lease/option deal - Posted by Anne-ND

Posted by George(OH) on April 17, 2000 at 07:26:01:


lease/option deal - Posted by Anne-ND

Posted by Anne-ND on April 15, 2000 at 18:38:22:

Hi folks,

I have a motivated seller with a nice 4BR/1.5Ba house in a rural town about 20 miles from my city. House is updated (steel siding, newer roof, new electricals & HWH) with lots of character.

She wants PITI paid each month, and enough to cover her closing costs. Right now, FMV is $54K. The offer: I buy for $55K with a lease/option over 3 years (4th year at my discretion). $100 = option consideration. She gets her $530/mo for PITI, I charge $620/mo, and get $200/mo credit toward price. After 3 years I buy for $47.8K which takes care of her mortgage balance. Seller is moving out of state and is willing to give me limited POA to handle any house-related activities, and will make me beneficiary of insurance.

One other thing, her loan is assumable for first-time homebuyers, and she has permission from her lender to rent it out.

The plan is to l/o the house if I can find a t/b, if not then just rent. The seller will pay until we get someone in, she’s doing the legwork right now, and quite a few people are interested, especially in the l/o. The only problem with this lovely little house is it’s right across the street from a fairly active RR line- big trains go by about 6 times per day and night. Amazingly, trains don’t seem to really bother North Dakotans- some really nice apts are built along train lines here in Grand Forks.

I’m only doing this deal because the seller is a friend of mine. I’ve been trying to help her get it sold without getting involved, but she’s desperate now (moving out of town in 4 weeks), and begged me to take it off her hands. I know that this could spell trouble (dealing with a friend), but ignoring that, my question is: is there anything about this deal (other than the train) that I should be thinking about? This is my first l/o, and it would be very helpful to have this in my portfolio to answer other potential sellers when they say “sounds good, but have you done a l/o before?”

I know I’m leaving quite a bit on the table, I just feel better doing it that way this time. FYI, this will be my third deal, the other two are rentals.

Thanks for your help,

Re: lease/option deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on April 15, 2000 at 20:45:53:

OK, I won’t cover the dealing-with-a-friend issue (smile).

When you say you will buy for $55k, then down the paragraph you say, “…after 3 years I buy for $47,8k…” you have lost me. If your option price is $55k on a property with FMV of $54k, there is obviously no deal there.

What I would do is specify your option price as the seller’s current mortgage balance at the time of closing. If the $47.8k figure is the mortgage balance in three years, then you could do OK; not spectacular, but make a few bucks and help out your friend.

Next…will your local market support a rent of $620? Remember, you can ask a bit above market rent in a L/O, because you’re giving added value. Then, when you say, “…get $200 credit toward price…” I think you mean GIVE $200 rent credit. Personally, I wouldn’t go that far unless I had to. I give a maximum of $100 rent credit and have not yet had a T/Ber object to that.

So here’s how it could come together:

Lease from the seller, your friend, for three years with an option to purchase at the mortgage balance on closing. Your monthly payment: $530. Then you find a T/Ber and get option consideration up front of 2-5% of their option price…which could be, say, $56k on a one year option.

That gives you up-front profit of approx $2k, monthly cash flow of $90 and a back end profit of $5000, less any closing costs you can’t get your buyer to pay. ($56,000 minus $2k option consideration and minus $1200 rent credits = $52,800 from your buyer at closing. Pay the seller her $47,800, leaving $5000.)

And why give your seller $100 option consideration, unless she needs the $$ and you are just trying to help her out? I NEVER offer option consideration to a seller. I COLLECT it, not pay it!

Sounds like you have covered the POA and insurance issues already. Just make sure you check the title for other liens, and consider recording a memorandum of option if you go ahead with the deal.

Brian (NY)

Re: lease/option deal-followup - Posted by Anne-ND

Posted by Anne-ND on April 17, 2000 at 08:39:15:

Thanks for your very helpful comments. Just to clarify, I was going to pay her $530/mo, she would then give ME $200 credit per month toward purchase price ($55K); after 3 years I would owe her $47,8K due to the credit she gave me.

She had an open house yesterday, lots of interested folks came by, including several who want to lease/option. I pointed out the train tracks to everyone of them, and it didn’t seem to faze them- even when a huge train came screaming by and every dog in the neighborhood started to howl.

After thinking about it, I’m going to do a PACTrust on this one. I’ve been trying to get one done for a while and I think this will be a good subject for that.
Thanks again for your help, it’s much appreciated.

PS- I agree with you, I would not offer a t/b rent credit and would get a big down. The PACTrust seems to get away from the rent credit problem.

Re: lease/option deal - Posted by George(OH)

Posted by George(OH) on April 16, 2000 at 17:57:33:

Current FMV 54K

Is it unusual (read: dumb) to offer to pay the asking price if, after due diligence, you feel the property will be worth more in 3-4 years when you close? In other words, a 4 year l/o with an option price of 54K when the FMV at the time of closing MIGHT be 60K+?

Just wondering,


Re: lease/option deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on April 16, 2000 at 21:06:08:

The short answer is yes, it’s dumb, in my opinion.

Unless your crystal ball works better than mine, how do you really know WHAT the market might do in four years? It’s taking a big gamble. Remember the old adage to make your profit going INTO the deal. Of course, you could simply decline to exercise your option if FMV has not appreciated, but why not try to negotiate a better option price up front so you would be in a stronger position down the road, even if appreciation is minimal. Plus, if you are subleasing to a T/Ber, and they DO exercise down the road, then you would HAVE to exercise your option in order to perform. If the option price and the T/Ber’s option price are too close together, there goes your profit. And while the option price to your T/Ber can reasonably be a little bit above FMV, you have to stay within reason.

The biggest share of profit on most of my L/O deals is in the back end. Now, if I could get into this deal with a monthly payment well below market rent, and if I had a T/Ber already lined up with a large option consideration payment, AND if there was no other way to do the deal, then I might consider it. But most of the time I will try harder to negotiate a lower option price.

Brian (NY)