All Forum Posts by: Ray Hurteau

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. :)

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.

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?

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 :)

George P. I like to plan for the worst and expect the best. In your example, 584 per month is best case and 215 is worst case.

Our rule is no less than 200 per door.. but that's for 3+ multi-families.

It would be wise to absolutely factor in vacancies, even with multi-year leases... if they don't pay, they don't pay. it's much worse to have a vacancy for 1 our of 1 units versus 1 out of 2 or 3 units.

Even with leases in place, the eviction process takes time (obviously, depends on the state.. MA is brutally slow and pro-tenant)

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

Hi Scott LeDuc and welcome! As a fellow newcomer to the site too, I'm glad to see your post. I have a few multi families in Boston and am looking to rehab at the next possible moment. Send me a private message since I may want to pick your brain about making smart, green improvements to my place and future projects I come across.

Congrats on your rehab also, btw! It's always more enjoyable to get your hands dirty and show off all that work.

Ann Bellamy - will introduce myself at the next meeting (not sure if we're going to the Worcester one) - thanks!

Christopher Lourenco - welcome as well! Best of luck to you too - I've found having one other person on the team help keeps both people in check (at least for us)

Brandon Turner - looks like I'll need to get an iPhone! Also have a few keywords set up so I'm up and running. I will get into some of the podcasts and listen to them while on the road.. thanks!

Mike LaCava - Mike, looking forward to meeting you as well - congrats on the full time gig.

We've been talking to a number of agents, people, etc and have a couple prospective deals in the works... one thing right now is a 6-family being offered to us - needs work and we're not entirely keen on the idea holding it ourselves due to location.. but we don't want to leave money on the table... we were thinking of wholesaling it again since there could be enough meat on the bone to do so.. is this common practice? Any tips/advice?

Joshua Dorkin - Not a problem! I hate telling the first story, but love the second part. Hoping to have more of the same to share.

Justin Silverio - Definitely looking forward to meeting you! I just read your response for an earlier thread with Kevin Barrett and may need to pick your brain as well...

I'm glad I joined - it's clear there are other honest people out there who care about the success of the group. Time for some sleep for now....

@Mike Hurney 22 Santuit - 3rd floor (take a look at the google maps view.. that's how we got it)...

we wanted to get our money back and pay back some family.. err.. private investors. :) in today's market, we gave it away. hindsight... however, we probably should have rented it out to try and recoup some costs..

Dan and I make a good team and are happy investing 50/50 - we're both good at certain things, but it just means we need to find 2x as many deals!

look forward to meeting you at a local event!

-Ray