Quick Turn into JV

[DavidMacDonald]

Hi Everyone! I`d just like to quickly run through a deal and maybe get some feedback from my fellow investors...

First of all, this lady was ready to walk away from her house and just sign it over to me without receiving any cash. I explained that I was an investor, the loan would stay in her name, and I would be putting a tenant/buyer in the property until I get it cashed out in the future. But a Joint Venture idea came to mind...

Details:
ARV = $320,000
Amount owed = $281,000 + $4000 in arrears to 2nd mortgage + $12,000 to father-in-law = $297,000
Payments = 1800/mth (1st and 2nd Mortgage)
3 bedroom, 2 1/2 bathroom, 1400 square foot home in southeast Edmonton, built in 2003, needs some carpet cleaning.

Originally I was considering coming up with $16,000 to pay off her father-in-law and bring her 2nd mortgage current, take over her loan, put a Lease Option Tenant/Buyer in the house, and cash out in 1 year.


However, I really wanted to create a win-win deal for both of us...along with not putting down any of my own money. So I presented her with this 50/50 split JV deal:

Lease Option in the amount of $320,000
Receive a 3% Option Deposit of $9600 ($4800 each) She would use her half to bring her 2nd mortgage current.
Rent out at $1850/mth
Offer the down payment assistance program and collect an extra $200/mth
Credit of $100 incentive going toward the purchase price for a total of $300/mth off the purchase price = $235/mth Cashflow ($117.50 each)

At the end of 1 year $306,800 is what the Tenant/Buyer owes
The amount owed to the lenders will be approx $291,000
Difference of $15,800 ($7900 each).

This would allow her to actually receive some equity out of her house, I wouldn`t have to put up any of my own money or credit, and there is enough money left over for her to pay off the father-in-law and have $7900 in her pocket.

Of course, everything (including the JV Agreement) would be prepared by a lawyer so we`re both protected. One question...can I put a clause in the JV Agreement that she must use her half of the Option Deposit to bring her 2nd Loan current? Am I allowed to do that? I don`t want to find out that she never did in the future and then the house gets foreclosed on.


Your thoughts on this deal??



Thanks!

 

[EdRenkema]

Here are my thoughts.
Although I don`t have experience in these types of deals if this person was already in arrears and prepared to walk at the drop of a hat what makes you think they wouldn`t do the same to you?
Your motivations are good but CYA before you step out to help someone else.

 

[Cargren]

Did you factor in property tax, insurance and any other expenses you would be responsible for when you calculated cash flow? I don`t see it anywhere, so there may be no cash flow or maybe even negative cash flow from what I see.

 

[DavidMacDonald]

Property tax is not included in these figures...but insurance is. On a Lease Option deal, any repairs under $500 are the tanant`s responsibility. The home is only 7 years old, so the furnace, hot water tank, and any other large items should be in good working condition for the next year or so. With regards to the cashflow...if it`s a negative cashflow of $50 or even $100 per month, wouldn`t that be worth it to receive a potential $12,000 overall?...and without investing any of my money up front? I think it is. As always, I`ll continue to run my investment portfolio like a business and put the $4800 from the Option deposit into a safe place should I need the funds down the road.

I know it`s not a killer deal with thousands upon thousands to cash in on...but every one gets me a little closer to my belize

 

[housingrental]

Hi David
Yes there`s potential under your scenario but with risk.
You`ll be taking on liability (Or I`m I mistaken?) for house if rto doesn`t work, value drops, and owner is assetless right?
Is there enough upside to justify the risk?
Your likely scenario is you lose money on operations... Does this help or hurt you qualify for other properties? Does this really get you closer to your Belize?

 

[DavidMacDonald]

Hi Adam,

I will be taking on liability, but only through a JV agreement. I will not be taking over the loan, and as long as I structure the JV agreement properly, I am able to minimize the risk.

With regards to the "value dropping", if I`m not mistaken, the option price is set before the tenant moves in and can be written so the purchase price is the appraised value at the the time of purchase...correct? (usually after the 1st year) So your comment about the homeowner being assetless, should not be an issue. If we were to just straight RENT the property as opposed to Lease-Option, then I could see the potential of the property value dropping and losing some equity. However, with the option in place, as well as what the economy has been telling us so far, things are looking a little more positive in 2010 with regards to house prices. But like I say, the purchase price is set when the contracts are written up so we`re both protected.

 

[ZanderRobertson]

Good points, and if the lease option tenant does fall through, you retain whatever deposit they`ve already given you and you lease option the same property again. You should be quite well protected as long as your documents strong.

QUOTE (DavidMacDonald @ Jan 13 2010, 10:01 AM) Hi Adam,

I will be taking on liability, but only through a JV agreement. I will not be taking over the loan, and as long as I structure the JV agreement properly, I am able to minimize the risk.

With regards to the "value dropping", if I`m not mistaken, the option price is set before the tenant moves in and can be written so the purchase price is the appraised value at the the time of purchase...correct? (usually after the 1st year) So your comment about the homeowner being assetless, should not be an issue. If we were to just straight RENT the property as opposed to Lease-Option, then I could see the potential of the property value dropping and losing some equity. However, with the option in place, as well as what the economy has been telling us so far, things are looking a little more positive in 2010 with regards to house prices. But like I say, the purchase price is set when the contracts are written up so we`re both protected.

 

[housingrental]

What if current owner defaults / asset less
RTO defaults
Value drop is less than rto deposit?
Low likelihood..potential though..
There is minimal upside ... I`d pass... you might see it differently