Lease Option vs Financing, and the easy way out??? - Posted by Ed Garcia

Real Estate Investing Real Estate Gurus
1

Posted by Rick Vesole on September 05, 1999 at 15:02:39:

Acutally, I agree with a lot of what you had to say - however, as in almost anything else, when you make blanket genaralizations, there is always someone out there who will prove to be the exception.

Actually here’s the main difference in what you said and what Piper and I have said. If your game plan is going to be lease-options (like Piper and I do) you need to be set up to do them over and over again - and yes, be prepared to be a landlord and to leave your money and assets at risk.

However, for the investor who wants to make his money and get out and go on to something else, selling for cash (as you advocate) is definitely the way to go.

Nevertheless, for Piper and myself and others like us who are willing to make the long term commitment, the lease-option is a good strategy.

If it makes you feel any better, even though both Piper and I both primarily use lease-options, we have different philosophies as to their usage. I believe that Jim’s stategy (Jim, correct me if I am wrong about this) is to get his cash investment out up front via the option downpayment and to hopefully get his profit out in one or two years at the end of the option period. On the other hand, I have no problem with leaving cash in the deal and I prefer not to get paid off - I would rather keep the payment stream coming as long as possible.

What does this prove? Only that there is no single technique that is best for all investors, and that even those who do use the same technique may do it for different reasons and with different goals in mind.

Rick

2

Lease Option vs Financing, and the easy way out??? - Posted by Ed Garcia

Posted by Ed Garcia on September 04, 1999 at 16:39:40:

Lease Option vs Financing, and the easy way out???

I notice that most folks on this site endorse Lease Options over
Financing, when selling a property.

Since my being aquatinted with the Creonline, I have tried to
educate investors to the point where I even did a couple of
workshops on,
( How To Have Lenders Fighting To Give You Money).

I try to teach you folks about working a credit line, which is not easy
to obtain. But is a killer financial tool. It allows you to make cash
offers, season your own deals, and do flips with out costly financing.

The reason I screened my students so thoroughly, was because I wanted
experienced investors. Investors who were real players, not just part
time investors. Unfortunately, my workshop had people with different
experience levels, and so I had to adjust my workshop accordingly to
accommodate everyone. Allowing them to leave it with something of
value.

My workshop was designed to do much more than just teach about
a working credit line. It was designed to teach you about all facets
of financing, lenders, techniques, marketing, sales techniques,
negotiations, and more.

What I?m talking about here is EDUCATION.

The reason I bring all of this up, is because I feel that much of the
information being taught today is out dated. Some of the people
teaching you people are not with the times. Their out dated,
their Dinosaurs.

Did I leave something out, or do you catch my drift.

Now the reason I coming on so strong, is because I have been
watching questions being asked on this board, being answered by
people who just a few month ago, were asking the same questions.
And now a few month later their experts, and answering these
questions like they really know what their talking about.

When I watch someone pushing lease options. I know two things.
There either a newbie who has learned about it for the first time, and
think that they have just struck oil, or a Pro who is locked in gear,
and has been successful with this technique, and therefore has not
learned to develop their sales skills, and are using it as a crutch.

I found this to be a common practice where an experienced investor
uses a lease option as a niche closing tool, and don?t properly
develop their sales skills. Instead they sell themselves on the fact that
they have sold the house and now have income as a lender, rather
than being a landlord.

Don?t fool yourself, your a landlord.

OK, the mind is a powerful tool. We can think about it, or justify it,
any way we want to. But bottom line is, that house isn?t sold until the
buyer exercises their option.

Now lets talk about this buyer. With financing so available as it is
today, why do we have to do a lease option ? Usually it?s because the
borrower has had credit problems. (Oh and buy the way, I realize,
that some folks want to do a lease option, who have good credit), but
that?s the exception to the rule, Not the rule.

Now don?t get me wrong, everybody deserves a second chance and
I?m not saying that this buyer can?t do well with their second chance,
but for the benefit of my point, I want to make you aware of the fact
that the buyers are usually high risk.

So I?m going to lease option my property to this high risk buyer with
the underlying financing being in my name.

If this buyer pays me slow, it could effect me paying the mortgage
on the property on time. Yes I know, I could get rid of the buyer and
get another one. But then I will have down time, and maybe some fix
up cost, and what will my next buyer look like, if I use this same
technique ? Do you get the picture.

