying a rental property for the current owner. It comes with a tenant. They say they're going to eventuall buy it. Blah, blah, blah. The current owner wants out because the tenant told them the same thing and hasn't followed through.

    You're paying $320K for a property that rents for $1800 a month. I don't need to look any deeper to know that's junk deal. Just like the current owner, three year's from now you'll be wanting out. This pair is in a crummy deal and is looking for a sucker to bail them out. Don't be the sucker.

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  • Ray HurteauPro Member
    OP
    Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes
    13y

    Thank you everyone... I will keep you posted. We've modified our strategy and are considering a sub2 with the current owner... I apologize for the confusion between A & B - it was a late night.

    It's very clear we need to deal with the current owner and not the tenant - I guess the part we want to do is not go behind the tenant's back, who essentially brought us the deal in the first place, but clearly they may want too much and I'm sure they are looking for a way out.

    I feel like there is a way to make this work, but if we're trying to jam circles into squares, we can ditch. Our goal at this point is to keep the tenant a tenant and if it works, great, if it doesn't we find another tenant or flip it.

    Buying for 320 is definitely out - newbie mistake. I should mention this would be our first sub2 and/or lease option, so we really appreciate everyone's comments and help.... more to come later :)

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    There's definitely some role switching in your description. You say Party A is the tenant. Then you say Party B doesn't want to leave the property? I think Owner and Tenant would be easier to understand.

    Even if you can't work it out so that the Tenant can be the end buyer, you can still pay them for the lead. The push back will be if they feel entitled to more than their repair costs and/or if they have resentment because they can't buy.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Jon Holdman:

    You're making this WAAAAY to complicated. Its simple. You're buying a rental property for the current owner. It comes with a tenant. They say they're going to eventually buy it. Blah, blah, blah. The current owner wants out because the tenant told them the same thing and hasn't followed through.

    Blah blah blah is right. I ask every seller if their current tenant is a possible buyer. Easily half say their tenants had an option that expired or that they asked for an option or some kind of rent-to-own arrangement. Plenty of sellers have tenants that made repairs at their own expense, and thus feel entitled to a right to buy. Somehow, the tenants always have income and debt issue and never perform. That's why the landlords are calling around looking for a buyer.

    2Reply
  • Ray HurteauPro Member
    OP
    Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes
    13y

    Thanks K. Marie Poe, Jon Holdman, Nick Aalerud, Ann Bellamy and Dion DePaoli

    At this time, it appears the current tenant and the property owner have an agreement to purchase for 275k, good for 90 days. Obviously, not an ideal scenario (and a lesson learned for us).

    Given what it is... we believe we've gotten a good enough rapport and explained to the tenants that we're only going to make a deal if everyone can benefit (ourselves included).

    They understand and agree. We didn't get into number details because we're still hashing it out, but they would like to remain in the property for 12-18 months and either have the option to purchase or simply walk away.

    We have a couple options but feel the best for everyone involved is to assign the property and note to us, subject to existing terms. We enter into a rental contract with current tenants as well as a secondary agreement with the tenants regarding how much they get AFTER they move out and we sell the home (or if they choose a lease option to buy, after the closing).

    One question: if we do subject to, are we able to pay off the initial investor (e.g. 275k - current loan balance) but not have this 275k be treated as a purchase and thus need to be taxed by the city? what would be an alternative if this is not an option?

    Before we sign any offers (whether it's with the current owner and we can get the current agreement nullified, or with the tenant who has the property under contract for consideration of $1), we will need a number of conditions (exits) which I'm sure everyone would agree to:
    - appraisal of home supports our CMA as-is condition and ARV
    - background, credit, and reference check for current tenants to prove they pay on time
    - clauses about limits to amount we pay for if something breaks (ignoring existing issues)

    -any others come to mind?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Sorry, no. Buying subject to an existing loan is exactly the same as getting a new loan of the same amount. If there is a transfer tax, the only way to avoid that is to not do a transfer. Doing a lease or lease option, perhaps. That would make this convoluted deal even more convoluted.

