Limiting Liability Options

[Doug Pretorius (...]

Steve and I were discussing possible ways to limit or eliminate the liability of making payments on vacant SLOs. Turns out a seller that I have a deal lined up with for January had the answer. They will take part of the option consideration, and in exchange they'll take responsibility for any vacancy or repairs. Nice! So I'll keep a few bucks upfront, all the cash flow, and the back end and not have to lose a wink of sleep worrying about my T/B skipping out in the middle of the night.

How's everyone's business going in the run up to Xmas? I've got motivated sellers coming out of my ears, 10 years doing LOs and I've never seen it like this before!

[SteveK]

Steve and I were discussing possible ways to limit or eliminate the liability of making payments on vacant SLOs. Turns out a seller that I have a deal lined up with for January had the answer. They will take part of the option consideration, and in exchange they'll take responsibility for any vacancy or repairs. Nice! So I'll keep a few bucks upfront, all the cash flow, and the back end and not have to lose a wink of sleep worrying about my T/B skipping out in the middle of the night.

How's everyone's business going in the run up to Xmas? I've got motivated sellers coming out of my ears, 10 years doing LOs and I've never seen it like this before!

I'm new to this (goin on my 6th month) and still no CA's done. Thanks for askin

[<Steve>]

Hey Doug-

Yes, we talked about SLOs and the pros and cons as one builds up a portfolio. Having multiple properties I have at times more than one vacancy at a time. This can create a negative cash flow. To minimize the any loss, we know that the option consideration received up front is a cushion and it is important to set aside a reserve. Now I am a ‘tight wad’ and I don’t want to give up any part of a reserve either. So, we tossed back and forth ideas to not have to be responsible for the rent payments should a property become vacant. One idea as Doug mentioned is to share part of the t/bs option consideration with the seller. I am still resoling with the idea because being the 'tight wad' I am I hate giving up the front end profit too. Although I may have a negative cash flow for a month or two with SLOs, I look at the monthly passive income for the full year to realize the profit.

Doug, where did all those sellers come from? For me it's slimmer pickens for sellers this time of year, but there are tenant/buyers out there.

I'm new to this (goin on my 6th month) and still no CA's done. Thanks for askin

Hang in there SteveK. People are thinking more about the holidays right now; except in Canada...

[Doug Pretorius (...]

It's the Steve's!

SteveK, like <Steve> said, hang in there. If it's slow where you are now around the holidays it should pick up around mid-January.

<Steve> nothing special, just plain old dialing for dollars. I still don't much care for 'cold' calling but I'm pretty good at it now and comfortable with it when I actually get around to it LOL! The possible deal I mentioned above was a no 6 weeks ago, now it's a probably.

Oh believe me, I'm searching for a way to get all the money and not have any responsibility Another simple way to do it although you'd be giving up the back end profit as well (not a problem if it's a marginal deal to begin with) is to do an assignment and carry back a note for the cash flow.

Example:
Your deal with seller...
Price: $200k
Rent: $1,500
Term: 2 Years

Let's say the house isn't worth much more than $200k but you can rent it out for $2k. A normal CA would have that cash flow (or part of it) go to the seller and you take say $8k. But why not keep that cash flow for yourself? Assign the deal for $20k...payable $8k upfront and $500/month for 24 months, all of it credited to the purchase price.

That would be kinda half way between a CA and a SLO on the profit scale, and you would have zero liability for vacancy or repairs. That's what I'm going to do on my next deal just to see how it works out. Lots of deals to be had here where the seller wants or needs too much for a SLO to be worth it.

[SteveK]

It's the Steve's!

SteveK, like <Steve> said, hang in there. If it's slow where you are now around the holidays it should pick up around mid-January.

<Steve> nothing special, just plain old dialing for dollars. I still don't much care for 'cold' calling but I'm pretty good at it now and comfortable with it when I actually get around to it LOL! The possible deal I mentioned above was a no 6 weeks ago, now it's a probably.

Oh believe me, I'm searching for a way to get all the money and not have any responsibility ;) Another simple way to do it although you'd be giving up the back end profit as well (not a problem if it's a marginal deal to begin with) is to do an assignment and carry back a note for the cash flow.

Example:
Your deal with seller...
Price: $200k
Rent: $1,500
Term: 2 Years

Let's say the house isn't worth much more than $200k but you can rent it out for $2k. A normal CA would have that cash flow (or part of it) go to the seller and you take say $8k. But why not keep that cash flow for yourself? Assign the deal for $20k...payable $8k upfront and $500/month for 24 months, all of it credited to the purchase price.

That would be kinda half way between a CA and a SLO on the profit scale, and you would have zero liability for vacancy or repairs. That's what I'm going to do on my next deal just to see how it works out. Lots of deals to be had here where the seller wants or needs too much for a SLO to be worth it.