Don?t get me wrong, LEASE OPTIONS, are definitely a way to sell
your house. There strong point is, if the market place is slow, then
Lease Options can be King… They are a fast sale, and you can get full
price. But just keep in mind that there is a reason for that.

Also, if you know how to do 100% financing on a good borrower,
you still will get full price.

Now believe me when I tell you, if I want to defend Lease Options.
I Ed Garcia, could give you indisputable reasons, that lease options
are the way to go. And give you live examples, as defending reasons.

Remember folks, lease options, are just another way of financing
your deal. And that?s exactly how I view it, as a source of financing.

But the truth of the matter is, the deal speaks for it?s self.
And if we start to think about doing lease options as a way of doing
our deal, than that?s exactly what we will end up with.

The MAIN reasons I like FINANCING over LEASE OPTION.

  1. The obvious, I have my cash in my hand.

  2. I don?t have the financing in my name.

(Now that?s a biggie. The reason is, because I don?t want the
liability of the loan. It reduces my borrowing power.
It also reduces exposing my credit.

  1. Asset with no Liability.

Even if the borrower has bad credit, in today?s market there is a
loan for that guy. Not all companies are credit score driven, and
at 70 to 75% LTV you can finance the dead.

So wouldn?t you be better off carrying a second, behind a first that is in
the buyers name. And have an asset being the second, with no liability.
Also if the buyer gets behind on their first. It won?t effect your credit.

In CONCLUSION,
I don?t want to turn anybody off as far as lease options are concerned.
I think they are a powerful way to do a deal. But not a preferable way.

The point I?m trying to get across is, that the knowledge of
financing in general. Is more powerful, than any one technique.

So take the time to learn an understand what financing is all about.
As I said before, a lease options is just one way to finance a property.

If the time I have taken to write this posting, helps 1 person.
Then I have accomplished my goal.

Ed Garcia

3

Financing IS Powerful! - Posted by Matthew Chan

Posted by Matthew Chan on September 06, 1999 at 20:45:15:

I am certainly not a mortgage broker or even have the expertise of a mortgage broker, but it is certainly nice to UNDERSTAND what you can do with financing. In what little time I’ve had to look at properties in the last month, I find that I have great confidence that I am able to buy properties any number of ways. The fact that I can qualify for a loan and buy it conventionally allows me the ability and confidence to deal or not deal with sellers asking ridiculous amounts on the down payment. I simply tell them “Why would I put $XXX down, when I could put less than that on a conventional loan?” They want to play the owner-financing game against me and I simply refuse to play because I have developed good relationships with 2 mortgage brokers.

As a matter of fact, it is so powerful, I’ve had potential buyers of houses willing to buy any reasonable house I can acquire because they know I can qualify and they simply want to “ride my loan” by me providing owner-financing to them. I have not yet executed it but I plan on doing it soon.

On the commercial side, knowing more about the financing side has allowed me “an excuse” to get closer to the seller and his motivations since the broker often doesn’t know much about the financing situation.

Without diminishing the many experts in the field and their creative techniques of acquiring property, it is nice to be able to be creative on conventional financing too!

Of course, it was Ed’s expert workshop and subsequent mentoring that has significantly built my confidence and my negotiating abilities on the mortgage financing front. I got information and mentoring from him that I have yet to see or hear anywhere else.

4

What a great thread! nt. - Posted by Tom_Nagle

Posted by Tom_Nagle on September 05, 1999 at 20:40:15:

nt

5

Ed–i hope i am that one person - Posted by steph in tex

Posted by steph in tex on September 05, 1999 at 18:16:26:

i watch everytime i see your post–
i want you to know–i listen.

thanks for all you do
steph

6

Real life example - Posted by Troy M

Posted by Troy M on September 05, 1999 at 15:21:33:

Just for fun and clarification I thought I’d apply both methods to a rehab I am completing this week. You all can have fun picking apart my example, ok?
Some of the numbers are rounded just for simplification:

$12,500 purchase cost (closing costs included)
$17,500 rehab costs

$30,000 total basis

FMV = $50,000

IF everything goes right and I sell w/ financing, me holding a 10% second lien, assume sales price of 50k and 2k closing costs, I get:

$45,000 from first lien
$ 5,000 note from buyer (5yrs @10%, mo. pymt= $106.25)
less-
2k closing cost

After 1 yr. I have 13k (at closing) plus 12 pymts=$1275 for a total of $14,275 (most of which is collected at time of sale).

