L/O Questions (Sec. Deposit/1st Month's Rent) - Posted by Earl

Real Estate Investing
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Posted by Alex Gurevich, TX on June 27, 2001 at 13:01:20:

Tim,

You’re right, $3k on a 100K home is not a large amount of money. Actually, I fully understand where you are coming from. What prompted me to reply was a somewhat categorical tone in which you said “don’t do it, the buyers don’t qualify” to someone who wasn’t sure.

When you say, “I like to get at least 4-5K from a buyer and I won’t do it otherwise”, I can relate to that. When you say “don’t do it”, you are cutting other options out. Yet these are potentially viable options for someone, depending on the situation.

But overall, yes, you and I are not that far apart.

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L/O Questions (Sec. Deposit/1st Month’s Rent) - Posted by Earl

Posted by Earl on June 26, 2001 at 10:50:32:

When you get an (3-5)% option fee for l/o, do you also get sec. deposit and first month’s rent as well? How much do you usually get for sec. deposit?

-Earl-

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Don’t Do It… - Posted by TRandle

Posted by TRandle on June 26, 2001 at 17:27:47:

EB,
If you mean they only have 3k total, the answer is they don’t qualify. You want to get at least 3% up front that can be applied wholly to the option consideration, PLUS the first month’s rent. Also, I typically sign them up on a promissory note to pay the remaining 2% over the next 11 months (and thanks to Gurevich, may start charging serious interest on those payments).

Now for my personal twist. I take part of the option fee and use it to purchase a home warranty - that’s just their money spent to protect the house. I take $300 and use it for the security deposit, which would be applied toward the house if they purchase.

That’s enough to justify it’s really a lease and also enough (sometimes) to provide incentive for them to clean the place when they leave. The house will be an absolute wreck if the deposit is only $100. Anyway, that’s my method.

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Re: L/O Questions (Sec. Deposit/1st Month’s Rent) - Posted by JohnBoy

Posted by JohnBoy on June 26, 2001 at 10:56:24:

Yes. As much as you can. I like to apply as much as I can towards the option consideration since that is non-refundable and apply less towards the security deposit since that is refundable. So I usually go with $100 bucks towards security, plus first months rent and apply the rest towards option consideration. This way I have “something” showing as a security deposit seperate from any option consideration to eliminate any argument that the option money is part of a security deposit.

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It’s a matter of choice and your situation. - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on June 27, 2001 at 08:36:43:

With all due respect to what Tim says, I disagree.

It’s a matter of personal choice on how you decide to execute your Lease/Options. Taking a large downpayment only addresses 1 concern, safety, for the investor.

While it’s an important one, trust me there are many more. To address those, you’ll have to weight what kind of effect they may have on your financial situations and goals.

The 2 biggies to consider are: the vacancy factor and your profit margin.

Tim probably hasn’t been in the situation yet where he has 10 epmty houses he needs to move or fill up quickly. When he does get to that point, and start running $10,000+/month negative cash flow on vacancies, he might change his mind about waiting for that perfect buyer with 5% down.

He might just go for a tenant with small chances of qualifying next year but the dream of homeownership. The tenant who’ll offer Tim to pay much more than regular rent. That might be good enough.

Profit margins. If you just L/O’ed a house from a seller or took payments on the loan over “S2”, chances are high you don’t have a large equity/profit margin. If you take a solid tenant/buyer with 5% down, they will likely exercise their option at the end of the year and you’ll end up with $7-10,000 in profit at that time.

I wouldn’t go for it. I’d take a week buyer with really small downpayment and I’d expect to ride the appreciation for a couple of years until I can pick up $30,000 or more on the back end. In fact, I do it routinely as a part of my biz process.

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Re: Don’t Do It… - Posted by JHyre in TexOhio

Posted by JHyre in TexOhio on June 27, 2001 at 07:39:53:

What kind of warranty do you get…what does it cover? How much is it?

Thanks,

John Hyre

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Re: Don’t Do It… - Posted by Earl

Posted by Earl on June 26, 2001 at 22:37:59:

What kind of interest rate, would normally be charged on the note for the remaining 2%?

