L/O or buy - Posted by Bill

Posted by johnman on December 16, 1998 at 24:10:38:

thanks for the examples. They really help.


L/O or buy - Posted by Bill

Posted by Bill on December 15, 1998 at 08:43:06:

I have an opportunity to buy/obtain a nice 3 bedroom 2 bath house in a fairly nice neighborhood. Its probably one of the nicer homes in the area. It has been on the market for approx 90 days at 104.5K with one offer of 99K that fell thru because buyer could not qualify for loan. Owners want very much to move out of state. They just want out. there is a 91K assumable loan at 6.5%. Is there a potential deal here, or is the “equity” too slim. Any ideas would be greatly appreciated.


Re: L/O or buy - Posted by JohnBoy

Posted by JohnBoy on December 15, 1998 at 09:58:31:

What are the monthly payments? PITI? Are they paying PMI with this loan? What do other 3bd homes in this area rent for?

Re: L/O or buy - Posted by John(NH)

Posted by John(NH) on December 15, 1998 at 09:21:39:

We don’t know what the equity is because you don’t
state what the property is worth. But even if it’s
only worth 99k, if you (or your buyer) can assume the
current loan at that rate I think it would be worth

Re: L/O or buy - Posted by Bill

Posted by Bill on December 15, 1998 at 09:29:36:

Recent sales comparisons suggest its worth 115K. However it hasn’t sold for 90 days at 104K. I would say it probably would sell for 95K or so now, and maybe the full 115K in the spring. My question is would this be a good L/O candidate or would you just buy it outright? Im certain, after talking with the owner, that I could buy it for 95K. thanks for your input.


Re: L/O or buy - Posted by JohnBoy

Posted by JohnBoy on December 15, 1998 at 13:52:51:


Here’s the way I would look at this deal.

Since the owner is motivated to get out I would go for the long term l/o over assuming the loan at this time. Try for a 7 year l/o, then 5 year, down to a minimum of 3 years. Lock in the purchase price of $95k as the option price.

By doing it this way your not obligating yourself to a mortgage, but rather a long term lease. If something didn’t work out for you in the future, you can always sell or assign your contract to someone else or walk away from a lease easier than a mortgage you committed too. If you had to get out of the deal for what ever reason, what’s the chances of the seller going after you or reporting anything on your credit file? A lender would be all over you on this if something happened where you needed to get out. You would also have one less mortgage showing up on your credit file that would allow you to obtain another mortgage on a future deal if you couldn’t l/o the property and had to get a mortgage on it to get the deal done. Most lenders won’t give you a mortgage once you have 4 of them showing up on your credit file. Since the loan on the property is assumable, you can exercise your option at the end of your lease term when the property increases in value 3 - 7 years down the road if your tenant/buyer never buys the property. Put in your contract that the seller will pay half of your closing costs when you exercise your option.

Since this property would be worth $115k today, you can “sandwich” l/o this for $900 - $950 per month with an option price of $120k and $5k + as “NON-REFUNDABLE OPTION CONSIDERATION” as a down payment on a one or two year lease. Since your offering terms you should have no problem getting $150 - $200 above market rents and a premium on the option price. You could even offer a generous rent credit to make the deal more attractive to your tenant/buyer. When people respond to your ad, don’t tell them how much you need down. Rather “ASK” them, “how much do you have to put down”? You never know, someone may say $7k or $10K. If they say less than $5k, then you can say you need at least $5k or take whatever they have if you think they sound
like they may be a good tenant and have enough income to support the rent.

Lets say you want to get someone in there fast and need to offer something good to get people responding to your ad. Run a ad in the “Homes for Rent” and “Homes for Sale” sections of your paper.

NICE! 3bd / 2ba House / Call xxx-xxxx

Your phone will ring off the hook with this type of ad.

When they call you tell them you have a nice 3bd / 2ba home available on a lease option. The purchase price would be locked in for two years at $120k in which they could exercise that option anytime during that year if they decide to buy the property. The monthly rent is $950 and you will apply $300 per month against the purchase price “IF” they exercise the option,
providing the rent is paid on time each month. If the rent is one day late, they loose the $300 rent credit for that month.

Ask them how much they have to put down? I’ll use $5k for this example:

Option price of $120k
$5k down as “non-refundable option consideration”
$950 a month in rent = $200 a month positive cash flow x 24 months = $4800
$300 month rent credit = $7200 in credits

$120k - $5000 = $115k - $7200 = $107,800 balance owed at the end of 2 years.

Your profit:

$5k up front + $4800 cash flow = $9800
$107,800 - $95,000 “YOUR” option price = $12,800

$9800 + $12,800 = $22,600 profit over 2 years

I used 2 years instead of 1 year for two reasons. 1.) The capital gains tax is lower after 18 months. 2.) It’s usually easier to find someone offering 2 years instead of a 1 year contract.

If you did decide to assume this loan, you could offer this deal as an owner finance.

A $91k loan at 6.5% over 30 years would be $575.18 PI per month. (You didn’t say how old this loan is, so I used the $91k balance for this example. The actual PI payment will probably be a little higher than the $575.18 I’m using)

NICE 3bd/2ba House / Call xxx-xxxx

Selling price of $120k
$5k down
$115k at 10% amortized over 30 years with 2 year balloon

Monthly PI payment would be $1009.21 with a 2 year balloon of $113,654.48

$1009.21 - $575.18 = $434.03 per month positive cash flow

$434.03 x 24 months = $10,416.72

$5000.00 + $10,416.72 = $15,416.72 + $113,654.48 = $129,071.20

$129,071.20 - $95,000.00 purchase price = $34,071.20 total profit over 2

Now all you need to decide is which way to go. If you assume the loan and sell owner finance you could make $11,471.21 more vs. the l/o arrangement. Calculate your risk and figure out which way is best for you. So to answer your question whether this is a deal or not? It sure can be!

Re: L/O or buy - Posted by Bud Branstetter

Posted by Bud Branstetter on December 15, 1998 at 11:11:53:

If someone wants to give you the deed it is always worth considering. But, will they want some cash, will they be willing to let you take subject to, or will they want it out of their name? When the seller won’t “give” it to you switch to the L/O mode.

I doubt very much if the loan is assumable without qualifying. If you have the 4K to buy you could get most, if not all, back with the option consideration. The rest would be monthly cash flow. Controlling by buying subject to would probably allow you more flexibility and sell owner financed on a wrap for more than you can get with a straight lease/option. However, if they want their name off at some point they won’t do that and you offer to help them out by making the monthly payments as soon as you can find a tenant.