If I sell on a L/O and everything goes right (buyer gets new financing after 1 yr. term), I get:

$3,000 Nonrefundable option consideration, buyer pays $700/mo. rent w/ $200/mo credit. After a year, I have collected :

$3,000 nonrefundable option consideration
$8,400 in monthly pymts, only $2,400 of which goes toward purchase price, so:
$14,600 from new loan

$26,000 total received from buyer, MINUS

$3,000 1 year’s interest on underlying financing
$1,200 property taxes and insurance
$2,000 closing costs

$19,800 cash to me after 1 yr.

Now, let’s assume everything goes WRONG, after 1 year, buyer has stopped paying, and has done 5k damage to the house. If I’m holding the second, unless the buyer will play ball it is not IMHO worth pursuing, so I have collected the $14,275 and I’m done with it.

If I have sold on L/O, I have collected:
$11,400 (option consideration + 1 yr. pymts)

$ 4,200 holding costs (interest, taxes, and insurance)

$ 7,200 profit, but I still own the property, and can evict my tenant/buyer.

Then, I have a 50k house for which I still owe 30k (less the amount paid down over a year)and needs 5k in repair.

In conclusion, best case scenarios, I like the extra $5,520 I get from the L/O in one year (not a long term IMHO). NOTE: I realize I left out the second lien note for 4 more years which will net you $5,100 more.

Worst case scenario, obviously you get more cash with the finance sale, but IMHO $5k is a terrible thing to waste, could be even more if your house is pricier, or if you have to hold a larger second (i.e. 15-25%). I like the fact that the profit will still be there if the “buyer” stops paying.

I realize there are a hundred variables we can throw in there, such as apreciation or depreciation in the area, buyer claiming an equitable interest, and greater damages to the house, just to name a few. These are all risks, but isn’t that what it’s all about? Risk management, and maximizing profit? Once again, I don’t claim to be an expert here, but this topic is near and dear to my livelihood, so go ahead, tear it up.

Regards,
Troy M

7

Re: Lease Option vs Financing, and the easy way out??? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on September 05, 1999 at 13:35:55:

Ed,

I have the utmost respect for you, but I have to cordially disagree with you on this one.
Am I better off carrying a 25% LTV 2nd?? Not as far as I am concerned. Now if it were a 5 or a 10% 2nd, I would be on board.
As for why I will choose LO over financing, it is simple. It is much easier for me to evict a tenant on a lease for non-payment of rent than it is for me to foreclose. I have my lawyer file and get a judgment in 30 days. If the tenant still persists, I get a writ of restitution and they are physically removed in 30 more days.
And the reason most buyers choose LO is that they are a little “dinged” and want a year or 2 or 3 to clean up
their credit or need more time on the job or need to establish their self-employment income. I know I am not telling you anything you don’t know and I know you could get these people financed. But at what rate and terms??

Just my .02

Mark

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Re: What about nonpayment? - Posted by Troy M

Posted by Troy M on September 05, 1999 at 09:07:28:

Great points Ed! I am posing these comments/questions not as an expert, but to further my own education. Here is a real life example:

Recently sold a rehab for top market value of $67,500. It sold within a week because I offered to “help finance”. In the end, the buyer got a new loan for $57,375 (85%), and I held a second for $10,125 (15%). Fortuantely, we screened our buyer well, etc. and they are paying on time. But, suppose something happens to our buyer (divorce, lost job, unexpected medical bills, etc.etc.), and they stop paying after just a few pymts. The vast majority of my profit is in that second lien. So, what happens now? Here are some options, let me know what I’ve left out:

  1. Talk to the sellers, try to restructure the note to accomodate them.
  2. Depending on whether or not the first lien is current, I can foreclose, which will eat up a good bit of that 10k second lien profit, and what’s left will probably be spent on fixing up the place AGAIN.
  3. Write that 10k profit off to bad debt and forget about the months of rehab and effort put into it the deal.

Would it not be easier to remove a tenant/buyer from a L/O “sale”. My intended use of a L/O would be to avoid holding second liens at all, working with the buyer, giving rent credits until he/she can get financed and pay me the balance in full. So, isn’t the control you get with a L/O another point to consider?

I have a couple more rehabs almost fattened up for the market and truly apreciate your input. I have considered selling both ways and look forward to yours and others’ comments on this subject.

