Newbie and have a possible deal, but no idea what to do

I’m a total newbie. They say just go out and sign up a contract, so here I’m handed this deal and don’t even know what to do with it.

I was looking for a place to rent, well this one was out of my price range but they included a line that said lease to own, so I called him on it and said would he consider $4,000 down and drop his lease to own amount down to $1400 per month? My thinking was if he would even consider it then we could talk details. He’s had a renter now moving out and it sounds like he fears having to make the mortgage without a renter paying? So he said come out and see if you’d even be interested.
Well that gave him time to figure out his finances in the meantime and decided he needs to have $1750, but would certainly considerin selling it outright for $380,000. It’s a two bed two bath condo in Aliso Viejo, CA. Very nice neighborhood, I wouldn’t mind living in. I can’t get regular financing. I called up the comps there were 2 foreclosures in the area one sold for $345K, and one sold for $325K. All other properties sold over $425K+.
I don’t know if this would be a nice flip or should I try the lease option deal 'cuz I need a place to live in the OC for another 3 years and then sell it. Only problem is he wants a quick deal, like before he has to make the next mortgage payment without a renter in there. And he’ll only do the lease option for a year and would hope I refinance the thing by the end of the year term? Again, I don’t think I’ll be in the position even by that time, unless I start making some deals myself.

Can you read between the lines? :banghead

Any ideas or suggestions?

If you can handle the monthly mortgage payments and the HOA fees, how about just taking over his mortgage loan? Purchase the property “subject to” the existing financing. No down payment. Just start paying the owner’s mortgage payments once you have the deed in your name.

I think a lease option is a good idea. Try to get it for longer than a yr. Also be sure to have the right to sub-lease and the right to asign. If you find the deal isn’t right for you for whatever reason, you can always sell your option to another investor. Good luck.

So after a couple of replies it made me start thinking. If I were to take over his payments what are they actually? How much is the Hoa? etcl.

So I called him and asked him these questions and here’s what we’re really up against. . .

He’s not sure of the property value, but is afraid if he sells it he’ll end up owing capital gains which he cannot afford. He lived in it the first year he owned it, but it’s been rented ever since he got married, 4 years ago. So he’s afraid the capital gains will be sell for $380K bought for $170K. What he’d like to do is get his credit card debt from a business that didn’t work out paid for which amounts to upwards of $60-$70K. He’s wondering if there’s a way to get that taken care of - paid off by someone as a means of down payment, without having to pay capital gains.

In other words he’s in debt over his head and couldn’t handle capital gains on top of it. I also mentioned an opportunity to split equity after a few years with me owning it and he thought it would be better to keep it and just keep renting it out until the time he can afford to pay capital gains.

Maybe I’m :banghead against a dead horse?

I loved the idea of getting an option to lease and possibly subleasing it out. thanks for that idea. Just not thinking this guy wants to owe more than he already does. Should I continue to pursue and is there any way of getting his debt paid off in other areas and he selling it to me for less? Would he still have to pay capital gains on the full amount?

Need creativity in this market - that’s what doing it means. I’m seeing that now.

I’m thinking this guy wants you to buy it for more than it is worth in today’s market. With the foreclosure sales $60K less than he is asking, I suspect an appraisal would come in a lot less than $380. Old comps set a price ceiling in a declining market. If the active listings are being marketed for less, the appraiser will note the price trend is downward and compensate for that in the appraisal.

This guy is not really that motivated to sell if he is worried about capital gains. Wait for this property to go into foreclosure, or find another property. Pass on this one for now.

No way for him to shelter his profits by paying off his business debt. IRS will still tax him on the sale profit regardless of what he does with the money.

He obviously does not have a strong CPA who can assist him in his tax savings. However in a stronger banking market he could have pulled out his equity with a HELOC and that would be paid off during the sale. Less profits, less taxes to pay. Doing a refi will cost to much, but banks are still doing HELOCs to about 70-80% of the ARV. However his payments will increase, but the rate maybe less than his current credit card rates if that is important to him.
However downside to HELOC to pay off debt. Now your home can be lost to not paying the HELOC where that doesnt happen with the credit cards.

This seems to be a widely held misconception. The profit on the sale of real estate is determined by the cost basis and net sale price. You have the same taxable profit when the property is owned free and clear as when the property is 100% financed.

The amount of debt on the property is irrelevant to the taxable profit calculation.

Wow, the answer is so apparent.

He has a minimum he must get per month, that has since gone higher than when you first spoke.
70k in credit card debt.
Some line about avoid the capitol gains, he could do that by just living in the house for one more year.
Is trying to get 385k when you could buy a foreclosure for 325k.

There is no deal here. Sounds like a failed flipper. Probably got in 70k of credit card debt just to stay afloat for this long. Wait for the foreclosure, by they you could probably pick this up for under 300k; prices are still dropping for quite some time.

Besides there is no equity cushion here to tide you over, even at 325k and definitely negative equity at 385k. On top of that it looks like he tends to underestimate his costs, why he was willing to accept $1,400 at first. If you lease option from him, its likely he will be in foreclosure before you know it anyway and you will lose out on any option as well as your deposit.