I don't think this is a scam, but I can't see a significant downside.
April 14, 2022 3:02 PM   Subscribe

We have been presented an opportunity to sell our condo in a way I had never heard of, and I'd like someone to help me think through whether it's a sound concept.

You are not my real estate advisor.
You are not my attorney.
You are not my financial advisor.

Okay, standard disclaimers out of the way, here's the deal. We moved into a new condo a couple months ago, prior to listing our old condo for sale, because the old place needed to have some work done that was easier to do when the place was vacant. That work got done, the condo got listed, and...no interest. This wasn't terribly surprising to us; the condo market here in Portland (OR) is pretty poor right now, and our unit has a couple challenges that we knew meant, in a down market, it would be reeeeeeeallly hard to sell. So it was.

Plan B was to rent the unit until the market got stronger in a couple years, because the rental market here is as strong or stronger as the housing market. The unit itself is nice - the building's 15 years old and super solidly built (utterly soundproof walls!), the unit has brand new floors throughout and mostly new appliances (the gas oven/stove being original to the unit, but it has a new DW and a fairly new refrigerator). It's in a highly desirable, super dense, walkable neighborhood (NW Portland), it comes with off-street secured parking, and all in all it'd be a great rental for someone.


One of the challenges I referred to before is that the building in which our condo is located has no amenities - no common patio/gathering area, no concierge, no bike room, no exercise room, nothing. At the price point we will need to rent the unit in order to cover our mortgage/HOA, people in the rental market have come to expect those amenities, so if there's any competition for a rental, ours will probably suffer. It's been on the rental market for a couple weeks now, and sure enough, has gotten no real solid interest.

Last week, an investor called me with a proposal that I didn't even know was a thing. He is proposing he buy from us as a lease-to-own deal, in which we agree on a sales price now ("now" being defined as "whenever we execute the deal", not as "today or nothing"), they give us a non-refundable deposit of a fraction of that as, essentially, earnest money (although we wouldn't have to escrow it), and we sign an agreement that they will pay us the price we agree on now, minus the amount of the security deposit, in 36 months. They have said they will offer fair market value, but I have not received their offer yet (it should be here today or tomorrow) to know if their definition of FMV lines up with ours.

They would then turn around and lease-to-own it to a buyer (who may not be ready to buy today but who is on the ownership path, and may just need a little time to fix credit/get a down payment together etc), and assume all the obligations outstanding on the unit as of now - mortgage, HOA, routine maintenance, and also tenant management for the people they lease-to-own it to.

The investor checks out as legit and pretty well regarded, from what I can see - it's not a predatory situation, they're not looking to buy distressed properties on the cheap (or buy from panicked sellers who need to unload RIGHT NOW) and flip them for a quick profit.

The immediate thing I think of with that type of arrangement is "well, what if the condo market explodes in three years? Aren't you leaving money on the table?", to which the answer, from where I sit, is...maybe but probably not? In addition to the no amenities thing, the other significant challenge of our unit is that it's essentially a daylight basement - the building is built into the side of a hill, and we're on the first floor, two floors below street level. It gets good light for being that far below street level, so it was never an issue for us, but potential buyers all said "it's pretty dark!" because it doesn't get flooded with light like a third or fourth floor unit would. The unit also has no outdoor space.

In the seven years we've owned it, the value of the unit, even in pre-covid times when the market was OK, essentially stayed static, so I'm not sure hoping for a massive increase in value in three years, which would make the lease-to-own a lot more of a gamble, is realistic. Our goal is not to hold on to the unit any longer than we have to, and this seems like a reasonably sound way of doing that (given that their definition of FMV is consistent with ours).

From where I sit, this doesn't sound like a bad idea, but I would love to hear if anyone has had experience with this type of transaction. Am I missing something?
posted by pdb to Home & Garden (17 answers total) 1 user marked this as a favorite
One thing to notice is that you are giving up the amount that you would normally be able to earn by investing the sales price of the condo over the three years. Even a super conversation investment might earn you another 10% over 36 months. As an alternative, what would happen if you lower the selling price by 10% to get a quick sale instead?

In addition you don't have access to the money until it sells. For most people, that is a lot of money tied up with no liquidity (no way to get access to it). If this is a retirement nest egg that you don't need, then fine. But if you think you might want access to funds before the lease to own expires, this could a problem.