Regards,

Troy M

9

Timing of this post was GREAT Mr. Ed, thanks…again. - Posted by Jim IL

Posted by Jim IL on September 05, 1999 at 01:05:54:

Ed,
You know, it is funny how you reference the newbies here and how we (I) asked questions a few months back and now answer them.
I try NOT to answer as though I am an expert, (I am not), but to simply give back by sharing my experiences, even if they are few.
I figure that someone out there may just be a couple of deals behind me, and they may avoid some of the same pitfalls I encountered if they see my “Two cents”.

However, I do like Lease Options, as opposed to financing, because I have “yet” to get my credit in order. We are working on it, but are not quite where we’d like to be. (and cash flow is a must for us, since we are happily unemployed Õ¿Õ)
Also, we have found a “niche” in our area for over encumbered or nearly 100% financed homes, and the L/O seems to be the best way to get them signed.(After we try for the deed that is)
What we have done (so far) concerning our “education” in financing is to learn the various programs available and use them to cash out quicker.

I learned just today that I was stuck in a rut of sorts.
We got home “subject to” via land trust, and automatically thought, “sell it on a L/O”.
Never even thought of trying to sell this puppy any other way.
But, then today a RE agent calls me and says that his client saw my home, likes it and wants to buy it outright.
The only problems were “How” to deal with paying commission and the buyer needed a little more downpayment.
This was a tight deal to start with, but the L/O would have solved that and brought me a nice profit.
We agreed to at least allow the RE agent to show the home and then talk it over.
We got it for $90k loan balance, and the agent/buyer offered us $110k. (which was our price on the L/O).
Agent wanted 4% commission and for us to pay 2 points to help the buyer get his loan.
We said, “no, the deal is too skinny”.
Buyer has now offered $114k, 2.5% commission to the agent, and 2 points paid by us.
So, we will virtually make the same profit, and do it NOW!
The only part I’m not too thrilled with is paying taxes on it now.(rather than deffering it, but HEY, next year I expect to make more, so maybe better to pay now anyway)
There was very little cash flow on the L/O plan, so we are not crying about that.
Bottom line, your post here, was worth its weight in gold.
Thank you.
My short sightedness almost got me in this deal for the LONG haul, as where now we have the $10k plus we were looking for to complete another deal. (at least we will when/if we close).

You are right, those of us who are still “new” need to look beyond the tools we have learned to use so well in such a short time, and expand our tool box.
I know that I will.
Of course, that home we pick up for 95% of value will still be a L/O when I sell it, but that will no longer be my “main tool”, we will use them all and keep educating ourselves as we go.

Thanks again for sharing your thoughts and making us “think” as well.

Peace,
Jim IL

10

Re: Lease Option vs Financing (choices - long) - Posted by Eric C

Posted by Eric C on September 04, 1999 at 23:39:48:

Hi Ed -

I understand what you’re saying; lease options have never worked well for me. Many years ago, I began to learn about banks and I’ve never looked back since.

Although, I’m always searching for a better method or a new twist to this business of RE, one of the things that initially attracted me to the business was that so many people could do well using different techniques!

I feel comfortable with banks and bankers. I can go into a strange bank and come out with a loan. Not everyone can do that. But they can learn.

People should learn as much as they can about this business. In the process of learning, they’ll find an approach, a program, or a technique they can feel comfortable with.

Lease Options, flips, cash outs, refinances are all just tools to be used as necessary to achieve our objectives. Like any other tool, they can be used improperly or mishandled. But the right tool at the right time can work wonders - especially if it’s in the hands of an expert.

11

How to properly develop LOC? - Posted by Tim Randle

Posted by Tim Randle on September 04, 1999 at 22:17:22:

I’m going to ignore the L/O vs. Financing discussion just like I ignored the “Battle of the Bills” because my knowledge and experience levels aren’t high enough for a hard stance.

However, I was curious if you would share the best way to develop and increase a LOC. I have 2 unsecured lines, 10k and 15k, each with a different lender. Once I finally sell my current SFH lesson (more like a seminar), I will have enough funds to pretty much pay these off. Should I? Or should I make partial payments?

I know I probably need to develop a relationship with a decision-maker of a smaller community bank, but I’ve not accomplished this yet. I would be very grateful for any general tips you would be willing to provide.

12

Re: Lease Option vs Financing, and the easy way out??? - Posted by CarolFL

Posted by CarolFL on September 04, 1999 at 18:17:59:

Ed,
You are the best!
We can fill our toolboxes by learning from you the many
avenues of accomplishing our goals.
Hope the readers for whom this was intended take it in the spirit in which I know it was written!
Rgds,
Carol and Dennis

13

Another Way to Look At It - Posted by JPiper

Posted by JPiper on September 04, 1999 at 17:53:04:

Hi Ed:

I couldn’t help but respond to your post?..if for no other reason than to show one possible reason why someone might want to sell via lease/option rather than for cash.

