Missing The Math

Hypothetical Situation:

Seller has agreed to $200,000 on 6 year L/O.

T/B agreed to $230,000 in 3 yrs. Option fee = $10,000. They're paying $1800/mo with $400 rent credit (toward purchase price, right?)

At the end of 3 years, they decide to exercise their option so they've got $10,000 credit from option fee and $14,400 from rent credits = $24,400.

So, now they need to arrange financing on $215,600, right?

At closing, after paying the seller, I'll get $15,600, not the original $30,000 difference between seller price and T/B price. Is that right?

I thought the "big payoff" was when the T/B closed and you got the difference of the 2 sales prices.

What am I miscalculating?

Thank you,

Nic
[addsig]

Comments(8)

  • NewKidinTown221st January, 2005

    At closing, you would get $5600 because you already have the $10K option consideration in hand.

    Your "miscalculation" is failing to realize that rent credits come out of your backend profit. If you want to give a large rent credit and still want the big payday, you have to increase your option price accordingly.

  • LeaseOptionKing21st January, 2005

    I only give rent credits in exchange for higher than market rent. Let's say the top dollar rent is $900 a month. Let's say my payment to the Seller (or on behalf of the Seller if I am paying the bank directly) is $800. I'm not happy with only $100 cash-flow. So, I would select a T/B who has an especially good job and make the following offer: If you can pay me an extra $200 in rent, I will give you DOUBLE in rental credit. Due to the time value of money, $200 in my pocket now is worth more to me than $400 later (that I may not even have to pay at all). An arrangement like this eliminates late rent (they would lose the credit) and makes it easier to get the T/B financed (lenders LOVE high rent). By the way, I would have gotten the other $200 from the Seller (by explaining depreciation and requesting a miniscule amount of rental credit from him--namely $200). So, my back-end profit is not touched at all, and everyone is happy (especially yours truly).
    [addsig]

  • nplsdvr21st January, 2005

    Thanks NewKidinTown2.

    Your reply says "$5600" did you mean "$15,600"?

    LeaseOptionKing:

    I'm going to have to read that again - it was just a liiiitttle over my head.

    Thanks again!

    Nic

  • nplsdvr21st January, 2005

    So, with the above numbers ($200K seller, $230K T/B, etc.)

    I would be better off:

    $1400 pmt to seller w/ $200 rent credit.
    $1600 pmt from T/B w/$200 rent credit.
    $10,000 option pmt from T/B.

    3 years down the road, at closing, it becomes:

    I owe the seller $192,800 (200K-36 mos @ $200)
    The TB owes $212,800 (230K-10K-36mos@$200)
    Right?

    "Big Payoff" is now $212,800-$192,800 = $20,000

    Have I got it?

    Thanks,

    Nic

  • nplsdvr21st January, 2005

    Thanks NewKidinTown2.

    But it seems to me, the rent credits are a huge selling point to the T/B.

    Let's assume $200K seller's price, $1400 pmt.
    $230K TB price, 3 yr l/o.

    How would you structure the deal?

    Thanks!

    Nic

  • LeaseOptionKing21st January, 2005

    Get extra rent
    Give double in rental credit
    Get the other half from the Seller

    All benefits--no cost
    [addsig]

  • nplsdvr21st January, 2005

    So would it be something like:

    Seller: $1400 pmt, w/$200 rent credit
    T/B: $1600 pmt ($200 cashflow), w/$400 rent credit(double $200)

    What do you mean by "the other half from the seller"?

  • LeaseOptionKing21st January, 2005

    I mean I would get $200 in rental credit from the Seller.
    [addsig]

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