Third is to figure out what happens if the deal falls through for some reason. Is the earnest money enough to pay for fixing up any tenant damage? Are you sure there is enough insurance to cover a catastrophe? What if the house is destroyed due to fire or tornado or earthquake? This might be manageable but you want to think about it.
posted by metahawk at 3:20 PM on April 14, 2022 [4 favorites]

Best answer: I don't know a thing about OR property law; this can't be legal advice. I am just thinking about the financial side of it.

You are effectively allowing them to mortgage your property for whatever the "deposit" is. It shouldn't be hard to do the rough math on what interest rate they're effectively paying you if all goes as planned, and to compare that to market rates for an unsecured (?) loan. Note that this deal only makes sense if they can "borrow" from you cheaper than they can borrow from a bank to just buy the property from you in the normal fashion; otherwise, they could just do that. While that doesn't inherently make it a scam, it does mean they are probably trying to cheap out on you. Who's covering all the closing costs associated with the sale of the home?

And then what happens if they don't have the money at the end? Does the property revert to you? You talk about assuming obligations, but has title actually passed? What about any damage or simple wear-and-tear to it then? What happens if the property taxes, HOA fees, etc. aren't paid? If the property doesn't revert to you, do they just...hold onto it while you wait for the rest of your money? Do they walk away, leaving you with the deposit and the house? Are you going to have to sue these guys, either to enforce the agreement or to foreclose?

I am not saying this to be mean--I believe that most people lack the sophistication to manage the weird asset that is a house in anything other than the most ordinary of courses. If the questions I just asked didn't naturally occur to you, you are not ready to enter into this unconventional deal.

These types of transactions are also well understood to be predatory for the lessee, who will lose everything they put into "leasing to own" if for whatever reason they can't consummate the deal. I would really think long and hard before I got involved in that kind of scheme.
posted by praemunire at 3:23 PM on April 14, 2022 [14 favorites]

I think this approach to the purchase is called a "subject to" deal, so you could look up the risks associated with that.

Top on the list is, will your current bank allow this? Generally they don't, at least not officially. These folks may have some clever work around, I don't know. Generally the penalty would be for the bank to call for the loan to be repaid in full immediately. I don't think this always happens, but it's the risk. A bigger risk in an era of rising rates: why should they continue to lend you money at 3.5 percent when they could call the loan and lend that money to the next borrower at 5 percent? So if you had to come up with the cash immediately, could you? Or would this investor buyer cover that? This is a well known risk of this purchase type, so they should have a plan thought out.

What happens if these people don't want to close in 3 years? I'd be a little concerned that they're treating this like an option to purchase and will be able to walk away (leaving you just with the earnest money) if the market crashes, but stick to the deal if the market soars. How much of a down payment are they making? Would they agree to a thing whereby you get to share in some of the equity that accrues if the market goes up?

I agree that liability is a risk. Whose name is the insurance in in case of a fire? What if this renter hurts themselves because the cabinet falls off the wall on them, who do they sue? What if a fire spreads from here to a neighbor's, who does the neighbor sue?

There could potentially be a win-win in this, assuming the two of you can stomach the risk, but yeah, I guarantee that there's money on the table here, and you're taking on some risk that you deserve to be compensated for, so I'd get an attorney or real estate investment adviser to look at the documents and help you think about the fairest bargain you can strike.

The rent-to-own on the other side is also weird and seems designed to get their down payment to you back in their hands ASAP. My hunch is that these people are working some "acquire property with little to no money down" strategy. But again, that doesn't mean there couldn't be a win-win. They might be more or less decent people working this strategy. (Depending on one's view of the overall ethics here.) Or it might be worse. And you might not know which it is for three more years.

Generally in an inflationary environment, it's a great idea to hold assets. But who knows if the fed is going to keep raising rates in a way that crushes prices. Lotta uncertainty. And renting out a property isn't zero work so if you hate the idea, it won't be fun. Best of luck whichever way you go. But since these guys are clearly calculating all the angles and you're just a person who is spending your mental energy elsewhere, I am a little worried that they'll take advantage of you and would be sure to get an expert on your team. The $500 they charge you is nothing compared to the risk of losing tens or hundreds of thousands of dollars.
posted by slidell at 4:02 PM on April 14, 2022 [1 favorite]

Response by poster: @metahawk:

As an alternative, what would happen if you lower the selling price by 10% to get a quick sale instead?