Let’s assume for a moment that we bought a house and fixed it up?.our cost basis is $70K. Let’s further assume that we can sell the house one of two way for $100K. The first way is to sell with a lease/option?.and let’s assume that we sell for $5K in option consideration. The second way is to sell with institutional financing?..and for the purpose of this let’s assume that we sell with $5K down, $85K first, and a $10K second. Further, for the purpose of this comparison let’s completely disregard the cashflow from the lease/option?and let’s disregard the income from the second mortgage. I’m disregarding these by the way not because they should be?but because they detract from the central point I’m going to make.

Proceeds from the sale with institutional financing will be $90K. However, gross sales price is $100K?and therefore your profit for tax purposes is $30K?.eventhough you only got $20K in cash. I’m assuming by the way that if you’ve taken Ed’s suggestion and sold for cash?.and you’ve done more than a few of these?.you’re now a dealer and subject to dealer rules in terms of taxes. Therefore you’re taxed on $30K. For the fun of it let’s assume for a moment that taxes amount to 30%?.or $9K. Therefore the after-tax profit is $21K?.but wait?..$10K of that is a second mortgage?..so you put $11K in your pocket?cash.

Now let’s look at the lease/option example. You sell for $100K?.except that you only get $5K cash in the form of option consideration. Interesting though?.this cash is not taxable at this time?.not until the option is exercised or expires. Let’s assume that you did a 2 year lease/option?.and that over the course of this period you are busy building the tenant/buyer’s credit. Let’s further assume that you took Ed’s good advice?and that you have a credit line which you bought the property with originally?and that you refi the property after you have it seasoned in 12 months?thereby taking it off the line?.and putting cash in your pocket. Let’s say you do an $80K refi?.which for arguments sake puts $10K in your pocket?.which is not taxed since it’s loan proceeds. Let’s assume that at the end of 2 years?.you get this tenant refinanced with an 80% loan?.which covers the original purchase price less your option consideration. So now we have $15K to go do another deal with?.except in this case we’re going to do a 1031 exchange?.thereby deferring taxes.

So here’s how that looks?..$10K in your pocket from loan proceeds (NO TAX). $15K in cash serving as your down payment on your upleg property in a 1031 exchange (NO TAX)?..and $5K in option consideration that may have been received as boot and therefore was taxed. So in this example you have tax of $1500?.the rest of it is deferred.

Therefore, with the lease/option using my example, the after-tax profit is $28,500. We have $$13,500 of it in our pocket?.and the other $15K in a new property. Compare this with the institutional finance way?.$11K in your pocket?.and a $10K note.

So here’s a little summary. Using Ed’s financing method?.we put $11K in our pocket. We only put $5K in our pocket with the lease/option?..but after 12 months we put another $10K in our pocket from our refinance. Further, assuming Ed collects on his note?.he’ll make $21K. Disregarding the lease/option cashflow?.the lease/option method will give you profits of $28,500. That’s a $7,500 difference. Now let’s multiply that by 10 deals?.and we’re looking at a $75,000 difference.

Here’s the question Ed. Is the lease/option method sufficiently more lucrative to warrant taking the risk of financing yourself?

JPiper

14

Re: Lease Option vs Financing, and the easy way out??? - Posted by d.henderson

Posted by d.henderson on September 04, 1999 at 17:50:49:

Thank you for your comments and answering my post, below.
I’m a new investor and want to know all that I can. So when are you going to help the new investor? We want people fighting to give us money too. smile*
Thank you again. I always read all of your posts.
dee-Texas

15

Re: Lease Option vs Financing, and the easy way out??? - Posted by don, sdca

Posted by don, sdca on September 04, 1999 at 17:18:39:

Ed,

I am new at this and appreciate the advice. As you have said many times, change is constant in the financing area and lots of people should be able to get financed; we just need to learn HOW.

Lease-options seem much easier to complete, but you are right, its not the same as CASH!

Thanks for your great ideas!

don, sdca

16

Re: Ed Garcia’s Real life example - Posted by Ed Garcia

Posted by Ed Garcia on September 06, 1999 at 01:10:40:

Troy:

OK Troy, it?s just you and me kid.

Pipers sleeping, it?s his nap time. Rick Vesole, Landlord Extrodenair,
is trying to get a new computer to count his money.

