Failure Rate
I have been reading a lot about purchase options and sandwich leases mostly by Conti and Finkel.
Then I went to John Reed's site and it seems like he hates l/o's because according to him the majority of the buyer's never exercise the option. I guess I am trying to elicit opinions from people who do this a lot if they have a high no exercise rate and how does it really effect/affect (not sure which) your bottom line. Also is the the nonexercising due to high purchase prices like Mr. Reed says, or are there other reasons?
Hopefully I am starting a long informative thread so feel free to expound to your hearts content. (hungry for knowledge from people who do this and know)
Thanks
Scott
I actually do the no-no and hang with some of my competitors (used to be President of the local real estate club), so from what I gather from them and from others I've spoken with informally, around half will close. We can raise this a little higher by offering rental credits and dealing with very liberal lenders. You can also take back a second mortgage for some of your equity to make the deal fly. I would make it nonburdensome--no payments--no interest--with a balloon in five.years. Some will move in two or three years, and you'll get a phone call to come pick up your check. Otherwise, they will have to refinance in five to cash you out.
Hey,
I would guess that even less than 50% go to the closing table.
I think that has a lot to do with the fact that some investors (REI) do NOT want their L/O to execute the option. Some REI see L/O as an exit strategy and others view it as a profit center, to be used over and over again.
As LeaseOptionKing mentioned, the REI can structure the deal to help the buyer. More investors should follow his advice.
This seems such a crucial question for the sub2 guys to weigh in on, because a high failure rate means big pressure on their expiring sub2 contracts. It's been my question all along about these sub2 operations.
Well the one thing that is making the option method more attractive to me is that I have the option to walk away if I don't have a buyer, and I am giving the owner back a property that they now have a ton more equity in, and a current loan. If I was smart on the entry then the worst case I walk away with two to three years of rental income. So I'm not really defaulting or anything, because that would lie heavy on my conscience. I want to find the most ethical way to do this, thus my question that started the thread. I do hope to get many more opinions.
Scott
First, let me say that, while it is a good method for selling homes, I do not like L/O's a method of "buying" or controlling properties. If you don't have the deed, then there is too much risk. REI is a fairly simple business to understand. If a method (like L/O) is good for selling, then usually it is less so at the opposite, or buying. Subto, for example, is a good method of buying, but not a preferred method for selling. With that said, I'll get off the soapbox.
As far as your L/O's actually closing, I believe (as others have hinted) that the success or failure rate depends greatly on the individual investor. If your intent is for the t/b to actually exercise the option and buy the house, then you, as the investor, have to help them every step of the way. Your contract needs to help them with rent credits. You need to have mortgage brokers lined up that work with bad credit financing. You need to offer your t/b's services that will help them to improve their credit. Finally, one of the most overlooked aspects, you need to only sell to t/b's who are committed to actually buying the property instead of renting.
Roger
I do concur somewhat, Rajwarrior. Getting the Deed is ideal, of course; however, most of my Sellers are not behind in payments and just would rather not continue making another payment (though they are not in danger of missing one). The motivation is not enough to sign over the Deed, but I can control those properties and still grab up those deals (and with no money). Life is a cumulative set of choices based upon risks versus rewards, and each of us has to decide our answer to that. With Lease Options, I do what I can to lower the risks to as minimal as possible and try to make the rewards as high as possible while still being fair. Of course, the L/O on the Seller side of the equation would be structured very differently (both Lease and Option in one Agreement, wording to create an equitable interest for me as T/B, the recording of a Memorandum, and good Contracts). A Deed in escrow and/or Performance Mortgage would be sweet, but the motivation has to be higher than the average Seller I deal with. Conversely, we want separate Lease and Option Agreements to give to our T/B (who should be called an "optionee" in the actual wording), take extra precautions not to unwittingly grant equitable interest in the property for our T/B, and language that forbids the recording of any Memorandum--lest it render the Option nullified. So, we can structure the two sides differently--almost so different that they are foreign in appearance. But all of this is just my take on things, which is tainted by my own opinions. *steps off soapbox to avoid flying tomatoes*