Assigning L/O's - Posted by DanMc

Posted by DanMc on June 03, 1999 at 24:28:34:

Thanks raelynn!!!

You gave me some really useful info. I have yet to do my first deal…but I’m learning all I can ahead of time. And, yes, my intention was to grab the chunk of cash, and step out of the deal…assign and walk away. This is because I am new, and I don’t want to be in the position of having to “landlord” when I have “0” experience. I am also “poor”, so I thought this could be a good way to create some start up capital for some other deals. I could probably pull this one off within 30 days…as opposed to holding on to a property and having to wait a long time to cash out. Once I have a few thousand to play with…and as a cushion, I know I will have no problem taking some different approaches. I am in the process of talking with a friend who has 10K or so that he will be getting in August, and he said if I could come up with a good deal, he would partner with me on it. I figure maybe we can do a rehab…he wants to cash out when it’s all done.
Anyways, thanks for your insights…I’ts given me some food for thought.

Assigning L/O’s - Posted by DanMc

Posted by DanMc on June 02, 1999 at 01:40:23:

I have been studying lease options for a little while now…And feel that obtaining for very little ($100) consideration, then assigning the Options for a profit might be a good way to generate some cash for other deals. This is the formula I have come up with…could someone look at it and see if I have left anything out?

1)Find the Property and Negotiate a L/O w/right to assign.
2)Notarize & Record the L/O
OR file a Memorandum of Agreement.
3)Find the T/B’s
4)Assign the L/O for X$$$,(This is where my profit comes in)
5)Have the Seller sign a Liability/Release Form.
6)(Not sure about this one…but couldn’t hurt)
Have the T/B sign a Liability/Release Form
these are in case either party defaults, saves my butt
7)Move on to my next deal…with my profit.

A bit simplistic, I realize…I was just curious as to anything MAJOR that I might have missed. Feel free to fill in the blanks for me. I look forward to any answers.

Thank You and LONG LIVE CREOnline…The Site that changed my life!!! Dan

Assigning L/O’s…Why? - Posted by raelynn mitchell

Posted by raelynn mitchell on June 02, 1999 at 09:23:21:

I know you’re trying to generate cash, but as I look at your 1-7 steps, the only one I would take out is … #4, Assign the L/O for X$$$. Finding the T/B and the property is most of the work. Why shouldn’t you keep most of the $$$? You don’t always need to have a monthly positive cash flow, only big up front payday IF you get your liability release from the seller and T/B.

But you may be shorting yourself on the back end when T/B exercises your option.

I guess it all depends on your style. What you describe is what JPiper once did in So California–lawyer capital of the world, but that’s another subject!–(minus #4 Assign the L/O for X$$$). I guess you could say you’d be assigning your L/O to the T/B and keeping the down/option consideration as your profit.

Re: Assigning L/O’s…Why?(raelynn mitchell) - Posted by DanMc

Posted by DanMc on June 02, 1999 at 11:53:19:

Yes, I would be making my profit with the money the T/B’s put down…It wouldn’t be “Option Consideration”. It would be a “Fee” for assigning the option. Everything I have learned (from this site) says that the money is just a “fee”. Please explain where I would be shorting myself, unless of course, you were refering to the money the T/B’s gave me…and thinking that had to be put against the eventual purchase of the house. Also…you mentioned JPiper…How did he profit in that particular situation?

Re: Assigning L/O’s…Why? - Posted by Brian W(IN)

Posted by Brian W(IN) on June 02, 1999 at 11:09:10:

Raelynn, I have one question regarding L/O. You mentioned that Dan could make more money if he didn’t assign his L/O to a T/B, my question is how do you actually get the seller to allow you to sublease the property? Do you put a clause in your L/O contract with the seller? Also, do you use a typical Rental Agreement with your T/B in order to have them sublease the property from you? I’m just curious about this because I will be getting into Lease Options soon and just wanted to get a clear picture of what I am doing. My last question is - do you have to assign the property over to the T/B or just have them lease from you?