But I will tell you, that I?m happy that you brought me at least a real deal.

Now before we start to play, keep in mind that I?m at a disadvantage.
I don?t know your market place, or if the subject property is in Beverly
Hills or an area that you have to carry a gun to collect your payments.

I?m going to have to think, that?s it?s not in a bright and shiny area, or
you wouldn?t have to do a lease option to begin with. Especially after
you just figured to spend $17000 for rehab cost. That alone should be
a sign that something?s not right in river city. We can see you had to
do more than just cosmetic repairs and now you want to spend that type
of money, and turn it over to someone who already has a track record of
not paying , or they would be able to finance the deal to begin with.

So I want you to know that I?m with you. LET THE GAMES BEGIN.

Oh, and one more thing ,I want you to know that( I?ll Be Your Huckleberry)
Troy, Doc Holliday said that in the movie (Tombstone) and I?ve always
thought it was a cool saying.

Troy, let me do this. I?ll put your posting, on this posting, and then destroy
it, making you mad. You will then go make up a Voodoo doll of me, and
stick pins into it. It?s OK Troy, I?m Voodoo doll proof, I?m a Catholic.

Here Go?s??.

Posted by Troy M on September 05, 1999 at 15:21:33:

In Reply to: Lease Option vs Financing, and the easy way out???
posted by Ed Garcia on September 04, 1999 at 16:39:40:

Just for fun and clarification I thought I’d apply both methods to a rehab I
am completing this week. You all can have fun picking apart my example,
ok?
Some of the numbers are rounded just for simplification:

$12,500 purchase cost (closing costs included)
$17,500 rehab costs

$30,000 total basis

FMV = $50,000

IF everything goes right and I sell w/ financing, me holding a 10% second
lien, assume sales price of 50k and 2k closing costs, I get:

$45,000 from first lien
$ 5,000 note from buyer (5yrs @10%, mo. pymt= $106.25)
less 2k closing cost

After 1 yr. I have 13k (at closing) plus 12 pymts=$1275 for a total of
$14,275 (most of which is collected at time of sale).

ED GARCIA SAYS*****
**((@ Now Troy, lets Stop right there. Why did you decide that, you had
to carry back 10% ? Why couldn?t you have gotten 100%
financing ? .Also, Why if you can sell with a lease option and get
$3000 down, couldn?t you sell with financing and get $3000 down.

It makes a difference Troy. I think to be fair to our deal, I?m going
to give us $3000 down, just like your lease option deal. Or do the
Lease Option with no money down, just like my deal. You don?t
like the sound of that do you Troy ? You pick the poison, but it?s
got to be the same. For now I?m going to use your $3000 down.

In doing so I now have a 90% loan =$45,000 minus $2000 closing ,
STOP. I?m going to add $3000 to my price to cover the $2000 closing
cost. I?m doing this as a favor to the buyer, because I don?t want them
to come up with any more money than they have to.
(Remember, it?s the buyers loan, not ours. That?s their cost, not ours)

Now this deal, is already starting to shape up. I now have $15,000
from my loan, and $3000 down in cash. I?ve got $18000. Up front.

And now I?m only carrying a $2000 second for 3 years at 10%=
rounded off, $66.63 per month. ( chump change) But I have no
exposure. And I?ll have another $2399. **((@

Troy CONTINUES

If I sell on a L/O and everything goes right (buyer gets new financing after
1 yr. term), I get:

$3,000 Nonrefundable option consideration, buyer pays $700/mo. rent w/
$200/mo credit. After a year, I have collected :

$3,000 nonrefundable option consideration
$8,400 in monthly pymts, only $2,400 of which goes toward purchase price,
so:
$14,600 from new loan
=$26,000 total received from buyer, MINUS

$3,000 1 year’s interest on underlying financing
$1,200 property taxes and insurance
$2,000 closing costs
=$19,800 cash to me after 1 yr.

ED GARCIA SAYS
**((@ STOP. We now have for the first year $19,800 from the
Lease Option, and $18,200 from the sale being financed.
$19,800 take away $18,200= $1,600 difference for the
first year. I still have as much control in the deal as you
do, and no exposure. At this point were at,
( 1 bird in hand, 2 in the bush). I?d like to bring up the fact.
that I?ve got my money, your hoping that your lease option
can be financed to get yours. Yes, you will be $3000 a head
if it?s not. But while your dealing with this problem, I?ve
already bought another house with the money I made off of
this deal and made $20,000 again. You still have your money
tied up in the first deal and hoping to still sell it. **((@

Troy CONTINUES

Now, let’s assume everything goes WRONG, after 1 year, buyer has
stopped paying, and has done 5k damage to the house. If I’m holding the
second, unless the buyer will play ball it is not IMHO worth pursuing, so I
have collected the $14,275 and I’m done with it.

