Michael Temple
Sylvania, OH Active 2 months, 3 weeks agoForum Replies Created
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Jackie,
When you say stay outside urban areas are you saying go to rural areas, small towns, suburbs, etc. Suburbs are untouchable right now at prices anywhere near sane that will cash flow. If I pay the asking price and get seller carryback with a payment that would amortize over 1,000 years or so I should be able to get it to cash flow, not exactly doable 🙂
Yes, I am concerned about this from a rental property ownership standpoint. If my tenants start getting slammed with $300-400 dollar gas bills I can see my rent falling in priority of getting paid. In my state, the gas bill is in their name, but if it gets too high they may be squeezed too hard to still make timely rent payments.
If interest rates rise, big IF, given the Fed doesn’t seem all that concerned with the inflation right now. They still seem to think it is all transitory and will go away in early 2022. Anyway, because houses were driven so high and we have such a shortage I think the rise in interest rates might slow down the current craziness a little, but I am not sure I see the houses coming back down. There is still a shortage and think it will just make them more expensive to buy because of the higher payments. It will probably just push some buyers without a bunch of extra cash to the sidelines is all.
Jackie, so glad you are feeling better. Now that you have had Covid your natural immunity will be better than people that just have the vaccine according to a new Israeli study that just came out. It said the best group was people that recovered and then had one dose of vaccine, but the second-best group is people that had it and recovered.
I am located in Northwest Ohio and our market is still very hot. The good properties in the suburbs and better parts of Toledo are gone the same day they hit the market. The older houses in more marginal neighborhoods might make it a few extra days or a week. Most are going for above asking price and have multiple bids on them.
The good news, if there is any, is that I have finally started seeing *some* houses hit the market, and a week or two later, if they are still there they back off the asking price by $10K, but that is only on some houses and sometimes it is just a ploy to generate a bunch of interest. It will bring in new people thinking the price is coming down and a new bidding war starts and pushes it back up again.
I am thinking this will not come to an end until interest rates start rising and pushing the loans for these houses outside of the affordability range for a lot of buyers. if and when that happens inventory *might* start rising and prices may come down a bit or stabilize.
Gary,
Sorry, I didn’t see your response until I logged in today to post on another forum. Yes, to both of your questions.
However, I was at a seminar with Pete Fortunato a week or so ago and was talking through this with him and he gave a great suggestion I had not thought of. He said to work with her to set up a reverse mortgage that will pay off the first mortgage. This would allow her to eliminate all payments on the mortgage until after she is gone. Interest rates on reverse mortgages for 15 years right now are about 3% so very little of the equity would be chewed up by mortgage payments.
The second step would be to have her deed the property to a trust and we give her a quasi life estate, i.e. the terms will be she can live there until she passes away OR moves out permanently. In return, we would become responsible for taxes, insurance, repairs, and maintenance. Once this step is complete she would have no expenses to live there at all and the removal of monthly mortgage payments and expenses would free up her limited budget to live on instead.
The obvious risk here is she suddenly has a burst of good health and lives another 20 years and we pay a lot of taxes, insurance, etc. However, I am not sure that is a real possibility under the circumstances.
I would be doing this deal with a buddy of mine and we would split all expenses, so unless a roof or furnace go (both relatively new) I am figuring our out of pocket expenses would be around $6K per year or $3K each with the upside being that we get a $220K house for $99K plus our out of pocket expenses once the life estate ends.
Mike,
Very interesting, thank you. I had never heard of recording a lease and seeing how that might put you in a leveraged negotiating position. So if I understand correctly your recording the lease didn’t give you any type of “fixed” position per se, but because the lease (now recorded) would need to be cleared off the title for the developer to get a clean title you would approach the owner and essentially agree to give up your lease and clear that off for some type of payment, which would be negotiated at that time since he was selling out to a developer for a nice profit, correct?
If I am grasping this that gives an entirely new twist to master leasing in high growth markets or master leases of properties in the path of development as you mentioned. Fascinating. That is the type of stuff I love about this business!
Mike,
You said some stuff in your post that was intriguing, but I am not sure I follow. If you had a master lease how would you benefit if the developer had come through and offered a huge increase on the property values? Wouldn’t the owner selling the properties just terminate your lease agreement with none of the upside going to you other than maybe a fee for breaking the lease early?
I would also approach this with a master lease arrangement, but I would add an option to buy down the road on everything except the 4 that needs some rehab. I would structure the options so I could purchase on seller financing to him and/or his sister. For the 4 that need rehab, I would see if he would just sell those outright to me on seller financing. That would mitigate his taxes on those 4.
Next, I would begin raising rents to get them back towards market rent.
I heard an attorney discussing these Federal Court rulings and his position was that if your rentals are in one of the areas where these courts have overturned the moratorium that you can evict if you need to. That the Federal appeals court ruling applies to the geographic areas they oversee. To get it overturned nationwide would require a ruling from the SCOTUS.
Since I am not an attorney I have no idea if what he said is a valid interpretation, but I would say it is worth at least looking into if the inability to evict is sinking you as a property owner and you need to take steps to fix the situation.
I would be a little concerned that the executor doesn’t want you talking to the tenants. This seems like a perfectly valid action given that as you said you are flying blind. The fact that they don’t want you checking on this information is a bit of a red flag from my perspective. Maybe it is nothing more than they just don’t want the tenants knowing the properties are being sold. It could also mean there is something there they don’t want you to find.
I think I would talk to the executor a little more and see what their concern is with you talking to the tenants is and if they have another suggestion for how to get what is obviously necessary information to make a good deal.
