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