If I have sold on L/O, I have collected:
$11,400 (option consideration + 1 yr. pymts)

$ 4,200 holding costs (interest, taxes, and insurance)
=$ 7,200 profit, but I still own the property, and can evict my tenant/buyer.

Then, I have a 50k house for which I still owe 30k (less the amount paid
down over a year)and needs 5k in repair.

In conclusion, best case scenarios, I like the extra $5,520 I get from the
L/O in one year (not a long term IMHO). NOTE: I realize I left out the
second lien note for 4 more years which will net you $5,100 more.

Worst case scenario, obviously you get more cash with the finance sale, but
IMHO $5k is a terrible thing to waste, could be even more if your house is
pricier, or if you have to hold a larger second (i.e. 15-25%). I like the fact
that the profit will still be there if the “buyer” stops paying.

ED GARCIA SAYS
**((@ STOP, at this point Troy, your already talking about how much
money your going to make (IF) the deal don?t go down so you can
sell it again. Also I?m wearing out with the largest word in the
dictionary, (IF). When I do my deal, I don?t have to worry about
that word (IF). I?m done, and on to my next deal. (IF) the guy don?t
pay me. I would most likely have walked from the deal, I?ve got
my money in my pocket, and I don?t need the aggravation for a $2000
second. **((@

Troy CONTINUES
I realize there are a hundred variables we can throw in there, such as
apreciation or depreciation in the area, buyer claiming an equitable interest,
and greater damages to the house, just to name a few. These are all risks,
but isn’t that what it’s all about? Risk management, and maximizing profit ?

ED GARCIA??..
In CONCLUSION :

First of all Troy, I want to think you for being such a good sport.

As you said when you started, that I could have some fun picking apart
your deal. Well I hope it was as much fun for you as it was for me.

I hope that you noticed something that I found interesting.

You structured your Lease Option deal with $3000 down, but when you
did your Financed deal, you structured it with no money down.

So that proves what I?ve been saying all along. And that is, A DEAL
STARTS IN OUR MIND. We actually program ourselves. When we do
this, we find ourselves looking for what we think we should be finding.

You have been taught to do Lease Options with money down, and that?s
why you did it.

I also feel that it?s only fair to remember if I did pull my money out of
a deal, it gives me CASH to go into another DEAL.
As I saw you like to make $20,000 a deal, that was the figure I would
use. So the way I see it. Is if my money is tied up in a deal, then it?s
costing me $20,000, because it prevents me from doing another deal.

Like I said before, deals are made in our mind??.But the mechanics
of these deals Financing vs Lease Option can make a difference.

Ed Garcia

17

Re: Lease Option vs Financing, and the easy way out??? - Posted by Ed Garcia

Posted by Ed Garcia on September 05, 1999 at 14:33:04:

Mark:

You just said it would take 60 days, if everything goes right to get the
buyer out of your house. We both know that there will be some fix up
in addition to that, which will take more time. Mean while this deal has
put you in a position to make payments on the property.

Now you would have to make the payments in either event, but at least
if it becomes slow going for what ever reason, it won?t be counted against
your credit if your in second position. In another words it won?t count
against you if the buyer is slow pay on the first.

Also you have other avenues that I haven?t even mentioned. You could
sell the note, or discount it to do a refi.

As far as to what it would cost the buyer who has bad credit is concerned,
of course it?s going to be more costly, but that?s a temporary situation.
If the buyer does as they say they are going to do, then they can refi and
get a better rate later.

But what if, do you do a deal with the intention of the buyer cleaning up
their credit, and then they don?t. If your not careful, you could stay in this
deal forever.

I think if we were in a room, and not on the board. I could convince
everyone that I?m right. Not to just win a argument, but because over all
it really makes more sense.

If you Benjamin Franklin the deal, you?ll see you have more options my
way which is important to any deal.
The reason being, is my circumstance today may be completely different
tomorrow, and it?s nice to have my options open.

If I have cash in hand, I obviously have more options than to be locked
into a property.
The main thing I can do with cash in hand, is go find another deal.
You have to admit that?s not a bad consideration in it?s self.