-E-

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Re: L/O Questions (Sec. Deposit/1st Month’s Rent) - Posted by Eal

Posted by Eal on June 26, 2001 at 11:10:50:

John, for example if you sold home on l/o for $100K and you charge $1000/mo. for rent. If the t/b has $3K. Do you apply the whole $3K as option fee? Or would you apply $1900 as option fee, $1000 (1st mo. rent), and $100 for sec. deposit.

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Re: It’s a matter of choice and your situation. - Posted by Earl

Posted by Earl on June 27, 2001 at 11:54:08:

Alex, if you finance the rest of the option fee for a tenant/buyer, what is the general int. rate that would charge to the t/b and over what period of time?

-Earl

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not that far apart… - Posted by TRandle

Posted by TRandle on June 27, 2001 at 09:06:13:

I don’t consider 3% to be a large upfront sum on a 100k house. Also, if that amount is being split amongst option fee, security deposit, and first month’s rent, it will be very difficult to cover any costs.

I agree vacancies and margin are important as well and the most I’ve ever had vacant at once was 5, and that didn’t last long. However, I do understand the term “Motivated Seller”.

I typically receive slightly more than market rent and since my typical buyer only has 3% option fee and pays the remaining 2% over time, the numbers are larger. Although, I easily concede that I may not be getting the rents that you are.

I don’t look for the dream buyer and I don’t run them by a mortgage app. I look for someone who appears responsible and is willing to invest time and money into their home ownership. I have no problem with renewing their option and prefer to renew, depending on payments and care.

Even if I were cashed out at the end of 12 months, it would be a minimum of an additional 15k or I probably wouldn’t have done the S2 in the first place.

Alex, I’m not trying to be confrontational, but I felt the need to express my viewpoint and misconceptions on the way I do my L/O’s. In fact, I think you’d be pleasantly surprised that my primary exit strategy is probably 95% or more of what you presented in your course.

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Re: Don’t Do It… - Posted by TRandle

Posted by TRandle on June 27, 2001 at 07:50:31:

I just purchase a renter’s warranty policy from American Home Shield (www.homeshield.com) for $375 (in Texas), with additional fees for add-ons if the T/Ber wants to do that. The T/Ber pays for it, realizes it’s lost funds, and chooses whether or not to renew the next year.

The policy covers some of the basics like plumbing, electrical, etc. I believe the deductible is $35 or $50.

I got tired of getting calls during the first 30 days about this and about that. I explain to the “owners” that this will assist them in lowering costs for repairs when I discovered this was a BIG concern for some T/Ber’s (single moms, mechanically inepts like me, etc.). Not only did it address the repair concern, but it eliminated the first month calls.

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Re: Don’t Do It… - Posted by TRandle

Posted by TRandle on June 26, 2001 at 23:06:37:

EB,
I don’t know what would be reasonable since I haven’t done it before. I’ve just broken up the remainder into nice even payments and was happy to get the extra cash flow. I think the acceptable rate would depend largely on how it was presented to the buyers. Sorry, I know that’s not much help, but it will be trial and error for me next time as well.

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Re: L/O Questions (Sec. Deposit/1st Month’s Rent) - Posted by JohnBoy

Posted by JohnBoy on June 26, 2001 at 11:19:44:

If that was an amount I was willing to accept then yes. But $1900 as option money wouldn’t get it on a $100k property. A $50k property, maybe.

On a $100k property they would need at least $5k for option money, plus first month’s rent, plus $100 security. Now if coming up with the extra $100 for the security was a problem after they put up $5k option money plus first month’s rent, then I would apply $4900 as option money and $100 towards security.

If a tenant/buyer had $8k to work with where I would have taken $5k as option money, I would take out $100 for security, $1000 for the first month’s rent and apply the $6900 left towards option money rather than increase the security deposit equal to a month’s rent. I would rather get as much of their money towards the option consideration since that money is non-refundable.

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We charge 12% - Posted by MoniqueUSA

Posted by MoniqueUSA on June 27, 2001 at 19:18:04:

Earl,

If we accept less than our full Option Consideration from a buyer who has most, but not all of the money upfront, we’ll finance the rest at 12%.

MoniqueUSA