Are Lease Options In Demand? Are Tenants Favorable To This Method?
I guess I just want to know what the turnaround time is after putting a lease option offer on the market (ie, newspaper, online, etc.)? Does it require a degree of persuasion to get a potential t/b to accept the lease option approach? Thanks for the feedback. 
Carry costs are never just cut and dry. Your market, home appeal, repairs, and price, contribute to the investors carry cost. Straightforward ad: "Chicago: 3/2 house with basement, rent-to-own E-Z qualify, $1,200 per month 312-555-xxxx"
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Im not sure that answered my question. Let me pose it differently. Why would a potential t/b choose a lease option over a conventional method of purchasing a home? And how hard is it to find a t/b for a lease option?
I just did my first lease option deal and it wasn't too hard to find a person who was motivated. People with dinged up credit or folks who haven't been in the US long enough to establish credit are great targets....post an ad that reads- RENT TO OWN!! I made 10K on my first deal.
Thanks, thats the kind of info I was looking for. Very helpful and encouraging.
Sorry Ram, finding the tenant buyers is not difficult. Just remember that the odds of the tenant actually buying the property prior to option expiration is rather low.
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To answer your first question as to why would someone choose to do a L/O instead of conventional financing, think of it like this:
There are many people who could afford the mortgage payment on a $300,000 home, but do not have the $60,000 down payment plus closing costs. An investor lets them "rent to own" a house. They put down around $10,000 instead and choose a purchase price of let's say $315,000. They pay rent that is only slightly above what their mortgage would be, the house appreciates in value and they may be getting a rent credit as well.
After 2 to 3 years, they have built up a good amount of equity in the home, and can show a mortgage company an excellent track record of making the payments that will be required of them.
Win,Win for all parties
That actually prompts another question I had in mind. Lets say Im doing a sandwich lease option and my term with the seller is 3 years and my first t/b exercises his option after their term of 1 year expires. How would that work with the seller if he isnt expecting the purchase for another two years to include the appreciation?
When you sign your L/O with the original seller, it is for a maximum period of time (in your example 3 years).
You have already set the purchase price up with him in your original negotiation.
Nobody minds getting paid out at full-price early.
My stats...22 days is the longest time for me... no persuation at all... just a matter of which tenant/Buyer I chose .....
Quote:
On 2003-10-29 10:12, ramgon1280 wrote:
I guess I just want to know what the turnaround time is after putting a lease option offer on the market (ie, newspaper, online, etc.)? Does it require a degree of persuasion to get a potential t/b to accept the lease option approach? Thanks for the feedback. <IMG SRC="images/forum/smilies/icon_confused.gif">
Quote:
On 2003-10-29 11:51, mcl8190 wrote:
When you sign your L/O with the original seller, it is for a maximum period of time (in your example 3 years).
You have already set the purchase price up with him in your original negotiation.
Nobody minds getting paid out at full-price early.
But isnt the original seller expecting more than I will be receiving from my t/b considering that at the time of the lease with the seller he is expecting a projected 3 yr selling price (with appreciation), and my t/b would have only been given the 1 yr projected price? I may have this all messed up but any clarification would be greatly appreciated.
Ram,
you are confusing the 2 things.
Go through it in steps. This is a very simplistic example
1. Find MOTIVATED seller
2. offer to L/O his house for 3 years. Offer him a price below his asking price up to a maximum of his asking price. This gets him out of paying mortgage, taxes, utils, etc on an empty property. let's say you offer him 250k on a house worth 270K. He now has no payments on this house for the next 3 years and he will get the full 250k after that. He also has the tax advantages during this time as an added bonus.
3. You find a tenant-buyer to rent-to-own the house. You come up with let's say 290K purchase price on the house and charge him a monthly rate higher than you are paying the original seller.
4. if after 1 year the tenant-buyer wants to pay off the 290K, you give the seller the 250K and walk with the difference.
Well thank you for that clarification. However, where does the appreciation rate come into play in the previous scenario? I think I get the jist of this whole lease option method, its just the appreciation that confuses me.
You get the benefit of the appreciation. The seller gets out of a problem, has their mortgage paid, and is paid up to full asking price based on FMV TODAY, not 3 years from now. Now, the t/b will agree to a price with you that is slightly below market, based on projected appreciation rates in the property's neighborhood (some sites on line can help with this, I believe). So when they buy at end of term, they will have equity, seller gets agreed to price, you got up front option payment, which was part of your future profit that you realize when t/b exercises option, and you had positive monthly cash flowl
As far as rent credit, I heard most banks will not credit that as down payment (unless you hold that portion in escrow to PROVE funds are there - I think rent credit as DP is based in theory, not reality, but prove me wrong folks).
Perhaps another way to sweeten the pot for seller (because t/b who is motivated should be tickled to get into a house with option to buy with their low credit score) is to offer them a percentage (albeit small) of future equity profit.
Just an idea, good conversation going! - Dave
Wow that's a great question.
Someone please respond.
My guess is that you would try and
sync up the terms beforehand.
-Ariel
Ok then, to recap. When I lease option with seller, he does not get the benefit of appreciation because of all the other benefits he'll get such as equity, taxes, etc. But I do take appreciation into consideration when sub-leasing to t/b. Ah I see, that's where I was lost. I thought it was applied to both ends. You guys are great. Putting up with my feeble questions. God bless you all!
One more thought though. On that last suggestion to allow seller to share in tail-end profit, wouldn't there be a chance that the seller could just bypass you (the investor) altogether and lease to another t/b using your numbers (and profit) thereby cutting out the middleman. Just a thought.
Correct me if I'm wrong. Isn't that way you would have your L/O agreement prepared so you as an investor would be protected from such a deal.
Gonzo
Ram,
Seller can't bypass you if you have a written deal in place with them already. You are going to record your contract to cloud the title, and make it legally binding.
Your tenant-buyer is going to be a renter from you. You want to use 2 seperate contracts, a standard rental form (makes it easier to evict) and a option to purchase.
I think that was what you were looking for, if you were asking why they didn't just do this in the first place, it's because they aren't very creative, but luckily you are!!
Ok... thank you all for your replies. It is very helpful and greatly appreciated!!!
Just wanted to express my gratitude to all you for walking through this issue.
This was a great thread!
Thanks,
OTW