THANKS!
Why in the world would you buy a house that has thousands a month in negative cash flow? You’re far more than $900 upside down each month, the mortgage isn’t the only expense in any rental.
It may sound stupid, and might be illegal, (check your states laws) But I have a friend who sold raffle tickets to sell a house he was buried in. He got lucky because no one had tried doing it before him and there weren’t any laws against it at the time (there are NOW) But the local newspapers got a hold of the story (through him) and he actually made money on the house. Once it hit the papers every lottery player in the state jumped in. If I remember he sold tickets for $50 each and pledged to donate anything over a certain amount to MDA.
CHECK YOUR LOCAL LAWS!
This is illegal in nearly (if not every state) in the country. I owned an informational forum a few years back and for us to legally hold raffles we actually had to become a legit non-profit and even then I think we had to register every raffle we held over a certain dollar amount with the state. I didn’t really keep up with all the legal aspects of it so I can’t be that specific but definitely don’t even think about it. (The guy that owned it with me was an attorney and he did all the legal wrangling) If you raffle this thing and say have 1000 tickets you will have 1 winner and 999 potential million dollar lawsuits. You’d be better off just giving it back to the lender deed in lieu.
You don’t mention what your current mortgage balance is on the home. Perhaps you could come to an agreement with the tennant to buy him out of his lease and then simply put the home up for sale.
…or maybe you could sell it at a discount (for what is owed) to the Tenant if he executes now…at least you’d be rid of this alligator.
Keith
I’ve got $20 on $811,000.
What exactly was your plan on this to start? Where in the world did you plan to make money?
But if he offers to sell to the tenant for $811K, the tenat might decide to save the $22K (or more) and go for it
Keith
Okay, now that we’ve all kicked the OP in the gut (myself included), let’s put our thinking caps on and see if we can help. I’m not sure there is a solution here, but let’s see…
The problem here is that the house is not worth $811,000. I think we all know that there is usually a disconnect between an appraised value and the “real” value, especially in homes costing this kind of money. Moreover, any time I see an appraisal that comes in right at the purchase price, my crap detector starts to go off. That appraisal was done–in that amount–solely to facilitate the loan and the purchase.
Because the house is not worth $811,000, it’s unlikely that the renter will want to pay this amount for it, let alone the escalated price that was worked into the agreement.
I think your only options are to hang on to the house for a little while and hope that the value will increase to the point where you can sell it and pay off the note. Sure, you’re out $10,800 per year ($900 x 12), but that’s probably better than the loss you’ll take if you sell it for the true market value today. (And I think that $900 loss is only your half…correct? The real loss is $1,800 per month, more or less…)
You could put the house on the market just to see what it will bring. The time is right…spring is here, rates are low, etc.
I don’t know how the market is moving in your area, but here in north Atlanta it takes 6-9 months to sell a house at that price. Absorption rates are very low. However, a friend in Bethesda, Maryland, just put his smallish 4BR house on the market for $650,000 over the weekend, and he had fourteen contracts in one day, complete with escalation clauses to over $725,000. My guess is that your market is not moving like that, though.
If you don’t want to get behind and then do a short sale, you pretty much need to retail the house to an owner-occupant. Do you really think the market will bear $811,000? And then, of course, you’ll have to pay at least a 3% commission to the buyer’s agent.
Any chance that you could just sign over your half to your partner?
Do you think it would be difficult to sell the house with a lease-option “tenant” currently in place? Would she have to buy-out the tenant first?
The best option is to write up a new lease agreement with terms that are better, so the tenant will agree in writing to nullify the old lease agreement. I'm not an attorney, but I'm sure that if the language in the new lease says something to the effect of "this lease agreement supercedes all previous lease agreements between tenant and owner..." You could get out of the old agreement. I would ask an attorney just to be safe. For example, the new lease agreement is for $2800 a month, but it's month to month. Similairly, you could offer a rental amount of $3000 a month with a purchase option for less than $832,333. If the tenant goes month to month, they can be required to leave in 60 days following the sale of the property.
If the tenant likes the place and wants to buy it, another option would be to have the tenant agree to a higher monthly amount for a lower purchase option price; this would help the cash flow, but obviously wouldn't get you out of the deal (unless the tenant buys the place).
I don't know what the tenant's credit score is, but the subprime crisis has lenders running scared from scores less than about 600. If the tenant's credit score is better than that, have the tenant ask a mortgage broker if they could get 100% financing if you carry back a note. You will only be able to carry back a maximum amount equal to the amount of equity that you have in the place. Hypothetically, if you have $80,000 equity, then the tenant borrows $80,000 from you, and the rest from the bank. For example, the place appraises for $850,000, you owe $770,000. You only get $770,000 from the bank, and the tenant makes monthly interest payments to you until 2012, when the tenant owes you the full $80,000 that they "borrowed" from you. Last time I checked, you must carry back the note for five years if the terms are interest only with a due and payable.
The least attractive option is to decide on an acceptable sale price, and put the place up for sale. The terms of the sale will have to include the contingency that the tenant has a lease, and if the tenant decides to stay for the term of the lease, then the new owner will not be able to move in until the tenant's lease is over. This could potentially create a problem, because lenders will offer better terms to owner occupants.
Have fun with this one... Steve
Unfortunately, there isn’t an answer to every question. However, there are some good lessons for everyone here:
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Lease options usually do NOT work out with the tenant buying the property. Someone who has made bad choices in the past usually keeps making bad choices. If they have bad credit today, they will probably have bad credit tomorrow.
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You make your money in real estate when you buy. If you don’t buy at a BIG discount, you will have a BIG problem if the market turns down and you need to sell. As an investor, you should NEVER pay retail.
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You need to have a plan for making money with EVERY property you buy. Buying a property you know will cause a loss is not a good plan.
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Prices (and rents) can go DOWN as well as up. Everything doesn’t go up, up, up!
Mike
Thanks for the advice guys… I got into this house with a huge cash back deal. I’m just looking to get out of it before my rebate runs out. I am partners with a Real Estate agent who will help me sell without commission on the sell side and possibly none if we double end the deal. Any more suggestions??? ???
I’d tell the tenant he can buy right now at your breakeven price (whatever you owe), that seems to be a good option considering the other options such as getting him out of the property to be able to sell it.
RICH_IN_TC…
I can’t sell to the tenant right now because the tenants credit is bad at this point…thats why he is renting. He is renting until he can get his credit up to purchase.
Have you tried yourself to locate him financing? There may be people on this forum that can point you to lenders your tenant has not tried that may be more lenient.
How big of a loss are you willing to accept for an immediate sale? I recall reading posts here about investors havng some success with an auction.
This might be something to look into if you can work something out with the tenant.
I MAY BE WILLING TO PAY OUT IN CASH AFTER C.O.E. UP TO $12,000.00 AS A REBATE FOR CERTAIN IMPROVEMENTS.