Rent, Lease/option Or Sell???Need Advice BAD!!!

Ok. Have a property (Girlfriend) and she's adimant about keeping it. I want to gain a quick profit, but she keeps thinking we should hold onto it. This is the scenario that I have with it.

I tell her that since it's extremely difficult to rent this thing that we should lease/option it. She's asking $1050 rent for this 1 br/1bth condo. In order for her to break even with the association fee and with the mortgage she needs to charge atleast 1000/mth. She is now considering renting it for 950 per month (negative cash flow) and also painting and installing new carpet!! She says that she'll just keep raising the rent each year 50 bucks. I said even if you did that it would be 2 years before you start making any profit and thats not considering anything that happens that we have to fix.

These are the numbers that I came up with in regards to Appreciation rate, lease payment options etc etc.

Comp values by year in the same development 01' --92.5K, 89.9K, 87K, 80K
02' --114K, 115K, 119K, 96K, 88K, 103K, 110K
03' --130K, 125K, 129K, 125K

Mean of 01' = 87.35K Mean of 02' = 106.43K Mean of 03' = 127.25K

Appreciation rate based on these #s 2001-2002 = 22% 2002-2003 = 20%
(I don't know if this is accurate since I feel these are a little inflated, but this is what they sold for)

One is on the market right now for 139K.

So these are my numbers I used to set up this Lease/option:

Market value of the condo = 135K (I know conservative..is this good?)

1 year market value + 20% appreciation ( was planning on using a 1 yr lease option with possible renewal) = 162K

Option buy price = 140K (good?)

Non-refundable initial payment (3-5%) = 5.6K

Purchase price at 1 yr = 134.4K


payment options:

1) $1000/mth = 134.4K payout for the house after 1 yr

2) $1050/mth ($25 credit) = 133.5K payout for the house after 1 yr

3) $1100/mth ($50 credit) = 132.6K payout for the house after 1 yr

note: Anything over the 1000 payment would go towards there buying of the house.


Profit for us:

#1 = 17K
#2 = 16.1K
#3 = 14.6K





Ok...thats what I came up with. Please keep in mind this is in a central Nj area (woodbridge) and she has not been able to rent this out for 3 months. I think shes totally against selling it unless someones going to pay her 140k right away. I told her I think the optioning is the best route, but I'm new to this and don't really know for sure.

She owns several properties as vacation homes and has a bevy of acct's and attorneys that she uses. Her real estate attorney said wait till spring and then dump it if you can't get anyone. He's real conservative though. I'm am looking for advice on whether I am on the right path and if I calc'd this out on good numbers. Thanks and please be kind since this is my first post. Thanks <IMG SRC="images/forum/smilies/icon_biggrin.gif"> [ Edited by jonathanmalave on Date 02/20/2004 ]

Comments(4)

  • jeffbrandt20th February, 2004

    20% appreciation for a condo sounds ridiculously high. another alternative to pro-rating the sale price is to have a 3rd party appraiser calculate the market value at the end of the lease.

    if you do go with the pro-rated appreciation, i think you should up the dollars on the monthly credit. Consider giving 20-30%. It won't cost you anything. It comes out of the appreciation.

    i think the key is to find something that seems equitable on both sides of the deal. if you can't see yourself doing it, then why should you expect anyone else to.

  • jonathanmalave20th February, 2004

    Hi Jeff

    I agree with the appreciation seeming way high, but I called various realtors and this was right off of the comps. This is what they sold for so I went on that.

    So you think I should increase the credits to 20-30%?? This would cut into profits substantionaly. According to the example that I used from another investor, these figures were a little conservative. If I increase the credit, should I offset the loss by increasing the final pay price? Thanks for the feedback.

  • jonathanmalave20th February, 2004

    Jeff

    Please explain how increasing the credit won't cost me anything. The way I'm figuring my profit is taking the amount they pay and get in credit and subtracting that from the price they are paying. I then take the difference between that and what is owed on the mortgage and add that to the initial payment.

    EX.

    this will be with a payment of $1100 per mth.

    123K is owed on the mortgage. I'm selling for 140K. They initial payment of 5.6K. This leaves them with 134.4 K to pay for purchase.

    They pay $1100 for 12 months so that means $100 + $50 credit goes toward the purchase price of 134.4K. That would leave a total of $1800 off of the purchase price = 132.6K

    This gives me a profit of 5.6K + (132.6-123) = $15,200.

    Is this to much expectency? Please elaborate. Thanks

  • jeffbrandt23rd February, 2004

    You're right. It will cost you something but the credit is fixed and the appreciation is not. So let's take your example - assuming 10% appreciation. You sign someone up for a 3 year lease. Let's say the condo's valued at 100K and you rent it for 1000 per month. So at the end of three years, the buyout price would be 133. If you give a 30% credit, they would have 10,800 to apply to the downpayment. You give up 10 grand but you gain 33 and you have a buyer lined up without any realtor fees.

    Of course, you can try to structure it any way you want. Ultimately I think the deals that really work are ones where both people benefit.

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