    Why are you trying to do this deal? This is fraught with red flags. Yet, you're ignoring them and pressing ahead. Whenever you consider any potential deal, you have to look for anything that tells you NOT to do the deal. There are many. Only if you can overcome all of the possible conditions that would tell you not to do the deal should you proceed. I truly think these guys are looking for a sucker. Why would you want to sign up to be that sucker?

    1Reply
  • Shaun Reilly
    Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    13y

    Ray H. negative cashflow = bad idea
    I really don't have to look at any of the other L/O terms to tell you not to do that.
    When you throw in the guy doesn't have a job and has been trying to work this plan for a couple years already and there isn't much doubt it won't really end well for you with this tenant/buyer.

    I think that Nick Aalerud has the right idea of flipping it. If it is really worth $400K and you can buy it for $275K with only needing to do the roof and some cosmetics to resell it then get in there get that cash and get the hell out of the deal!!!!!

    If the current tenant is the one that brought you the deal you can offer them a pretty hefty fee based on these numbers. You can also be nice and give them 60+ days notice to find a new place. Might be a little risky but less so then giving them an 18 month lease with an option to buy that keeps you from doing anything other than getting that negative cashflow as long as they pay the rent (and the same eviction if they don't).

    It seems like there is some good profit in there for you. Just don't do anything silly just because you feel bad for the current tenant.

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  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    Ok, now it's clear. It wasn't actually as confusing as you thought. this owner/tenant situation isn't all that unheard of.

    Jon Holdman is right, you can't avoid the transfer tax if you take title subject-to.

    As for conditions, make sure your offer is subject to clear and marketable title. Emphasis on marketable. Hire your own real estate attorney. I can refer if you need a good one in MA. The option to purchase, if recorded, places a cloud on title, so make sure there are no other recorded complications.

    I agree the better plan is to flip the property, but you don't say where it is, so that may play into it.

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  • Account Closed
    Covina, CA · Member since 2013 · 11 posts · 3 votes
    13y

    I'd listen to Jon Holdman and look for another deal. The tenants seem like bums and gamers.

    The name of the game is cash flow......not negative cash flow.

    best of luck. Hope you step back and take a good look.
    Brian

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Ann Bellamy:
    Ok, now it's clear. It wasn't actually as confusing as you thought. this owner/tenant situation isn't all that unheard of.

    Jon Holdman is right, you can't avoid the transfer tax if you take title subject-to.

    As for conditions, make sure your offer is subject to clear and marketable title. Emphasis on marketable. Hire your own real estate attorney. I can refer if you need a good one in MA. The option to purchase, if recorded, places a cloud on title, so make sure there are no other recorded complications.

    I agree the better plan is to flip the property, but you don't say where it is, so that may play into it.

    I took a property subject-to senior liens last year. I paid transfer tax on the consideration that I paid to the seller ($200.00), not the value of the property ($80K) or the value of the outstanding liens ($275K). There was a space on the face of the deed to check that the tax was "computed on the full value less value of liens or encumbrances remaining at time of sale".

    Is it different elsewhere?

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  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    I should have said "make sure your offer is subject to clear and marketable title with the exception of the senior lien if you are taking it subject-to"

    K. Marie Poe, I'm not aware of a way to pay transfer tax only on the consideration above the lien amount. I'm talking MA of course, and Ray is in MA. Maybe a MA attorney will jump in and correct me.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Ann Bellamy:
    I should have said "make sure your offer is subject to clear and marketable title with the exception of the senior lien if you are taking it subject-to"

    K. Marie Poe, I'm not aware of a way to pay transfer tax only on the consideration above the lien amount. I'm talking MA of course, and Ray is in MA. Maybe a MA attorney will jump in and correct me.

    Something doesn't sound right about that. I found this, written by MA attorney Zev Gewurz:

    In Massachusetts, the transfer tax is calculated on the consideration paid
    less any “lien or encumbrance remaining on the property.”

    I'm sure counties would love to collect transfer tax on the value of liens. But I'm thinking it wasn't meant to be.

