Scenario

When it comes to a principle residence, few of us would not want to live in a nicer house. However, many of us would prefer not to increase our living expenses to afford such extravagance.

Solution

Dave and his wife Tracey walked through their neighborhood and found a vacant house that was for rent. They approached Mary, the owner of the house, and suggested that he sell them the house for a promise to make a payment of $1,500/month with no money down. As Mary was getting on in years she was looking to get rid of the work associated with property management. The reality was that Mary wasn’t a very good property manager and she’d never been able to find one either.

The reason she kept the house was that she planned to sell it in 10 years to pay for her grand daughters college education.

Knowing this, Dave and Tracey told Mary that if she’d accept their offer (market rent was $2600) that they would give her an option to buy the house back for the same price in 10 years or less.

Summary

Mary wanted the upside of the house, but needed to rid herself of the managemet hassles, so she traded near term cash flow for a reduced workload, and retained the upside.

As Dave and Tracey were going to live in the house and had good references, Mary knew they’d make good caretakers for her property, plus they would have to pay for property taxes and repairs during their stay. Net of taxes, repairs and property mangement, Mary would have only received $1,500 per month anyway, and she would have still had to deal with vacancies.

By selling the house to Dave and Tracey, she would receive a guaranteed cash flow, elimiated her liability (she can’t be sued for a dog bite if she doesn’t own the property) and Dave an Tracey got to live far above what their cash flow would support. Everybody wins!