We lowered the price twice during the period it was on the market, and it accomplished nothing either time.

If this is a retirement nest egg that you don't need, then fine.

The original plan was to recast our current mortgage, using the proceeds from the sale to reduce our current mortgage. That's still the plan, and whether that plan happens now or in 36 months is not necessarily an issue that would prevent us from going this route if it seems reasonable to sell this way.

Third is to figure out what happens if the deal falls through for some reason.

See next answer.

praemunire -

Does the property revert to you? What happens if the property taxes, HOA fees, etc. aren't paid?

Yes, we retain title. Title wouldn't pass until the agreed upon final sale date in 36 months. The written agreement we are expecting to get today will spell out what happens if payments aren't made in the interim, and what happens in the event of damages if the deal falls through, etc. If I need to, I will get a lawyer involved to review the agreement before we actually sign anything.

Who's covering all the closing costs associated with the sale of the home?

That is again expected in the documentation we're getting today, but I think we will be expected to. I'm not as worried about that piece, because in OR sellers cover closing costs in a "normal" transaction anyway. My concern there is that the closing costs are typical and not inflated, and we have a loan officer friend who will be reviewing all the docs when it comes to that, so I think we'll be covered there.
posted by pdb at 4:05 PM on April 14, 2022

Best answer: If you’re not able to find a buyer for it now, how confident can you be that they’ll find a buyer for the same flat in a couple of years’ time?

And in what proportion of these schemes do the people who “need a little time to get things together” actually get them together and have the money at the end of it?

Those are the general questions that leap out at me, as well as the more detailed stuff suggested above, about what the actual legal situation is if things don’t go as planned.

It’s in their interests to make it sound like this process always works out fine, but it sounds to me like it’s contingent on a lot of steps going the right way.
posted by penguin pie at 4:07 PM on April 14, 2022 [1 favorite]

I think this is a scam, and your or my inability to predict exactly how, is what they're relying on. But people who are scammers, have infinite ways up their sleeves (see TFG). If they want to buy it, and they can buy it, then they should buy it, now. Stringing it out offers you nothing above that but potential downside.
posted by Dashy at 4:44 PM on April 14, 2022 [3 favorites]

Oregon has a Consumer Protection hotline. They might be able to help you, or direct you in the right direction if you want to find out if it's indeed a scam.
posted by hydra77 at 4:52 PM on April 14, 2022 [2 favorites]

This feels like an attempt for the investor to get a call option on a property in a very frothy market. If the value remains strong (or gets stronger), they can go according to plan and buy it out. If the value declines substantially, they can walk away, leaving you with the rent that you collected and a much less valuable property.

If I were considering this, I’d figure out the financial effects in the ‘strong market’ ‘flat market’ and ‘major downturn’ scenarios, and make sure you’re not inadvertently giving the investor too much upside, or retaining too much downside risk.
posted by whisk(e)y neat at 4:54 PM on April 14, 2022 [16 favorites]

Yup, you're selling them a call option. You should assume they'll walk away if the market goes down or stays flat, as whisk(e)y neat says. Given that, you should figure out if the amount they're paying up front compensates you for the risk + time value of your money. As others mention, this is much more valuable to them in an inflationary environment, so it's no surprise you're getting pitched this right now.

I would literally feed the numbers into a Black-Scholes option valuation calculator. You can put:
- Underlying price: what you think is fair value for your condo
- Excercise price: how much they'd pay you in 36 months (NOT including the initial deposit)
- Days until expiration: 1095
- Interest rate: estimated annual housing price inflation, probably 5 or 6 percent
- Dividend yield: 0
- Volatility: 0.5% or so (this is the standard deviation of DAILY returns)

Take the price that comes out, *add your estimate for 3 years of rental income net of expenses*, and that's roughly a fair deposit price.

EDITED TO ADD: oh crap I totally forgot that they will rent it out to tenants who will trash your condo in the meantime (thanks praemunire!) Yeah just don't do this!!!
posted by goingonit at 5:13 PM on April 14, 2022 [11 favorites]

And in what proportion of these schemes do the people who “need a little time to get things together” actually get them together and have the money at the end of it?

