Inner Circle Form of the Month: Work For Equity Agreement

Back in February, I wrote a couple of articles about the return of the “Work for Equity” deal (you can find them in the blog feed on the Inner Circle page).

Since that time, I’ve done several more of these deals, which look like this:

• The property is a single family home, typically in a bread and butter or border zone area
• The condition is “ugly but livable”. It’s structurally and mechanically sound (the roof doesn’t leak, plumbing and wiring work etc) but needs cosmetics
• The buyer is a homeowner wannabe who doesn’t have the credit to buy right now, but does have the skills to fix up the property
• The buyer either leases with an option to buy for 2-3 years at a below-market strike price or, if the property is cheap enough to amortize a loan over 10 years or so, buys on land contract
• The buyer pays an up front payment, monthly payment, and overall price, all of which are lower than would be the case were the property completely stabilized.

I am offering most of my homes that go vacant this way now. In the most recent example, a tenant moved out of a 5 bedroom house in a pretty desirable little city adjacent to Cincinnati. It’s a $150,000 house fully fixed up; it needs carpet, paint, and landscaping to be “fixed up”. It last rented for $1250 a month.

I offered it 2 ways:

We fix, it’s $150,000, $10,000 down, $1,595/mo with a 2 year option to buy.

You fix, it’s $130,000, $4,000 down, $1,295/mo with a 3 year option to buy

We had no applications for option 1 and 3 for option 2.

The key thing to understand about this kind of lease/option is that the tenant/buyers are, legally, still tenants and that even if they agree to do the updating, they cannot be forced to do it. In fact, the repairs can’t be made an enforceable part of the lease at all—they can only be made a term of the option to buy.

And that’s why this month’s form of the month IS such an option.

Some notes on this form:

1. Of course, never use this or any other contract without reviewing it first with your attorney. Local and state laws may affect the legality and enforceability of this agreement.
2. This contract assumes that you OWN the property and can assure that you can provide clear title at the end of the option period. If you control the property via a lease/option, you’d need to strongly disclose that in YOUR option, in case some kind of title issue should arise.
3. Remember that, despite this signed legal document, you MUST make any repairs that affect the safety or livability of your unit if the tenant/buyer won’t. The “teeth” are that he loses his option fee and the right to buy the property.