here's a lease option example...missing anything?!
hi everyone! motivated couple due to impending divorce, willing to let us control contract on their 3/1 single family house. asking 76k to pay off their loan. appraised at 82k. monthly mortgage payment 612.00 plus insurance and taxes yearly of 1000 dollars. owners willing to maintain existing loan indefinitely. our thought is to lease option it with 3500 to 5000 down (which is where we'd earn our money). what may be missing up to this point? thanks, dogbrain
Hey dogbrain
Big question, how are you controlling the property? L/O or subject to, or what?
I'd suggest doing a subject to in order to have greater control of the property.
You may be able to get that much down, but in my experience, you won't. Should be asking about 3-5% down, which from your FMV of $82K is $2500-$4000.
If they have $5K + to put down, then they can probably get a loan unless their credit really stinks. If it does, you don't want them anyway because they won't be able to get a loan a year from now either.
Roger
I would never do this deal. If they need money then make their divorce lawyers prepare legal documents that give you the property now and then deal with the one who wants it back. You need two spousal releases and two lawyers for them, not one or you're in trouble!!
Buy this property cheeper than 76k or look for a better deal. Watch the property though in case it gets near foreclosure.
Perhaps I am just profit hungry, but I would be looking for larger returns. Regardless of the type of investment, I generally look for at least 20% below market value, if not 40% or more. For example, let's just say you achieved 30% below market value. You would contract the property for $58K.
Also, I'm not sure how safe this investment is. You don't have much of a cushion. I'm no expert on lease optioning, but aren't you responsible for certain types of repairs under normal circumstances? The last thing you want to do is gain a few thousand dollars now and then lose it all or more later.
Two thoughts come to my mind. Is it reasonable to expect that you could get a T/B to pay $850-900/mo in this market? And I have to agree with DMorrow that you need to have both spouses on board or you are ripe for trouble later. The above mentioned subject to contract with a wrap around mortgage will secure you pretty well on this second account (provided it is done right which should be no problem for you there are plenty of resources on this site to help you with that).
However the first issue is the key. If the going rent for three and one's in this neighbor hood is $700-800/mo you can expect to get a little more per month for a L/O / rent to own. People will pay more for the opportunity you are giving them that a bank won't.
One other piece is also important. How much fix up will it need? That is money that you may have to put in yourself.
As for the lawn and routine fix ups if you present it right to the T/B that they are getting the opportunity to own this house I think it is a pretty good bet that they will make improvements beyond little fix ups. Their non-refundable deposit of $3500-5k (or a little less as has been suggested here) will motivate them to consider that house their own.
Also don't forget to get the current owners to make the next few payments (two or three) while you are getting started. That money is critical to your profit margin. If they are truly motivated they will agree to do just that.
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Great Luck,
KP
Emerald Investment Real Estate
eiremclaughlin@comcast.net[ Edited by KP on Date 05/08/2003 ]
thanks roger, dmorrow, dural, and kp for replies and helpful advice! will try to address other's advice as it comes in. roger, we intend to control the contract through assignment, utilizing subject-to clauses, and all exit strategies. dmorrow, both owners are wanting out, neither wants property back due to expense for a single person. if this doesn't fly for us, we will continue communication with owners to track prior to foreclosure. dural, see info on bill gatton regarding land trusts. if l/o buyer fails to keep his/her end of agreement, then we'll keep any monies and repeat scenario with the next l/o buyer. as we've read: about 80% of l/o buyers do not continue with their agreements. kp, the new l/o buyer will pay roughly $740-$750 monthly to buy this house. as i've said, both spouses are on board with this arrangement. good point on having current owners make next few payments...for cushioning. though i'm not sure how possible that is. they seem to be walking the delinquent mortgage payment as is. this may go in the foreclosure direction. funny thing, this house was bought as a foreclosure by present owners. karma? thanks all...keep the great feedback coming!