Lease Option Question
I have a friend who just purchased a house and will be movingout of a home that she has a 'lease option' agreement on. She has decided not to exercise her rights to purchase and just leave the house. The owner of the house lives out of State and is panicked to have the house deal fall through and still has mortgage payments to pay.
My question...
If I approach this woman with a lease option deal, how would I structure it so that I can turn around and flip it within a short time ( a couple months)?
What I really need to find out... how do I take possession with as little money as possible out of pocket as possible and be able to sell it right away?
The house is assessed at $135,000-. My friend was going to buy it for this amount. The house has a FMV of $170,000- and the market is HOT in that area. I have about $10,000- cash to work with. :-o
You can go to the lady with the option to buy the home and have her assign the option over to you. The agreement may not be assignable so you'll have to check. The option agreement may be recorded so you can see the agreement yourself. If the seller does not want the house, you may very well be able to get the owner to allow you to purchase the home.
Ideally you want to sublease the property for a few months in order to find a buyer and sell the property. You will need some rent money for this. You will find a buyer---they make an offer to you. Then you will take that offer and your option agreement to the closing agent and do a double close on the property!
The most you will likely spend up front is rent money. All other (nominal) costs will be paid at closing.
GOOD LUCK--This is a potentially GREAT DEAL!
deblica,
You want to arrive speedily for reasons of picking up the same terms as the moving friend. If you can get the same terms, but with a MAJOR difference, you can pull off the "flip" very profitably.
Backing up, the owner should not be that panicked if she received several thousand $ as an OPTION FEE. She may be if renters are rare, while buyers are not, but this is somewhat unlikely as they go hand in hand.
Your GOAL is a ten dollar option fee, with the Option to buy @ $135,000 or whatever you can negotiate. For example, you approach the owner and help her not to worry. This puts you in problem solving mode, and may very well keep your OPTION FEE low.
If the OPTION FEE is contested because the owner got $3,000 OPTION FEE from the last tenant-buyer, you can ask her to split that with you (one way to do it; be an imaginative, problem-solver; it really helps). The split is $1,500 OPTION FEE, $1,500 increase in OPTION PURCHASE PRICE. Ask and you are likely to receive. Don't ask the MOST reasonable price and terms, because your looking for a deal of course, and it's hard to improve a deal if you started high. Conversely don't embarass yourself or minimize your value by asking way too low of a price.
Don't give $1,500 OPTION FEE and increase PURCHASE PRICE $3,000 because you think it's more reasonable.
The seller will have some reluctance to badger/nip etc. away at you, and you leave it that way. The numbers can be split, so stick to them and don't show slackness at an early stage of negotiation.
In this scenario, OPTION FEE is $1,500. (Seller likes this, some money in her pocket).
Your OPTION PURCHASE PRICE is $136,500.
The terms are 23 months RENEWABLE. (It's involved but trust me on this--due on sale clauses, laws, taxes, etc). Ask for two renewals prior to writing up the contract and include this statement. Owner now has a cash cow for 2-6 years or her money when the Option is exercised anytime over that period.
Now the good stuff. How do you "flip" it? It's the MAJOR DIFFERENCE. Include the "RIGHT OF ASSIGNMENT" in the Lease/Option contract. Commonly the contracts are preprinted with "cannot be assigned." As commonly, you line through and you both initial this, or you make a pristine new contract permitting assignment. This allows you to sublease the property, or even sell it to another investor. You do same again. YOU lease/option advertise a rent-to-own. Get as high option fee as possible and permission to check credit from potential tentants. If they can bring $3,000 cashier's check and have good credit they're in. You make sure the lease is for one year. Not renewable. Or 23 months and not renewable, unless (in both cases, one year or 23 months) a new OPTION FEE is given.
See Vickie and TC Bradley's course on the web for probably the most affordable as well as an outstanding L/O course with contracts included. TC Bradley sent me the forms later in Word format so I could tweak them, Adobe Acrobat is too hard to modify. He answered my questions promptly by e-mail also.
A lease/option contract is also in the LEASE/OPTION FORUM on this very site, a month or so ago, when a poster inquired about forms. I'd link it to you but I'm not real versed in the forum, if even I'm allowed to as a freshman.
MONTHLY LEASE PAYMENT; seek slightly lower than last renter. You could say, I really don't want to have a large OPTION FEE. Could we split this $1,500, etc......
...AND from the first $1,500 lower the monthly payment $22, because 69 months divided into $1,500 is $22 a month.
If yes, (or even if no-just roll with it, think it over, always be pleasant, leave a period of silence-no problem!) you continue:
If all of my payments to you are exactly on time, which they will be, would you CONSIDER (all likability has a touch of vulnerability in it - we don't often like the most powerful, smiling people who in their minds are being "friendly," unless we can help them also...unless there's a touch of vulnerability) giving me a RENT CREDIT toward my eventual purchase price. "What is that, or Yes, what did you have in mind?) "1/6th rent," you say. OK, that's a tiny figure that is usually jumped at; it could be $100 for instance. Two nice nibbles going your way. Subtract $2,300 after 23 months from your purchase price, and $506 savings from $22 less a month. It will all be prorated to when your Option is exercised of course. The longer the more savings.
If the answer is no, you lean back on it's "standard approach" for some credibility, but not belittle the seller. Slowly and with voice slighly lower, because your not desperate, (you can cash flow without it and you don't want to accidently fall into sounding too eager; you just propose a solution and see if it takes; you propose another solution, and so on) you say,
"It's actually common and standard in lease/option contracts to offer a very small rent credit for repairs, etc. (You will NOT be making repairs, though. All repairs under say $200 will go to your tenant, while over $200 will be the owner's responsibility - it will say this in your contract.) You could alternately describe the rent credit you want as only one half the repairs your willing to insure are performed each month, if needed. Just reverse the order of discussion, i.e, 'I'd like to make sure all minor repairs get done each month..." Owner likes this $200 month idea where you take on the responsibility. You then ask for RENT CREDIT for half that amount, if all payments are exactly on time, which they will be (though electronic automatic payments.)
If owner has a problem with sub-letting, remember you're a professional. You'll get their house sold and make absolutely perfect payments regardless, because of your reputation, your contract, and the rent credit incentive that you don't want to be wiped out (you don't mention the wonderful profit). That sounds all great to the seller.
An investor who may want to buy your contract through your assignment to her,
would see YOUR cash cow, and you could get out of a pickle. But don't hang around pickles. Get your biggest profit later when you exercise your beautiful OPTION PURCHASE PRICE.
To the owners question, "Who really will be living there?" Either a very qualified tenant family or myself.
Get that house, deblica. You are so close, now!
Alan
[ Edited by fearnsa on Date 04/30/2004 ]
I posted a Course! Way to go myfrogger!
Myfrogger's approach is simpler, and from a more experienced investor, deblica. The owner might want to sell you the other tenant's option. I really like simple, but personally prefer a new contract with the ability to make more money. Minimal downside to long-term lease is finding tenants to sublet to, but you'll always get an Option Fee, and this will prevent negative cash flow. You'll do well to learn this method of sub-letting, but to get quick cash this nice, myfrogger is onto something you might want to check on first!
Alan
Thank you everyone for your encouraging words.
I let the sellers know that I am interested in buying using a lease option. I have yet to hear back from them. Wish me luck.