I hear ya guys. What I seem to notice is that the areas that have been hit hardest by the housing crisis, So Cal (I'm in San Diego), FL, NV, AZ seem to be the toughest to do anything with because there are so many homes upside down on their mortgages and everyone here did 100% financing. I can do a phone call and in 5 minutes say what I need to say but when I crunch the numbers, it always comes out to $80 - $100k+ that the seller would have to come out of pocket with at close. I also notice nearly all the LO's on craigslist in my area are FSBO's doing their own LO. At first I thought I was doing comps wrong but then Michael and I did comps for the same addy and it checked out so I know it's not me.

Fortunately, I didn't go out and buy that Aston Martin expecting $6-$15k a month in CA's.

[<Steve>]

Doug-
A kind of hybrid of a CA/SLO. So, are you thinking the t/b would cut a rent check to the owner and a second check to you for the $500., and the $500. is the rent credit the t/b receives every month? Or, the seller receives the full rent amount and cuts you a check for the $500.

I am just thinking how to market the advantages to the seller. Maybe, you handle the administrative side of keeping track of the rent credits and the option consideration the t/b has paid, so when the t/b exercises the option you can provide the documentation/records of what the t/b receives at close. I guess you can also offer the advantage to hold either the t/b or sellers hand through the closing process too.

On the other side, I can see that although by agreement you would be out of the liability of rent payments and repairs, but if there was ever a problem you would still receive a call from either the t/b or seller. Not saying that the problem can't be managed. With an SLO the seller and t/b are kept separated from each other and with a CA you are released from the relations between the seller and t/b, with this hybrid L/O all three the seller, t/b, and investor are in the same deal together. You know what I mean. So, there may be other liability issues to consider, or maybe not.

I think it is a great idea. I had a seller a few days ago that I was explaining a CA to and as she was trying to understand how it works. She mentioned that I would receive the option consideration and the rent credit amount and she would receive the balance of the rent.

[MichaelC]

Howdy, boys. Creativity is the mother of invention. Way to tweak your approach, Doug, and make the deal more palatable for your preferences. As always, there's a give and take in these deals. Give up something here to gain something eleswhere in the deal.
And, yeah, it's December, meaning slower days for real estate. Most folks are wrapped up in Christmas and all that entails. Buying or selling a house gets pushed back a month or two. So it's not only you, SteveK. I think most of us are seeing the same thing.
However, the upside down situation is definitely emphasized in SoCal and Florida, and a few other parts of the US. Not much you can do about it other than to keep marketing. Not every homeowner is ass backwards in their property. In the meantime, push the idea of a straight rental to homeowners who really have no other choice. A little something is better than a whole lot of nothing.

[randian]

You can simplify the liability issue on a SLO by using percentage rent. Instead of a fixed rent you pay, for example, 80 or 90% of income. If there's no incoming rent for a month, 90% of zero is zero.

I would add eviction costs to your rent offsets.

[<Steve>]

. . . seems simple enough

[Doug Pretorius (...]

Interesting take on it randian.

[<Steve>]

The only issue I would see is from the good folks at the state's REC. What I pay the seller is distinct from and independent of any obligation between me and my tenant. This was a strong argument from my attorney to the REC and I wouldn't want that to be compromised. Basically, I am the seller's tenant and have permission to sublet; however, I still pay the seller as their tenant whether or not my tenant pays me.

The percentage idea grays it a bit for me. Don't mean to play devil's advocate.

[Doug Pretorius (...]

BTW Steve, with the approach I mentioned above where you take back a note for the cash flow. You're liability would be no different than a standard CA. All you're really doing is taking part of your assignment over time in a series of payments instead of a lump sum.

[randian]

One big difference between a tenant with right to sublease and a property manager is that the tenant has right of occupancy and the property manager doesn't. An owner usually doesn't have a right of refusal with respect to a subtenant, while an owner can always tell a property manager yay or nay. A tenant takes primary landlord liability with respect to the subtenant, while a manager, being an agent, generally takes no liability for the actions of either the tenant or the owner. Besides, percentage rent is common in commercial deals (retail mostly). Anchor tenants with a lot of leverage often negotiate percentage-only lease deals. If the REC challenges you, they implicitly challenge other percentage rent deals. That's a lot of mighty angry commercial landlords to content with.

[<Steve>]

randian, thanks for the reply.

Ok, I understand, but this issue I have is:

A tenant takes primary landlord liability with respect to the subtenant, while a manager, being an agent, generally takes no liability for the actions of either the tenant or the owner.

Being an investor, I am not an agent or property manager which requires licensure. Any ideas how to get around this?

[Jonathan Rexford...]

randian, thanks for the reply.

Ok, I understand, but this issue I have is:

A tenant takes primary landlord liability with respect to the subtenant, while a manager, being an agent, generally takes no liability for the actions of either the tenant or the owner.

Being an investor, I am not an agent or property manager which requires licensure. Any ideas how to get around this?

Performance Lease Option with the right to Sub lease option.

Under terms of agreement seller to get fixed amount of price
Under terms of agreement seller to get 85% of net cash flow when collected
Under terms of agreement Investor to get set amount of cash above sellers fixed amount
Under terms of agreement anything above investors fixed amount of profit the profit can be split 50/50

That will work.