Posted by phil fernandez on October 31, 1998 at 09:47:00:
David,
I think the deal is too skinny. As you mentioned winter is closing in. Fewer tenants and buyers out there looking. Everything would have to go exactly right for you to profit on this one. One bad tenant could kill you.
Consider this a good learning experience and move on to a more profitable deal.
First L/O Happening HELP ! SCARED ! R.E.Pros ? - Posted by David Larkins
Posted by David Larkins on October 30, 1998 at 23:18:08:
Although I have one rental condo that I used to live in, I am new to R.E. investments.
I have a 2 bedroom, 2.5 bath townhome in a good neighborhood that I have (thus far) successfully negotiated the following with the owners.
They were interested in entertaining a L/O from the start lucky me!(their FSBO ad indicated it). They are building another home and they don’t have enough equity to list with realtor, and have only been in the home for three years.
Initially, they wanted no more than a two year lease. After building some rapport at our first face to face meeting, I called on them several days later, and simply asked them for a three year term, and they agree(too easy ?). I enticed them with the fact that I will take care of any maintenance under $150.00 per month, my excellent credit history, the fact that I am devoted to finding a suitable buyer for their home,and presenting a professional approach/appearance.
The deal has the following characteristics:
Original Asking Price: $99,900.00
Offer to Lease Option: $97,980.00
Option Consideration: $1000.00 (toward purchase price)
Monthly Rent: $930.00
Term: 36 months
No rent credit: $0.00
My final price to pay: $96,980.00
The owners owe their lender approximately $94,000.00. The transfer tax plus the area’s traditional closing costs will bring them up to $95,000.00 or so. They stand to make $1000-$1500 at close.
Since this is my first L/O, and I was soooo excited to have someone actually work with me, I made the mistake (or is it?)of offering the $1000.00 option consideration. I also offered to pay them 2 months prepaid rent in lieu of a security deposit (I told them that in a L/O the option money is non-refundable so a security deposit is not required).
I have a total thus far of $2860.00 (3%)in the deal ( actually if I find a buyer before the lease begins only $1000.00).
Now…I am in a fight with myself over how to market the property. There is NOT alot of margin here since I have acquired at market value.
Do I raise the asking price to $103,000.00 or so (5%)and work with the $6000.00 spread? I need to keep $1030.00 out for transfer tax and then I could ask for $3000.00 option money and give $200.00/mo rent credit($2400.00). I would try to get $1050.00 in rent. I do not want to gouge anyone.
OR… Do I try to sell my position (assign) my lease option for $4000.00-4500.00 and simply walk away with a profit of $3000.00-$3500.00 ?
Remember, I have CONTROL of the property for three years. Do I want to chance vacancies, poor tenant/buyers…OR…do I want to roll the dice and hope that the potential buyers do not exercise and I can hopefully receive additional option consideration? I could have additional potential rental income profit of $4320.00 (1050-930)= 120*36=4320.00
Now here is my real problem…I AM SCARED TO DEATH THAT I WILL NOT BE ABLE TO FIND A TENANT/BUYER !!! It is becoming winter in the Northeast and the holidays are coming up.
This whole transaction is predicated on finding a qualified party to support my profit projection for either scenario.
One last thing…maybe I want to actually buy it in three years on only do a regular lease? By that time I could have used the PCF towards the actual purchase of the home and rent it out for income and depreciation. However, I want/need cash flow now, not depreciation, to leverage against more profitable deals?
Thanks in advance for any and all comments and suggestions.
Dave Larkins
Phila, PA. Suburbs
“Assume” the loan?? - Posted by Mark A. (CA)
Posted by Mark A. (CA) on October 31, 1998 at 14:27:55:
Here is another possible spin but keep in mind I have never done this.
As you stated, there is not a lot of equity in the property. The figures were as follows:
Mortgage: $94,000
Agreed selling price: $96,780
(after option consideration)
The spread is a mere $2,780.
In all likelihood, the loan is not assumable meaning you can’t due it conventionally. As Terry Vaughan says, “There’s always a way.”
This deal is probably to far along to use this strategy because it will require you to educate yourself before you can move on it. File this away in your mental Rolodex for the next such deal.
Offer to pay them the $2,780 spread if they will move the property into a land trust and name you as trustee and beneficiary of the trust. This will allow you to “assume” the loan. This accomplishes a few things:
For the full story, check out Bill Bronchick’s two articles in the How-To section:
How To Beat The “Due On Sale” Clause (Part I)
http://www.creonline.com/articl53.htm
and
How To Beat The “Due On Sale” Clause (Part II)
http://www.creonline.com/articl71.htm
Bill very clearly spells out the concept behind this strategy and states it far better then I.
Just my 2 cents,