Creative Deal Structure Game #4

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  • The purpose of the creative deal structure game is to help you start thinking outside the box with creative ways to solve real estate problems. You can learn creative ways by studying the lessons here at CashFlowDepot. And you can also learn to think more creatively by reading how others would solve real estate problems. There is no one right answer.

    Share with us how you would solve this real estate problem:

    Jim and Mary bought their house 15 years ago. They refinanced (again) in January 2020 and pulled out most of the equity. They owe $240,000 on a house that is worth $220,000. It’s in great condition. The PITI is $1791. Plus, there is a $120 a month HOA fee.

    Jim and Mary’s business died because of Covid, so they have no income and are burning through their savings fast. . They are current on their payments, but they know they cannot make the next payment, and they cannot afford to stay where they are. They are planning to move into their RV, which is paid for until things get better.

    Their #1 objective is to not have to make the house and utility payments anymore. They have started selling most of their furniture so they can raise cash.

    What would you do? By subject to? Master lease? Get an Option? Lease with an option?

    What is your exit strategy?

    Tell us the NUMBERS in your offers.

    Take it Subject Two. Then owner financing with higher interest rate and higher purchase, Sale property for $260,000.00 with $20,000.00 Down Payment. Finance the $240,000.00 @ 8.5%, 30yrs. P.I.Payment- $1832.41. Estimated original loan P.I -.$1411.00, the T.I. & HOA Fee -$500 total monthly payment- $1,911.00. Positive cash flow per month-$421.41, with a 6 years balloon. Total cash flow for 6 year- $30,341.52. Property will appreciate 5% per year 6 years a total 30% rise in equity $66,000.00. So went buyer fine financing he will have more then 20% equity in the property. Also, after principal pay down for 6 years my pay off will be less than the $240,00.00.
    R.O.I for property-
    Down Payment- $20,000.00
    Cash flow for 6 years- $30,341.52
    Plus pay down after 6 years of payments. Est. $10,000.00
    Total profit- $60,341.52

    Not knowing the rents, I’ll have to make some assumptions. Let’s say median market rent is $1900. Not wanting to switch places in the quicksand with the couple, I would offer them a 10 year master lease paying $1700 a month and ask for an option to buy anytime during the 10 years. They wouldn’t have to worry about utilities any longer, and with the HOA and PITI would be down $211 per month rather than the $1911 a month they are currently suffering–I would lose them less. Next I would protest the taxes to further get the taxes reduced and shop the insurance to find a better deal. Hopefully this would bring them near break even, and with tax benefits (assuming they aren’t taken away in 2021) they should make a small profit. I would be happy with a $200/mo cash flow and as rents increased, more.

    They refinanced in Jan 2020 propbably at a rate 3.5% – 4%.
    Their monthly payment is $1911. It may not rent for much higher than that.
    Given that the property is upside down, I would not do anything where I am liable for it.
    My preference would be to buy with the loan balance (just get the deed over) with subject to loan.
    Lease it and make the payments. If there is couple hundred short, I would pay. That’s my investments.
    Over the years, the house will be paid for by the tenant.

    So, I am controlling it with very little risk, with long term gain.

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