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The creative deal structuring game is designed to help you learn how to structure creative offers in a variety of different ways. I’ll post a new “real estate problem” every Sunday. We’d love to get your feedback about what YOU would do. And, when you read how others would structure offers, it helps you learn new ways to solve real estate problems. There is no one right answer.
This week’s real estate opportunity:
Seller calls in a panic mode. He has two rental properties and none of the tenants have paid rent since the pandemic started. The owner had to restructure the financing on the properties but now the seller is behind on their payments again. With no rent coming in, it’s hard to make a mortgage payment.
Each house is worth about $200,000 and in good condition. The tenant pays $1700 a month and has not paid rent in 6+ months. Because of the pandemic, the owner is not allowed to evict for nonpayment. After refinancing, the mortgage on each house is $170,000 so there’s not much meat on the bone. The PITI payment is $1361.
Would you walk away? Or would what would you do?
I would first try to help him keep his properties by advising him to workout payment plans with his tenants or help them get rental assistance (if he can wait for the new stimulus to start), so he could collect some rent to make his payments. If that doesn’t work out for him, I would offer to buy the properties for what’s owed on them, since there’s little equity. Get the properties under contract, then wholesale them to a cash buyer, which would payoff the existing loan and arrears. The new owner wouldn’t be under the stress of making monthly mortgage payments and could work something out with the tenants or wait to evict them at the beginning of the year when the moratorium has expired, but get the evict process started immediately. I would also help the seller rebuild his credit and business credit to help him start buying investment properties again with less financial risk.
If they were in my neighborhood, I’d certainly take them subject to… and might add in a few dollars to help the deal. Unless Congress changes things I’ll be able to evict on Jan 1, so I will file the eviction shortly. I’d talk to the tenants and tell them that they are still not off the hook and must still pay the back rent, but wouldn’t expect much. I’d probably offer them cash for keys on the 1st as an incentive to move.
If they fought the eviction, I’d go to the bank and ask for interest forgiveness and also file for some help as a small business.However, if I could get title to and only with $30k equity, the rents are good enough to carry on and with little down, would make a good investment.
Unfortunately, the eviction moratorium has been extended in the latest stimulus bill so this is likely to be with us for a while. So, a quick eviction is off the table. Therefore, I would offer to take the properties subject to at for what is owed on them since I am taking on a lot of risk for a very skinny deal. Next, since the moratorium doesn’t relieve the obligation to pay back rent my tenants now owe a lot of money for past due rent. I can’t evict them, but they could choose to leave.
I would offer to forgive all past due rent owed to date if they vacate the premises within 2 weeks. I would even agree to give them $1,000 in a “cash for keys” arrangement. By my calculations if this works I should be into this deal for under $5K with cash to the tenants, closing costs, and legal fees I might have in drafting agreements, etc. The final step would be to install new tenants, but take extra steps to verify they can pay rent even in the middle of the pandemic.
Unless they can add something else it’s too skinny. Do they own any other real estate? Do they have cash in a retirement account? A car? Boat? RV?
I thought about sub2 with a private reverse 2nd. Too risky because of time to evict is unknown.
We could give them some option consideration if they can get the banks to do a forbearance. Then buy sub2 later.
I would give him $100.00 for an option to buy for 30 days. I would contact the tenants and offer them $5,000.00. (and forgive back rent) each to move.
Then it is their (the tenant’s) call. I am assuming the landlord / owner has kept the mortgages / taxes etc current during this time.If they agree and move I would take “subject to” the existing loans.
If the tenant’s won’t budge I would walk away.
Merry Christmas and Happy New Year Jackie!
Hi All,
I would first ask the landlord if he has any liquid cash or generate any liquid cash and then see how much monthly payments I will have to make, let say if I have to make $500/mth payment I would buy an option for 5 yrs and wrap with 20% discount to buy each property and what ever cash for keys payment I make to the tenants to get out would be my down payment on both the house, I would do this deal only when the tenant confirms they will move out, I can even master lease from the landlord to make sure how much rent can be managed from the new tenants. The landlord can pay me back my money + 10% when he is in a good position.
Regards
AjayWould you have some type of requirement in there that he sells within a certain time frame? Otherwise he could decide to keep the property for 30 years and leave it to his kids for another 30 years if they wanted. I think you would need some type of way of making sure you get paid back within a reasonable time frame to do something like this.
I’d limit my cash outlay, option my involvement, and stay off title –
1. Negotiate a master lease with owner at existing PITI of $1361 per house then sub-lease to new tenant at $1700 market rent
2. Negotiate an Option to purchase house any time in the next 10 years with a strike price of the UPB + $2500 per house. Option consideration would be $2500 per house and credited to purchase price, but the owner agrees that $2,000 of the consideration will be used as “cash for keys” to entice existing tenants to vacate house.
3. None of this goes down unless existing tenants vacate house.This is beneficial to the owner because it alleviates his current headache, protects his credit, and prevents foreclosure.
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