Lease Option my personal home - advice please - Posted by Laura

Posted by Laura on November 21, 2000 at 18:46:17:

Lots of great info from JohnBoy, Thanks…and Jack too.
More info - first off, I have only lived here since July of 99 so I have not lived here for 2 out of the past 5 years so I cannot keep all the gain under the new rule. That is the problem. I do know that I can keep the gain on each and every home if I have lived in it for 2 out of the past 5 years, but that is not the case here. I kept the gain when I sold in July 99 and moved here, not thinking I would be moving so soon. Anyway, I purchased for $142k and had an offer of $156k in Sept that fell through. (that was a special deal and I would only pay the broker $2k flat fee as I really sold it myself). Other brokers wanted to list anywhere from $160-169k. I was going to sell it originally, but since it fell through I guess maybe it was for the better. So, now here I am and I realized I do not want to hand out my profits to realtors and the IRS. Not to mention, the market here is booming, so for investment purposes, it would be to my benefit to hold it a while and reep the rewards.
I owe $112 now and the mortg payment is going to be about $1100 since the homestead will be removed when I move out. The market value for rent here is about $1000 to $1400. This home is on the high end as it has many extras, solar pool, corner fenced lot, former model with lots of extra landscaping and a finished garage etc. Homes recently went up for sale nearby in my neighborhood simular to mine but with 4beds for $174 and $189. My land and lot is much better but their homes are slightly larger. I was thinking of leasing for $1500, offering a $100-200 rent credit. $100 would be better of course, so I could do $1400 with $100 credit to make it more appealing. I thought by asking for a lot up front would scare people off? Originally I thought about $3000, maybe I should go higher??? I though an option price of $170k in 12 mos. Sound about right? Any other advice or am I on the right track. I would like to sell it at the 12 mos or 24 mos if possible to get my cash out. But, if it is going ok, I could go on. I just do not like the idea of holding it too long, more things could go wrong as time goes on. The house is only 5 yrs old now, but they do start to need repairs as these FL homes are not built the best. I already just invested in new pool filter and pump etc etc. I would hate to have to pour money into a septic tank in a few years or anything else expensive. Plus, my real goal is to us the cash when I get it out to purchase smaller homes and lease/option those. Smaller ones are easier to rent. As far as I know, If I do this lease/option and then sell in 12 mos, I can then re-invest the money and basically keep doing this over and over and not pay any tax gain until I stop? Am I correct? I understand this is called an exchange? So, basically, this deal is just to get me started so I can then cash out and move on to other bread and butter investments. Hope I am understanding this exchange term correctly?

Lease Option my personal home - advice please - Posted by Laura

Posted by Laura on November 16, 2000 at 10:38:23:

Me and my husband are trying to figure out what to do with our home. Lease it with an option to purchase or rent it. It seems as though all the advice points to lease option.

Situation: We will be moving into our newly built home within a month or two. I need to lease out this home with an option to buy. I need advice on the best way to do it. How to advertise, which words to use in the ad etc. My mortgage is assumable, the mortgage company told me it was. I have about $40k plus equity in it now. I do not need the cash to buy the new home. Sould I do some kind of owner financing too? Cash up front would be nice to secure the deal of course and if the tenant/lessor will do all repairs and maintenance, even better. Any advice out there.

Re: Lease Option my personal home - advice please - Posted by Larry

Posted by Larry on November 22, 2000 at 18:19:44:

50 years of experience. Broker. Investor. Do not lease option unless other methods not available.
Lease Purchase. In a lease purchase the contract to purchase is not optional and the down payment is usually forfeited if they do not perform. If I were you I would prefer to hold a second mortgage and eliminate the risk on the first. The second is a risker holding so make it as small as practical. If you sell yourself only risk about 5% which would be equal to a brokers commission and enough to enable a buyer to obtain a conventional or fha mortgage. You are not in the real estate business and should get out from under the obligation as soon as practical. Owner financing and seller assisted financing will enable you to sell the home faster and lift the burden of two homes.

Best of luck.


Re: Lease Option my personal home - advice please - Posted by Jack-FL

Posted by Jack-FL on November 21, 2000 at 06:32:38:

Nice Senario, but the fog count is a little high! It is a moot point anyway, as we understand she only lived in it a little over a year. We like to take our tax free money whenever we can and use someone else money to do the lease option purchases, which we agree are the only way to go. She should go that way here.

Re: Lease Option my personal home - advice please - Posted by Jack-FL

Posted by Jack-FL on November 16, 2000 at 17:18:12:

Laura. Why go thru any problems involved with lease option, renting or owner financing(where federal taxes are due on the interest received) when, if you meet the qualifications for living in it for the required number of years, you can just sell it and get your $40K out of it and the equity, without having to pay any federal taxes on any of the net gain? Then you have all those funds to reinvest in more real estate or related entities that should return much more than you lease option, renting or owner financing would provide?

WHY NOT??? - Posted by JohnBoy

Posted by JohnBoy on November 17, 2000 at 16:55:00:

Why wouldn’t you sell owner financing because you might have to pay taxes on any interest you make??? That would be taxes on the interest, which is additional profit. I don’t see that being a concern at all.

