Real Estate Question - Rent for Deed

Planning to research these options, but I know there are some experienced real estate folks here and wanted to get some tips/opinions from you guys.

I own a home I bought in 2006 so I am currently 7 years into a 30 year. I bought for 105k and currently owe about 90k. I got the house in the divorce; one of the stipulations of the MSA was that I attempt re-finance the loan to get her name off the mortgage (it was already off the deed via a quit claim).

Anyway I did re-fi in April of last year. My home loan company offered to do two things on one condition. They offered to cut the interest rate from 5% to 4%, and to forgive 18k in principal (I was pretty far behind on the house at the time), provided I keep the loan in my name for 3 years. 6k of principal comes off each year for the next 3; if I sell I forfeit any principal forgiveness that hasn't occurred yet (e.g. if I sell after one year the 6k remains off the principal but I'm giving up the other 12 they offered). No balloon payment or anything like that, the 18k is just going to be forgiven per their offer.

Obviously it's in my best interest to keep the loan for 3 years. However I moved out of state and no longer reside in the house. I have a tenant who is currently paying me 1k per month for rent (my mortgage with insurance and taxes escrowed in is ~700). Tenant is a friend of mine, takes really good care of the house, and is always on time with rent.

Tenant now is inquiring about buying the house. It recently appraised for 109k when I was considering selling it, prior to the loan modification/rental situation. I don't want to lose this sale but I want to keep it in my name for the next 2.5 years. He's under lease through November but intends to sign at least 6 more months regardless.

I am considering doing a rent-for-deed situation of whatever you call it, where a portion of his rent goes towards a down payment/comes off principal after the term. If he decides not to buy then obviously I keep his entire rent. This would be best for me and him I think, as he doesn't have great credit and will have a hard time getting financed at this point; so it locks in the buyer for me and it locks in the house for him.

I'm thinking this works like this:
We sign a lease agreement for the remaining 2.5 years with the normal 1-month penalty or whatever if he wants to break it prior.
He gives me $1000 monthly; X goes towards principal/down-payment
At the end of the term he can buy the house for Y using the sum of X he has accumulated as down-payment, or walk away and forfeit the sum of X.

Now, the questions:

• How do I determine X? Is it a set amount or does it change over time in correlation with what I'm actually paying on principal? If I look at the amortization schedule and determine that of my mortgage payment I am paying $80 in principal this month, $82 next month, etc...is a %age of that what he is contributing towards principal? What %? All of it? How does this typically work?
• How do we determine Y? Is that agreed-upon now or at the end of the term? If now, what is fair? It appraises for 109 but I think it'd actually probably sell for 100 today but closer to 115k in a couple years (real estate is really rebounding in this town and I think it will continue to improve, but this is pure speculation on my point). I know this is an agreement we have to come to but just looking for opinions on this.
• What are the tax implications here? Someone told me the IRS does not look favorably on this type of situation and I'd be better off doing a "land deed agreement" or something like that? Not sure what he was talking about.

Sorry for the long-winded post but any advice would be MUCH appreciated.

OK I guess I'm asking about a Lease to Own and POTENTIALLY a contract for deed situaion.

[h=2]Lease to Own[/h]With a lease-to-own agreement, the seller of a property puts part or all the rent you pay toward the final purchase price of the house. The buyer usually sets the final price of the property at the time you enter into the lease-to-own agreement and grants the renter the exclusive option to buy the house for a specified time, such as a year. If the renter decides not to exercise her option to buy, the seller keeps the rent, the agreement is void and the seller can put the house back on the market. If the renter does decide to buy, the payments she’s made to that point are credited against the agreed-upon purchase price. At this point the parties involved can agree that the renter will seek a traditional mortgage, or they could enter into a contract for deed. During the term of the lease-to-own agreement, the relationship remains one of landlord and tenant. The landlord is responsible for paying property taxes and owns the property in the eyes of the law.


[h=2]Contract for Deed[/h]With a contract for deed, the seller of a property and the person who wants to buy enter into a contract in which the buyer agrees to pay off the price of the property in installments. The contract may or may not require a down payment. As with a traditional mortgage, each payment includes interest. While the seller in a contract for deed holds the title in the property until it is paid off, the buyer holds what is known as an equitable title. He can live on the property and make improvements and he is responsible for paying the taxes and insurance. In many ways, a contract for deed acts like a traditional mortgage, except the buyer can’t use the equity he’s building in the house to take out a home equity loan.

Another question, the portion of his rent that is going towards principal each month...do I have to keep that in some separate account and produce it at sale as proof to the bank of his down-payment (to help him get financed)? Or can it just come off the purchase price?

Your situation sounds complex. Why not consult a lawyer?

Bane1976 said:

Your situation sounds complex. Why not consult a lawyer?

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I'd rather not go that route cause, ya know, they tend to like currency in exchange for their services. This tenant is a buddy of mine, getting a lawyer involved should not be necessary. It's really not all that complex.

Thanks though.

Not complex until something goes south and things get ugly.

Bane1976 said:

Not complex until something goes south and things get ugly.

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At that point I would consult a lawyer. I'm perfectly capable given all the online legal tools out there of putting together a simple contract...things would only get messy if I had to enforce it. Just looking for some input on some of the specifics. Thanks for all your help bud, you have provided tremendous insight.

Correction I did a refi in April 2013, I originally said last year...