I would definitely pursue the master lease. As one of my mentors said in a seminar, everybody wants cash. It is up to you to find out what they really need/want, i.e. what are they going to do with the money. I was on a call with Pete Fortunato a week ago where he mentioned this exact thing. He said contrary to popular belief nobody wants a pile of Federal Reserve notes. He said if they say they want that they are lying to you and to themselves. I found that comment enlightening, to say the least.
I think I would start by going to talk to all the tenants and explain that you are a potential buyer of the property and wanted to see if they could tell you about the property and if they had a copy of their lease. I am not sure how far you would get with this, but it might yield some information you don’t currently have and help you figure out the risk that might be buried in this deal.
The next thing I would do is talk to the daughter and see if she would be interested in cash flow without property management. If so, this might be a deal where a master lease or a lease/option would be appropriate. This might get you into the properties without risk. You could take them over with the existing tenants and start sorting it out and decide where all the problems might be before committing to purchase.
Since you don’t know what the best price to offer is I think I might start with a master lease and move into the option idea when you have a better idea of what you are getting into.
I would try a lease/option on this deal. I would try and locate what they want to own as a rental with an option to buy. The only thing that makes this tricky is that in today’s market you may not find a rental property where the landlord wants to sell on an option in an area the couple wants to own.
I have a great house in an “A” class neighborhood that I rent and wouldn’t consider selling it on an option for all the tea in China right now. The house is super easy to rent to great tenants that pay fantastic rent. It is a cash cow. The places I might find a landlord that would be willing to do this are probably not in areas/houses that most young couples would want to live in, at least that is how it seems to be shaping up in my market right now.
Alex,
Thanks, I must have missed that the first time through your original post about limiting the life estate. I have discovered sometimes I need to hear things more than once for it to sink in 🙂
You are right about the option. I have to do more research to even see if that is enforceable in my state/area, especially on homestead properties. I just assumed options always were, but some research is in order. Although I don’t think I will do that on this deal for many of the reasons you pointed out about enforcing it.
I like the idea of wording this in a way that puts an upward limit on it in terms of years and dollars and fixes my downside risk to a certain dollar figure. Same as my thought about using an option, but as you point out much cleaner and done.
I think that is what I will propose to my buddy and see what he says. Thank you for very much for all of your advice and guidance on this.
Alex,
Thank you! I remember that story you told about the woman in France. I think she held the oldest person in the world record for a long time until a guy in Canada took it years later! You have given me a bit of a pause on this. I am 50 now and the thought that I might be on the hook for some undetermined amount of time plus repairs might be a bridge too far. However, I do like your idea of securing the deal and selling it to a younger investor who can wait for it.
I wonder if an option might fit here instead of a life estate with less risk. We create an option that has terms in it that spell out we can exercise our option if she moves out or passes away from the estate. It would renew each year to purchase at $99K and the fee for that option is enough to make up her mortgage shortfall each month for the term of the option. The option would have a renewal clause in it for each year on the same terms. This way if it starts getting too expensive or other unforeseen factors come into play we can simply not renew our option and she is free to sell, move, etc. In that scenario, our only risk is the money put in for the option fee. That might be a better arrangement than the life estate. That would also let my buddy and I part ways on the deal at the end of each option term if we want as well.
I am thinking I would be willing to risk a few thousand dollars for the next 3-4 years to see how this plays out for the potential of the huge upside and if things don’t go as expected I can always bail with a fixed amount of loss to date. What do you think of that idea?
Jackie,
Thank you for the reminder about the kids being involved if we end up going the life estate route. They are on board right now as long as their mom gets to live there for the rest of her life, but my concern is what happens when she is gone. Not having these terms spelled out and agreed to contractually have a way of coming back to bite you in the backside when the heirs suddenly realize there is over a $100K on the table when mom is gone. That kind of money has the potential of making people’s gratefulness and memories get foggy 🙂
@Alex Gurevich, a sincere thank you for this great information! I thought I understood what life estate was, but it turns out I really had no idea 🙂
This makes a lot of sense and I think other than drafting the documents this would make it a relatively easy deal to manage. We simply pay her each month and just monitor that payments, insurance, etc. are all being paid on time so our interest is protected whether we do it or she does it. I will talk to my friend and see what he feels more comfortable with.
I like that we are only out of pocket on this deal a small amount of money each month. One more question if I may. Who is typically responsible for repairs during this life estate arrangement? I could see where she might be, but as discussed she is financially strapped. So a roof or furnace going out could put her over the edge and to protect our position we would have to step in and pay for that. Is this how it is typically handled? Is that something that is put in writing in the beginning in some type of agreement?
@Alex Gurevich thank you! that is exactly what I needed. I wondered when Jackie suggested that if that is what she was talking about. My buddy said he wanted to do that for her when we first starting talking about this, but I thought this was something different.
So, I haven’t done a subject 2 deal before, which is what this is minus the life estate component. Does the person that conveyed the property usually still make the mortgage payments? I thought that was a function we would do. I was thinking she would pay us the $700 per month, we would add the $250 short fall and pay it. I figured this was how you would do it since technically we are the owners of the property once this happens. Am I incorrect about that?
@Jackie Lange I am not familiar with that term, life estate. If I understand the context would it be a situation where she is leaving the house to our LLC if/when she goes into assisted living or upon her passing and title doesn’t actually transfer while she is living there?
Second question in this arrangement does the life estate spell out the arrangement, i.e. she pays what she can afford ($700) and we pay the difference and any additional expenses (furnace, roof, etc.) is our responsibility?
I would definitely have an attorney draft this, but I want to make sure I know what I am asking for and how I would propose it be structured to get the effect we want.