You have up to three years to sell the property after you move out of it and still get the tax free deduction on the gain from a sale for a property you lived in as your personal residence. It’s if you lived in the property 2 out of the last five years at the time you sell it, you get to take the deduction. So she could make MORE money off this for up to 3 years until she needs to sell it and still keep the tax deduction.

She could L/O this for about 10% ABOVE RETAIL MARKET VALUE giving a one or two year option, get anywhere from 3% - 10% down as NON-REFUNDABLE OPTION CONSIDERATION and lease the property for up to $200 per month ABOVE the market rent going for rental property in the area depending on the price bracket of the home, and end up making a whole lot more money off this deal! Meanwhile her $40k equity is in one of the SAFEST places to be. In real estate!

If her tenant/buyer doesn’t exercise their option then she can get a new tenant/buyer and start over again with more option consideration, higher rent and a higher option price after each year!

She doesn’t say what her home is worth or what market rents are in her area for a house simular to hers. So lets use an example to get an idea of what she could make using a home worth $100k today with market rents at $1,000 per month?

She could offer that on a L/O for $110k, get $5k down as non-refundable option consideration and lease it for $1200 per month, for ONE YEAR.

At the end of one year she will have made $5k cash up front plus $200 per month cash flow ABOVE market rent for a profit of $2400 in cash flow plus the $5k option consideration. If her tenant exercised the option she would get $105k at closing which is $5k above what the market value was a year ago! Since she said she has $40k in equity and assuming this house was worth $100k, that would mean her mortgage balance is about $60k. So we could safely assume for this “example” that her mortgage payment is around $600 per month.

That means her total cash flow would be $600 per month leasing it at $1200 per month for a total cash flow of $7200 over the first 12 months. $7,200 plus the $5k option consideration = $12,200 profit in one year so far.

If the tenant exercises their option they would owe $105k. $105k plus the $12,200 profit = $117,200 she would end up getting for the property after one year. Instead of cashing out for the $40k equity TODAY, she now has made $57,200 instead of just $40k. An additional $17,200 profit and NO real estate commission to be paid! That would have given her a 43% return on her $40k by leaving it in the property.

Assuming the tenant didn’t exercise the option, she starts the process over again the second year getting another $5k option consideration and leasing the property for $1250 per month with an option price of $112,500 (assuming values have continued to go up in the area).

So during the second year she makes a monthly cash flow of $650 for 12 months = $7,800 plus the $5k option money for a total profit of $12,800 in year two!

If the tenant exercises the option this time around they would need $107,500 to buy the property. $107,500 plus $12,800 = $120,300 for the property the second year. Her $40k equity left in the property would have earned her a 51% return for this year.

If this tenant doesn’t exercise then she starts over AGAIN and gets a new tenant with another $5k option money and leases it for $1300 per month the third year with an option price of $115k.

This time around she makes $700 per month cash flow for 12 months for a profit of $8,400 plus the $5k option money for a total profit of $13,400.

If this tenant exercised the option they would need $110k at closing to buy the property. $110k plus $13,400 = $123,400 for the property. She would have made $63,400 instead of just $40k. Her $40k would have made her a 59% return in the third year.

So lets see. After three years assuming the third tenant exercised the option, she would have made a total profit over three years of:

1st year = $12,200 cash flow

2nd year = $12,800 cash flow

3rd year = $13,400 cash flow, plus $110k at closing minus her $40k equity minus her $60k mortgage balance = $10k additional profit for a total profit of $22,800 the third year IF the option was exercised this time around.

That a total profit of $48,400.00 over 3 years in ADDITION to her $40k equity she has now. That’s a total return of 121% on her %40k equity over just three years!!!

Ahhh! But you say, what if the third tenant doesn’t exercise their option, then she loses her tax free deduction on the $40k! Simple! The FOURTH time around, instead of selling on a L/O, sell it on a contract for deed! That’s a sale and would qualify to keep the deduction.

Now you sell on contract for deed for $120k and get $10k down, carry the contract for 3 years amortized over 30 years at 12% interest.

That means you collect principle and interest payments of $1131.47 minus the $600 mortgage payment on the underlying loan for a monthly cash flow of $531.47 for three years.

After three years she would make 36 months x $531.47 = $19,132.92 in cash flow plus the $10k she got down for a profit of $29,132.92 over three years.

At the end of three years the contract balance owed would be about $108,644.37. After deducting the $60k mortgage balance and her original $40k equity that leaves her with another $8,644.37 profit plus the $29,132.92 cash flow and down payment money she received for a total profit of $37,777.29 over three years.

Now lets see what that $40k equity made her after 6 years?

1st year = $12,200
2nd year = $12,800
3rd year = $13,400
4th - 6th year = $37,777.29

Total profit = $76,177.29 over 6 years!

After the 6th year when her buyer is required to refinance and pay off the contract for deed she will walk away from closing with $48,644.37.

So instead of taking $40k now, she turns it into getting $116,177.29 instead by selling on terms and leaving the $40k in the property over 6 years.

Where else can you put $40k today where it is 100% SAFE, and turn into $116,177.29 over 6 years?