They are deliberately targeting the subprime, or near-subprime, market. Why should they care if the lessee actually manages to purchase the property? The majority of the risk (how much depends on how much the "earnest money" is) is borne by the homeowner who has inexplicably decided to let them take all the upside while keeping most of the risks.

If I need to, I will get a lawyer involved to review the agreement before we actually sign anything.

If you don't understand why you need to, don't do this deal. Again, I'm not trying to be mean! You just seem completely oblivious to the implications. You are basically handing over your house to rent out to these guys who may or may not actually buy it at the end of the three years (if they manage to hustle a subprime borrower hard enough, or get a favorable mortgage then) or may just hand it back to you in unknown condition with a tenant in place whom you have not vetted and with whom you have no relationship and who you may or may not want to keep, but may have to evict. As the homeowner, all the major risks and liabilities remain with you, unless you have the sophistication to make favorable contractual arrangements re: indemnification and the like, and you don't. And that's assuming this is just a totally aboveboard bad deal for you. Are you capable of engaging in litigation over this contract? Do you have the money and the time? This is, presumably, one of your two most valuable assets, so you'd better be.

Basically, you are letting them rent the house for you as a management company would, except you don't get an income stream, only a modest amount up front. Ask yourself why they will be able to find a renter when you can't. If the answer is (and it is) that they are sleazier, will lie more, and will target poorer people, and you don't care...well, I guess if it blows up in your face you can join the vast ranks of people who thought the company would screw the other guy. In my line of work, I see a lot of those people.
posted by praemunire at 5:15 PM on April 14, 2022 [24 favorites]

There are probably versions of this that are worth doing, but this isn't one of them. The closest regular thing I've heard of is something that I've actually done, which is a "land contract".

I was involved on the seller side; basically it's like a seller financed mortgage where they pay a down payment and then monthly mortgage amortization, but the title is signed and not recorded - it's held in escrow and only released when/IF they make the balloon payment at the end or sell the property in the meantime (paying the balloon out of closing, in which case both title changes are recorded back to back). Googling land contract might give you some pointers, but you're getting that without the monthly payments AND without being able to vet or control the end buyer, so I would extra never do this.

Even with this being a relatively normal thing where I was it felt so sketchy all around, even though it worked out.
posted by true at 5:35 PM on April 14, 2022

This may not be predatory toward you, but lease-to-own is often predatory to the tenants. They have little right to the money they put in if they happen to miss payments later -- essentially, they're not building equity unless they're perfect and nothing bad happens to their finances for the whole payback period.

My (admittedly rough) understanding is this: if they put in $290,000 on a $300,000 house, then someone gets sick or depressed or their employer leaves town and they miss a couple of payments, they can lose that entire $290,000 -- they can't use any of that equity.
posted by amtho at 6:13 PM on April 14, 2022 [1 favorite]

Utah passed a law that if condo owners get behind on their HOA fees, other members can foreclose on the property. Just drop the price and sell it, or be a landlord. Do not put your "real estate," in someone else's hands.
posted by Oyéah at 8:09 PM on April 14, 2022 [3 favorites]

In NYC, this is the kind of deal that is described as "all shit and no pony."

If you, (nor the bright folks here), can't figure out the advantage to you -- nor adequately explain why this might NOT be an advantageous deal for you -- there's likely no pony.

That's a deal to walk away from, IMO.
posted by alwayson_slightlyoff at 11:04 PM on April 14, 2022 [4 favorites]

I would absolutely have a lawyer review any agreement. Who receives the rental money? What happens to the mortgage you currently hold on this condo?
posted by tman99 at 5:58 AM on April 15, 2022

I agree that this doesn't sound like a great deal for you. I am by no means a financial expert, but, just as a homeowner who has needed to think about things to do with a property after a move myself, I would consider this alternate plan: since you feel confident that the market will pick back up in a reasonable time, why not rent the condo out at a rate you think it WILL get snapped up at, without amenities, even if it's lower than your mortgage cost, and take a slight monthly loss? You will eventually get to sell the condo to break even, and in the meantime, you'll mitigate your cost even if you don't completely cover it. As long as you find responsible tenants who don't damage the property, in the long run, you'll come out ahead.
posted by BlueJae at 8:13 AM on April 15, 2022 [1 favorite]

http://www.benandrews.com/real-estate.html This guy is a truly good person and will be able to answer or steer you to someone who knows.
posted by tarvuz at 11:10 AM on April 15, 2022

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