    0Reply
  • Ray HurteauPro Member
    OP
    Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes
    13y

    The home is located in one of MA's vacation towns and we know that should the t/b not meet their obligations, we can rent for more than they currently pay.

    Ann, we've got an attorney who's in the loop and recommended the sub 2.

    We'll have the title conditions in any offer and reviewed by our attorney. We are going to get in touch with the owners to understand the terms of their loan. We have the current balance.

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    K. Marie Poe, thanks, I'll check it out! I assume that means existing liens in place prior to transfer, not newly recorded liens placed at the time of transfer.

    0Reply
  • Ray HurteauPro Member
    OP
    Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes
    13y

    so what happens if you take subject 2 and then the bank decides to use the due on sale clause? we would refi and then pay the tax? these are good questions for our attorney as well. :)

    0Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 545 votes
    13y

    Hey Ray, you are workin' it, man!!!

    I agree with Jon Holdman, Shaun Reilly and Brian T., No negative cashflow. (I even use the Fannie formula and derate the Rental income to 75% for vacancies and expenses).

    I'm still waiting for my first Tenant to start the repairs we agreed on (and I'd hate to tell you when we agreed on them).

    My experience in the Mass Courts is that a Lease Option has to be two separate documents, otherwise a Judge, when (and if) hearing the case, will consider it a Lease and advise all funds beyond 1st, Last, Security and Lock Fee be returned.

    Walk away offer and Next...

    2Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    So, if you buy a property for $100K and get a $80K loan and pay $20K down, you pay transfer tax on the $100K. But if you buy the same property for $100K, pay the seller $20K and take and existing $80K loan subject to you only pay tax on $20K? Really?

    0Reply
  • John Casey
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    Jon Holdman Not true Jon, In your subject to agreement it should say something like "property to be purchased subject to the existing mortgage of 80,000 plus consideration to seller of 20,000" This leaves a total purchase price of 100,000, which would mean you'd pay tax on the 100k.

    The only other route would be defaulting to the assessed value (see the assessor in your county for that value). This is what the recorder refers to for calculating tax when, say, someone buys a tax lien or an hoa lien.

    You really dont want them coming after you in the future for tax on 10 properties simply because you tried to pay less on each transfer. It's not worth it...

    The best way to stay above board on sub2 is to treat is exactly as you would any other deal. Do your inspections, appraisals, keep all of your paperwork complete, disclose everything, pay all of the tax owed!!... Treat it as if you were buying the property with your own money or financing.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    John Casey that makes sense to me. But K. Marie Poe is saying it works different. Ann Bellamy seems to be concurring with you and I, too. I just don't see why getting a new loan is taxed one way and taking subject to is taxed differently. As the buyer, I end up in exactly the same position.

    0Reply
  • John Casey
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    Jon Holdman I should have read the whole thread first, I wouldve seen that you were on my side of this... whoops... I completely disagree with K. Marie Poe... Not that it cant be done, but that I dont want people sniffing around in my deals, and their paperwork later on down the line.

    In front of a judge, if everything was above board, and the deal was treated as any other transaction, the chances of you coming out on top are higher... I wouldnt mess around with the tax... It is such a small piece of the puzzle, but could come back to haunt you...

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Jon Holdman, I'd say you're correct along with the crowd, assessments usually fall to the total value of the benefit received, not the amount of cash out of your pocket. :)

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Jon Holdman:
    John Casey that makes sense to me. But K. Marie Poe is saying it works different. Ann Bellamy seems to be concurring with you and I, too. I just don't see why getting a new loan is taxed one way and taking subject to is taxed differently. As the buyer, I end up in exactly the same position.

    I'm only saying how it works in CA. The stern ladies at the recording office never show me any love and make me do everything according to the book so I doubt I'm getting special treatment. Like I said, you can indicate on the face of the deed what the transfer tax was calculated on. Our Recorders also collect a Preliminary Report of Transfer (voluntary) and there is a place on that doc to indicate what kind of transfer it was and whether there were encumbrances. A quick search found one attorney in MA who specializes in foreclosures and short sales and he says the same thing is true for MA.

    As usual, code or law citations were be more helpful.

    0Reply
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