We're looking to buy an investment property - a SFH. Found a really nice house in a nice neighborhood. Owners are facing a foreclosure. I asked if they would be willing to stay and rent from me if I buy their house - they said that they would.

Assuming we come to a mutual agreement on price, rent, terms, etc - would you recommend doing a deal like that?! Things to watch out for?! Would use RE agents on both sides...

The abvious attraction is that we could get a nice house AND renters at the same time - with no improvements necessary to the property...

Comments welcome -

thanks,

james

You also get tenants who will not respect your ownership of the property... they will resent having lost it and will transfer that resentment to you.

>>If they can't make their mortgage payment, they probably won't be able to make the rent payment.<<

Do you have other properties or is this your first?

Would these people pass your written criteria like any other approved applicant would? You shouldn't just take them without screening. Even without the foreclosure, there could be other things in their history that might stop you from renting to them.

James you need to get an attorney involved in this deal. What you are talking about qualifies on the face of it as equity skimming and Colorado has added several laws in the last couple of years about this. They ALL favor the seller.

I can not believe that this is a good deal. You say both sides have RE agents so I assume the property has been listed in the MLS and had no other takers. (This means you are paying at least full retail) Are they paying market rent? You said the lease allows for 1-2 years of renting. What if you have to evict this summer or next winter? Can you rerent at the same rent they will be paying? If not bad deal.

A few years ago some folks gambled with this and won due to appreciation. Those days are gone.

Post the numbers here and I'll give my two cents.

Additionally since agents are involved the folks are getting some cash out of the deal. Doesn't sound too much like a winner.

Here are the numbers - please advise:

We have one other property up in the mountains that own outright - rent it out seasonally to skiers.

The house in question is in Brighton - it was built in 2004. It has 1400+ sqft: 3bd, 2ba - in excellent shape. It's been on the market for 15 days with no offers. The list price was $175K. Our 'verbal' offer so far (just to test the initial waters) was: $1250 in rent for 2 years with a purchase price of $155K; The HOA fees are $45 quarterly (180 annually), taxes are $2300 anually. I figured $500 estimate for insurance. We could put down as much as 25% of the purchase price at 6.125% ( or better) for 30 years.

By my estimation, the $1250 rent would save them about $400 each month, so it should be good for them and good for us (about 7% ROI) - if it works out...

Not sure of rents in Brighton but it is in the ball park (+ or - $100) for that type of space in the outlying areas I know.

So you pay 155K for it, after commissions that is about 145K available to payoff what is owed. How much do they owe and will that cover it? If not you are in a short sale situation and you need lender approval (have patience). If more than that is not owed why can't they get a loan for 145K then their payment would be the same as rent. Sounds like you don't have the whole story one way or the other.

Based on your scenario, you have no funds available for upkeep (it is new but what if the frig goes out). If something like that happens your return becomes lots less. Just one mis-step in the next two years and you would be better off with the money in a CD.

Think in terms of risk reward. You can do better in Colorado RE than 7% with that much cash. It does sound good in terms of the condition of the property and the amount of work needed for that.

I don't like the Brighton area because it is a haven for cheep housing. As Tyler has discussed these suburbs of cheep housing will be the ghetto in 10-15 years. There is no limit to the supply of these kind of properties in that area. They are building a 1,000 plus units a year in that area. So in 5 years would you rent the new one or the one that is almost 10 years old? Going to be lots of competion. Go look at how the bottom of the barrel new homes that are 10 years old hold up over time. Adams county schools leave a lot to be desired and your home would likely rent to a family.

Bottom line is that I see little upside. Don't mean to rain on your parade and ultimately it will be your decission.

Location, location, location.

NO, no, no! Never let the homeowners stay there. They will always be the "owners" in their minds, and will have no respect for your rules.

They didn't pay the bank. Everyone pays the bank if it is remotely in their power to do so. They cannot manage money (EXCEPTION: Medical tragedy, verifiable).

in some states and in certain conditions it will continue to be their homestead and therefore will have more rights than your typical renter.