Thanks for your comments

Sorry…Misunderstood ya…but see other post - Posted by raelynn mitchell

Posted by raelynn mitchell on June 02, 1999 at 12:44:59:

But shorting yourself…if your tenant buyer buys in 3 or 4 or 5 years, you may be missing out on some equity that wasn’t originally there when you first arranged the deal with the seller, equity that when the t/b buys and cashes out, can land in your pocket.

The way Jim Piper explained it to me, he was going after tired landlords who were in the middle of an eviction. Sometimes they hadn’t even thought about selling until he showed up on the scene. So he showed up with the lease option solution and simply found them a more qualified tenant that they were able to do so themselves, had them sign a release of liability, and moved on to the next one. (Just like you were talking about.)

At least that’s the short version of it…

PS. Joe Kaiser has an excellent course on lease options, explaining seeking out the tired landlord.

Maybe I misunderstood… - Posted by raelynn mitchell

Posted by raelynn mitchell on June 02, 1999 at 12:32:50:

because the first time out I got the impression he was looking to assign the L/O to someone other than the tenant buyer after putting them in the property (kind of like selling a seller carryback note to a 3rd party after creating it). (forgive me if I got it wrong the first time) Second reading gave me a different picture; that what he was doing was allowing T/B to take over his position by assigning it to T/B.

Different goals create different results. If your primary goal is positive cash flow every month, keeping the t/b making pymts to you is one way to do it. If your only goal is that chunk of cash they are willing to part with so they can have a chance at buying a home in the not too distant future, then the goal is different.

Nothing wrong with either version of the L/O; just depends on your goals and your risk factor (and the eviction laws in your area). Some states have a short eviction period (try 21-30 days). California (my state) does not, so it makes the risk a bit more. In all fairness, offsetting that risk is that you have a chunk of $$$ received from them to deal with the eviction process and expenses if required. Then you get to do a SECOND L/O with a new t/b, and get an additional up front chunk of cash. All in your perspective.

In Dan’s situation, he has the original seller release him from liability, so he has eliminated the risk. The risk is squarely with the seller (and in most cases any eviction if he has released you from liability).

It might be a good idea to get a separate release of liability from the seller once you find a t/b. A separate form means he can’t come back later and say “I didn’t notice this thing…” or yada yada yada if the tenant buyer later doesn’t pay. Also, since you’ll be finding someone paying the l/o seller, it would help to pull credit on the t/b and show it to the seller, that way he can’t come back and say “I don’t know this guy from Adam”. Giving him a chance to look the credit over makes him more comfortable with releasing your liability. You got him what he was looking for in a tenant–someone he would reasonably expect to make payments on time and take care of the place and maybe buy it in the future, provided he wants to sell.

One of the things that drew me to lease options, however, wasn’t the monthly cash flow or the up front chunk of money (although it certainly was a nice extra!), but the back end spread between what you buy the property for from your seller and what you sell the property for to your tenant/buyer when they buy. That can in some cases equal substantial dollars, especially when looking at rising real estate values. It can be a good buy for the t/b because he gets to buy 4 less than market if market has been good, and it’s a good deal for you when you set up the L/O because due to the t/b’s circumstances and offering easy financing, you charge him more on his option to buy than you pay on your option with the seller. In Ron Legrand’s course, he mentions putting everything in terms of “plus the loan balance”, which means the price you pay your seller at the end when t/b buys is actually going DOWN every month a payment is made! Picture working on a L/O, having payments come in every month that generate a little more than your outgo, then when the time is up and the t/b buys (here the longer the lease term, the better because you might be able to stretch this a little), you get this nice $20k or $35k or $50k check, and all you have to do is show up at escrow and collect. It’s like getting paid 3 different ways for doing the same job.

Another thing that drew me to lease options was learning that most lenders look at a lease option as a refinance deal when they approach it, so they look at the market value a little more than the selling price.