Stuck On A Big Lease Option
My deal is with a home owner in a house appraised at $600,000. No deliquency and they have two mortgages owing roughly $400k, and he needs another $75k to get rid of some debt and help carry his business (self employed). His credit is around 560 following a bankruptcy two years ago.
So the deal is that I would buy the house for $475K, lease it back to them for 2 yrs on a variable, interest only mortgage payment. They would pay me $300 per month over PITI and have the option to buy it back within 2 yrs for $500K (a $25k gain).
My problem is twofold. First is logic of the deal considering opportunity costs and the tying up of credit for the returns mentioned. Secondly is finding the money. My FICO is 670+- and we have about $250,000 equity in 7-8 properties.
Not interested in tying up these properties and also we are looking to finance 100%. So far I have found 75% of appraised value which = $450,000. I also had the full $475 between a major lender and my bank who would carry a second for 20% of the deal ($95K). Unfortunately the lender backed out when I could not identify the $95K prior to closing.
It has been suggested using a land trust which could give me majority ownership and then allow for an equity loan of say 80-90 percent of appraised value however I am not very familiar with this concept. Any comments / ideas?
Bobber
A few things:
1. It seems that this is a perfect candidate for taking the property subject to the existing mortgage (sub2). Read up on that if you are unsure what this is all about.
2. You should make sure that when leasing property back to the homeowner that the profit you are making is under your state's usury laws if your deal was considered a loan. A loan is exactly what the court may consider it if you aren't careful.
3. I would probably consider giving them a 2 years lease with option to buy and make it clear that after 2 years you will not renew their lease. This would leave you in at approx $475 + $75k = $550 which would leave you with a profit of $50k plus appreciation
4. You mentioned that the appraised price of the home is $600k. All houses have a range of value. You have a low end and high end of the market. It is my experience that apprasials come in at the high end of the market. Oftentimes, as an investor, you want to price properties closer to the low end so that you can get out and move on to the next property. Make sure the property is really worth $600k
GOOD LUCK