Agreement for Sale or Sandwich Lease???

[MarkTorgerson]

I'm looking for some creative feedback on a deal I have on the table.

Here are the numbers



Seller wants out of property.

• Wants 10k cash to lease option the property (to me)
• Will be walking away from about 75k in equity.
• My purchase price will be 600k
• Lease payments (from me to the seller) of $3,000 per month
• Great neighbourhood with appreciating values.
  
  
  Tenant / Buyer committed
  
  
  Deposit of 25k
  2 year lease option with a sell price of 750k
  Lease payments from the tenant buyer (to me) at $4,000 per month
  20% credited monthly towards purchase.

Would you try and secure this property through a lease option (if the seller accepts) or an Agreement for Sale? My understanding is that the lease option has less risk (for me) if my tenant buyer doesn't close. If I signed an Agreement for Sale, would I not now be legally bound to purchase this property in 2 years, regardless of what happens to my tenant/buyer?



Looking for some feedback on the numbers and suggestions on how you would structure this deal.



Thanks in advance

Mark

 

[neill]

Hi Mark:



1) Is the 10k to seller a deal-breaker? The less $ in the better for you.

2) How confident are you in $675k being current market value? Is the house in an area of good sale volumes (ie. they list and turn on average in good time) or is it an odd duck?

3) Option price of 750 - will the market support an increase of $75k (11.1% increase in 2 years)? Unless your TB is paying cash (which CAN happen, but is rare), the house will need to appraise at cash out.



Lease option vs. AFS is a personal call, based on:

- your risk tolerance level. If (aka when) you have a disconnect, is there another exit that does not leave you in a bad position?

- do you have an understanding of the seller's current financial status? A sandwich deal can go sideways if your seller ends up in trouble - and a lot can happen in 2 years...

- on an AFS you are legally bound to purchase the property. Whether or not your lawyer can include specific wording that would pre-define what the consequence/outcome is if you do not close is another question (and one that likely can only be answered if you disconnect down the road - as a good mentor once told me, a contract is only the starting point for negotiation in court). Can you specify that the upfront option deposit that you pay and the mortgage paydown (if any) are the sum total of liquidated damages? - not sure on that one...



I would definitely want to make sure that contingency plans allowed for a second exit if you chose to go ahead with this deal. With a property at that price point (not sure where it is located) you are definitely playing "in the thin air"... so the rewards for doing so also need to be worth the risk. (The analogy would be similar to what Don talks about when considering whether or not to have buy and hold props in smaller markets)



Hope that helps...

 

[Debbie]

Good points Neill. I would be nervous about AFS at that price point.



With a sandwich lease, do you know of a way to protect yourself legally if the seller does end up in financial trouble and stops making the mortgage payments? I could see the tenant buyer (3rd party) taking legal action against the investor in the middle if that did occur.



Debbie

 

[GaryW]

[quote user=Debbie]With a sandwich lease, do you know of a way to protect yourself legally if the seller does end up in financial trouble and stops making the mortgage payments?


Excellent question and I definitely wouldn't do the deal unless I could pay the lender directly and give the owner a proof of payment statement.

Gary

 

[Chris Veaudry]

This sounds like a pretty interesting deal. One idea to protect yourself is to setup a joint bank account with the seller where your lease payments would be deposited to. The automatic mortgage payments from the bank, property taxes and insurance would come out of assuming that covers everything (would need to know this). You can both then keep an eye on it to ensure payments are being made (yours to the seller and his to the bank, city and insurance).



For the issue if the tenant/buyers don't buy or are not ready to or the value is not there and you need more time is to setup a rolling 3 or 6 month lease with the seller. The lease could automatically renew itself if everything is alright. But if the tenant decides to bail out you could give 30 day notice prior to the end of your lease to terminate with the seller. If the tenants needs more time then renew it. In the end the seller still keeps ownership of the house while still profiting from the mortgage paydown, depreciation etc.



Cheers,



Chris

 

[neill]

Joint accounts and direct debit work well to protect the one property, however we have not found any way to protect against an overall bankruptcy filing. Knowing your seller's overall financial picture is part of due diligence (however, a lot can happen in 3 years).



We had an AFS deal where one of the two parties on title ended up declaring bankruptcy and claimed the house as an asset, although legally we were the beneficial owner. (the legal costs on this property are, ahem, slightly above average - but it is a cost of doing business...)