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Foreclosure Property Investment

Lief, this is a really bad idea:

“‘An investor-friend told me recently about a U.S. foreclosure he’d bought from the bank, a house still occupied by the seller…who is now a tenant paying the new investor-owner a rent high enough to generate an acceptable yield. Plus the seller-tenant has an option to buy the house back in two years.’

“Giving the tenant an option to buy is a big minus, not a plus. It means that if house prices rise dramatically, your investor-friend won’t benefit at all because the tenant will exercise his option to buy at the price agreed in the option. But if house prices fall dramatically, the tenant will choose not to exercise his option, and your investor-friend will be stuck with the loss. It’s a one-way bet: heads your friend loses, tails he doesn’t win.”

–Nick J., United States

Lief Simon replies:

Don’t agree. The friend I’m speaking of invested in the property because it’s throwing off a great yield. Any appreciation is gravy for him. Is the option a good idea? Depends on the terms of the option, right? Set the future price today, and it’s like a stock option with a strike price. However, you can write up a lease-purchase option for real estate in many ways.

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–Donald T., China

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