Personally, I think this whole thing has been stimulating and fun.

Thanks for your input Mark,

Ed Garcia

18

Re: What about nonpayment? - Posted by JPiper

Posted by JPiper on September 05, 1999 at 10:09:04:

Troy:

In the event of default where you’re holding a second, here’s a couple of other options available to you:

  1. Deed in lieu of foreclosure

Basically this saves the expense of a foreclosure, and obviously saves some time perhaps. What doesn’t change however is the amount which the borrower is delinquent on the first?.an amount that will have to be paid by you if you accept the deed in lieu of. It also doesn’t change any damage to the property. Further, before you accept the deed you should check title, since other liens may have attached since the initial sale?.and which you would be accepting if you took title. But it’s an option, and probably preferable to a foreclosure IF the title is clear of subsequent liens.

  1. Pursue your note without the foreclosure

You don’t have to foreclose. You could simply pursue your note. Of course this takes legal action in order to obtain judgment. It then takes collection. And, during this process the borrower could go bankrupt?.leaving you with nothing. But depending on the exact situation it’s possible that this option could be viable, and certain it saves the need to foreclose and to do fix-up. A lot would depend on how collectable a judgment might be if you were to get one.

Just between you and me, my thought on these high LTV seconds is that they probably won’t be worth pursuing, unless the property has appreciated enough to make it worthwhile. For that reason I like to make sure that the buyer has some money in the deal, and that I’m careful on what percentage of my profit I’m actually carrying. I won’t do a rehab deal where I’m primarily compensated with paper.

So that you know, there are some 100% financing plans out there (or were) for owner-occupants that combine an institutional first with an institutional second?..so you’re not carrying any paper. Check with your mortgage broker to see if it’s still available. Good credit is necessary.

A lot of this comes back to how you bought your rehab deal to begin with. When you’re buying I think you should do it with the recognition that you may not be able to cash out all of your equity upon completion, without extending your holding period long enough to locate an A buyer. That top 10% of your deal sometimes is difficult to put in your pocket in cash, at least quickly. That means that your initial purchase should be low enough (in my opinion) to permit carrying a second that you DON’T collect, and still be well compensated for the effort of the rehab.

Is a lease/option better for you in the event of a default? I really don’t think so. About the only factor that would change would be the speed and perhaps cost of getting the property back. But if it’s a situation that would have made no sense to pursue a note?.it’s probably a situation in terms of the lease/option where you’re just chasing your money. My thought is that in the event of default, the second mortgage method and the lease/option are basically going to wash. The difference is that with the lease/option you will HAVE to pursue?.even if you don’t want to.

The primary advantage in my mind to a lease/option is the tax advantage if you should later which to do an exchange.

JPiper

19

Re: How to properly develop LOC? - Posted by KenL

Posted by KenL on September 10, 1999 at 22:21:00:

Depends if you can get a better return on the cash you have than what your paying in interest and if you can sleep at night with with debt.

20

Re: Figures don’t lie, but liars can Figure… - Posted by Ed Garcia

Posted by Ed Garcia on September 04, 1999 at 20:06:45:

Jim:

I was thinking of you when I made the posting and knew you wouldn?t
be able to resist taking the stand that you took.

There is an old saying that says,
(FIGURES don?t lie, but liars can FIGURE.)

Your hypothetical example was designed to prove your point.
And as usual, you did. (That is you did with your example.)

I loved the way you took your figures and decided that if you did that
with 10 houses your difference would be $75,000.
Boy talk about pulling numbers out of a hat.

Jim what I was thinking of doing, is taking your hypothetical example,
and create hypothetical vacancies, so then I could show hypothetical
losses. Then you would be glad to take your money and run and do
another deal.

You also left out the fact, what if the seller destroyed the property ?

What if the property value instead of going up went down ?

What could I have done with that extra cash as far a future purchases ?

After all lets not forget the TIME VALUE OF MONEY.

In carry a second, I can walk and not look back, after all, I?ve got most
of my money.

Another thing lets not forget, 9 out of 10 times the property is a hard to
move property. It?s not usually on a HOT PROPERTY list.
So it?s almost a given that I?m not going to experience any real
appreciation.

Believe me, you don?t lease option HOT PROPERTIES.

Jim, tonight I?m taking Sandra to dinner and a PLAY. So I don?t have
much time, and I knew if I answered you tomorrow. This posting would
be at the bottom of the board.

Other wise, we might of had some fun.

Your Friend,

Ed Garcia