Posted by John on January 16, 2003 at 14:53:27:
Thanks… this helps alleviate my concerns. BTW, this is not about a specific deal… I’m asking this all hypothetically. I’m just trying to air out some concerns before I pitch any offers.
Thanks,
John
lease option on a house that needs repairs - Posted by John (DFW, TX)
Posted by John (DFW, TX) on January 16, 2003 at 11:18:32:
Hello,
How do you handle a lease option with a motivated seller if their house is not in showable condition? I.E. needs carpet, paint, other cosmetic stuff. Have the seller do the work himself before signing (at the risk of the seller walking because of the extra work), do the work yourself (I can’t see coming out of pocket ANY expenses on a house I won’t own), or have the TBuyer do repairs (at the risk of having to show an uglier home that won’t market as well, also not having as much up-front option money to cover costs down the road)? I’m interested in making my first deal as risk-free (or any other deal for that matter) as possible! I’d hate to have to pass on quite a number of sellers because the house needs a little work (whose house doesn’t?).
Thanks!
John
P.S. I’ve searched the archives and haven’t found a definitive answer.
Re: lease option on a house that needs repairs - Posted by Craig-SoMD
Posted by Craig-SoMD on January 16, 2003 at 23:02:15:
Suppose the house needed lots of work! Rehabber type of condition. Another option is to assign the great terms of your lease option to another investor that does rehabs for a couple thousand dollars. The great terms I would get on a house that needs work is to delay my payments to the seller/lender for at least 90 days(in a near foreclosure situation this might not work, but in that case I am getting a great price and probably getting the deed). Show the rehabber how he can fix the place up and still come out with some cashflow and $20,000 or so. Yes, you only get the $2000, but how long did it take you? You can easily protect your interest in the property, including the improvements you make to it, by filing a Memorandum Of Option at the courthouse.
Re: lease option on a house that needs repairs - Posted by Jennifer
Posted by Jennifer on January 16, 2003 at 12:24:59:
I would offer a “carpet allowance on it” or credit toward purchase price for the work they do. For instance, If you collect 5k option money- take $2 to fix it up right away. But still credit them the 5k.
OR- you can let them do the work themselves, in which they can make the choices they want. Collect 3k option money, but credit them 5k.
There are ways to work around it.
Good luck.
Re: lease option on a house that needs repairs - Posted by sam
Posted by sam on January 16, 2003 at 12:20:40:
I agree it is up to the individual as to what repairs they will or won’t do. I too am new and I passed on an opportunity simply because it is a skinny deal, no room to increase rent, slow moving area, and I didn’t want to make repairs on something I didn’t own. Had the back end been large or had there been room to increase the monthly cash flow I probably would have done the repairs. Or I would simply have given the credit to the T/B to decorate as they wished.
Just my opinion.
Good Luck!!
Sam
Re: lease option on a house that needs repairs - Posted by Tim Fierro (Tacoma, WA)
Posted by Tim Fierro (Tacoma, WA) on January 16, 2003 at 11:31:31:
I don’t think you will find a definitive answer to this. Each seller, investor, and buyer will have their own threshold of what work they are willing to do and how much cash outlay is needed to make that threshold be painless.
You have to get a feel for what the seller will do, what you are willing to do, and how much can be reasonably expected by a new buyer who may have little cash to play with. Weigh this all together to get to a solution that works for everyone.
I would lean towards lower price from the seller because of the MASSIVE amount of work needed. You do some of the MAJOR things to make it functional, then you sell to a buyer with only MINOR amount of work needed; if you haven’t finished it all on your own.
Look below a few threads about a situation where 2 rehabbers are conflicting over whether or not to replace the plumbing when the walls are exposed. It would be prudent to fix everything when noticed and have access to it. This gives a selling point that no problems should occur because of the new plumbing. Yet, the partner believes that why fix it if it is not broken when you can save money in the costs. Those costs, IMO, can be offset by a higher priced unit going to market with full functionality with cosmetics taking the backseat when cash is tight.
You explained the situation well. Now you have to decide which road you will take. Seller work, you work, or buyer does the work; but at some point in the game, someone will have to do it so whoever owns the house should be driven towards having it completed.
Re: lease option on a house that needs repairs - Posted by John DFW
Posted by John DFW on January 16, 2003 at 12:55:58:
To me, this sounds like the easiest solution. Two issues come to my mind though (which may not be valid):
-
I’m worried the house won’t show as well and the ‘curb appeal’ won’t be there to grab people emotionally. Therefore they won’t be as excited (read: won’t fork out as much) about the home. Forget that the carpet only costs 2k, there will be much more than that lost in their lower offer on the home (because it won’t appeal to them).
-
If I collect 3k and credit 5k, then my cushion against worst-case scenarios is much less and I have less peace about the deal.
John
Re: lease option on a house that needs repairs - Posted by John DFW
Posted by John DFW on January 16, 2003 at 12:23:36:
Thanks,
That helps. I’m still not at peace about the issue of putting any money in a house where my name isn’t on the deed. What if I put 5K in carpet/paint (after lowering the purchase price accordingly) just to have the seller pull some sort of legal maneuvering later to wrest the whole deal out from under me. In essence he just got free carpet and paint. Is this not a concern I should be worried about? Anyone been bitten by this and learned a lesson the hard way?
Thanks,
John
Re: lease option on a house that needs repairs - Posted by Jennifer
Posted by Jennifer on January 16, 2003 at 13:22:27:
You’re right- L/O can be a little risky- but they’re not that bad. As far as curb appeal- i understand what you mean, but there are a LOT of people out there that would love to take on a lease to own type of deal. Many feel that they cannot get a loan right now for this reason or that…They will overlook some flaws, believe me. PLUS- it gives them the chance to decorate as they choose- I would just say you have to approve it to make sure it isn’t way off the wall in case they don’t work out.
Also- if you have 3k left over option money- stick it away in case they default. How much are the payments? Get the first month payment off the bat and make sure that they know that if they go over 30 days late on payment- they will be evicted . Then you get to collect more option money and you will only have to cover one month payment. (if that).
All i can say is- you seem to have lots of doubts about the situation. You know more about it than we do- so you’re doubts may be valid. We all have to take risks in the business though. If you are doubting this as much as I think you are, you may want to move on. Good luck to you!
File your option at the courthouse - Posted by Craig-SoMD
Posted by Craig-SoMD on January 16, 2003 at 22:50:23:
You protect your interest in the property, including improvements, etc., by filing a Memorandum of Option at the courthouse. The seller will not be able to do anything with the property, and you maintain the right to buy at the previously agreed price within the term of the option.