We got an interesting proposition - will this real estate deal benefit us?

Question

My husband and I work full time and make about $26,000 year. We have a $90,000 mortgage and would like to buy a rental. We have $15,000 in savings (was an inherritance) and would like to devote it to that purpose. With those numbers, however, we can't get a second mortgage because while our credit is good and we have no outstanding debts, we have too high of a debt-to-income ratio. The man who sold us our house, has offered to sell us the neighborhing duplex with no money down. We would lease the house and it would remain in his name, and we would maintain it and collect the rent and choose the tenants.... until we could start paying the mortgage ourselves and then take over the mortgage someday. The duplex rents for $500 a side (or $1000 total), and he says we can pay him $500/mo and keep $500/mo. We would also have the advantage of choosing our neighbors and ensuring a good neighborhood, which is a BIG PLUS. Is this a good plan?

Thank you all, so far for the very informative answers. This will MAJORLY help when drawing up all the details. He has 6 months or less to live, so he really isn't interested in screwing us over... he has an inoprable brain tumor. He has always rented to bad section 8 clients because he felt like he was "helping" people, and lost over $140,000 on the duplex because they trash it over and over - he just wants to get rid of it... so whatever the deal is we work up, I'm sure it will work to our advantage since he is so emotionally wanting to rid himself of the place. Now we have some tips!

Answer 1

It is not a good deal for you the way you have described, but could be if he is willing to make some changes. First, set a firm sale price now, with a reasonable rate of interest. Agree that all mortgage payments you make on his behalf will be applied to that purchase price and interest. If you are paying his mortgage payments, you shouldn't need to pay him an extra $500 a month also, but if he insists, make sure that also applies to the purchase price. Agree on who will pay for insurance, taxes, maintenance, etc. Make sure everything is in writing. You don't want a problem later because of a misunderstanding or him wanting to back out of the deal.

Answer 2

Angie, in every business deal there is a winner and a loser. Rarely ever is there a win-win situation. Ask yourself, why would the guy help you out this way. the property is in his name, you are a leasee, what is your legal recourse. Who pays for repairs? With your income could you afford to replace the roof or any other major repair, or would he be responsible for those repairs? Before entering into any legal dealings, get a contract and run it by a reputable real estate attorney. You may be better served spending 1000 dollars for a financial planner to determine where you want to be. This deal sounds like a great deal for him and not a good one for you. consider starting a roth ira for your retirement with a portion of the inheritance assuming you have no credit card debt. In my opinion no one should get into real estate until they have read 50 of the top books (not just the getting rich ones), and have spent hundreds of hours looking for deals. A way a lot of people get started are they work for someone fixing up places so they get a feel for the work involved, then they can move up to identifying revenue producing properties, then partner and purchase as a group rental properties. It takes a long time, but you get a feel for all that is involved with rentals.
other caveats - who will make repairs when tenants move out, who will collect rent if/when they don't pay, who handles late payments and collections, who pays the insurance on the property, who handles it if the check bounces, what will you do if he decides to sell and not too you (what's your legal recourse?)

Other things to consider...You could earn supplimental income on ebay if you have time which would help get your debt to income ratio down. Again research extensively before jumping into any business venture and make sure you list all the worst case scenarios and how you would respond to them to get a better idea of some of the craziness that can happen.

Answer 3

Well, he is overselling it to you. If you went for financing, they would factor in one half of the rent as part of your income, so you might be able to afford it after all. See if you can swing buying it outright. I don't think you will go wrong buying it as an investment, but then there is no reason to have him hold it and do that weird $500 to each side thing. It depends on how much he wants to sell it for. A rough, rough estimate on if a rental property is a good deal is to see if the rents x 7 years of income (12 months of rent for each unit, times 7) equals the cost of the property now. Even if that formula looks good for your situation, contact a realtor and ask for some comparable sales data and ask them if they think it's a good deal.

The deal he is floating you sounds like he wants some free property managers to screen tenants and maintain the property while still enjoying all the benefits of owning it himself.

Answer 4

There are ways to convert this deal into a winner but his offer is too one sided. Assume you take his deal and give him 15K down on a contract for deed. Equity sharing of rent applying toward payment. What are you risking compared to his benefit. You are minimizing his risk and providing him cash flow and free property management. In exchange you receive 500.00 per month on your 15K spent and the risk of him selling out from under you if you are not on title. What is your end purchase price and what does your 500.00 to him apply to note and interest rate wise ? If the property was to rent for 1000.00 month a lender will allow 750.00 of it as income. You might be better off with a 2 year lease option with right to sublet. Let it prove its numbers while keeping your 15K for the later purchase if it pans out. You can then go stated for the purchase loan if necessary. As your deal appears at current I would be very leery and probably pass on it. There is a chance however you could rework the deal and give yourself better protective measures. This deal isn't a win-win.

I see you have ammended your question so in this new development I would have him do a contract for deed with you and get your name on title using a quit claim. That will help you when its time to take over the loan. His estate wont have a claim either if he doesnt own it. You do not want your deal going through his probate process should he pass away. Write up a new deal and post the new issues or e mail me them and I will gladly offer a opinion based upon developing a win win for both parties.

Answer 5

I think Myron has hit on something in his ammended answer that will be useful to point out to you.

If you have a deal without the protection of being on title the heirs can determine a new direction for the property. You must have a contract for deed that can not only survive his demise but one that can be bought out before anyone else can buy it. If an heir decides they want cashed out early they could sell their interest to a structured setlement firm for a discount. You need to preserve the right to match that with a clause in your contract. You might want to select a best answer to this question as there are some good responses but they dont fit the new question as well. Re ask your question to accurately convey the most recent situation. Keep in mind it is the property you are buying, not his condition. If the deal isnt good, his situation will not improve it. Please include in your new question an estimate of repairs necessary.

Answer 6

If I had $15,000 burning a hole in my pocket, I would apply it to my mortgage, first. You would save at least twice that amount in interest payments over the length of the mortgage.

Owning rental properties can be a real headache. If your tenant lives next door, you get no relief. I can tell you some horror stories about having tenants.

Answer 7

Hi you know while it all sounds great in theory--save yourself some money now by spending some on a business contract OR real estate lawyer.

he/she can draw you up a contract for probably around $150-300 Cdn.

Yes its $$ spent but if this doesn't work out & your relationship goes sour, if so, then at least you have your legal contract to fall back on in case you all have to (heaven FORBID) go to court.

Answer 8

I don't think so, as the property is not in your name so you are just acting as a leasing agent for him and he can cut you off as soon as he gets a good tenant.

Answer 9

NO NO NO NO

"remain in his name"

He is going to $crew you over. Sorry, but there is no way this will turn out well for you.