Need help structuring a LO offer - Posted by Karen (NY)

Posted by Karen (NY) on January 01, 1999 at 11:09:46:

Thanks Dan!

About the rent, my thought of $900 is for BOTH the house and cottage. Then, rent the house for $800 to $850 and leave the cottage rent at $400 for a total incoming rent of $1200 to $1250, with total outgoing of $900.

My plan is definitely to ask her what she needs to get by way of monthly cash flow. It may not be much, since the cottage pays her PITI (with only 2 years left on the mortgage) with no money coming from the house now. But I want to have guidelines for myself going in. I’m awfully nervous and don’t want to get caught up in the excitement of the moment.

I will look into subdivision, but do you think I could leave the property as is, and use the income property as buyer/tenant incentive?

Happy New Year!

Need help structuring a LO offer - Posted by Karen (NY)

Posted by Karen (NY) on December 31, 1998 at 21:11:47:

Hi experts and Happy New Year!

Spoke with an out of state owner today. (Just called the # on a tiny sign on a house.) She is interested in LO and glad that I called. I promised to call back Monday with numbers and to talk to her and her husband. Since this will be my first offer ever, I’d like your input.

The house is a 12 year old (with major renovations 2 years ago) 3BR 2BA ranch. It has a rental cottage on the property (2.5 acres) that is rented for $400 per month. It has been empty since 1996, when the owners moved to NC. It is in GREAT shape.

Asking - $150,000 (“willing to drop”) She almost accepted an offer for $135,000 last year, but they wanted the property subdivided (ok according to the survey, but they share water and septic). $150,000 is the appraised value from last year.

PITI - approx $400
Repairs needed - none
House has been listed all along but has only been shown 5 or 6 times.

My thoughts on an offer:
-see what she needs/expects from property and then stay within these guidelines (or less)
$900 monthly rent for house and cottage (gives owner $500 cash flow) - I could go to $1000
25% rent credit ($225 per month at $900 rent)
$125,000 purchase offer - could go to $130,000

For prospective tenant/buyer
$2500-$3000 down
$800-$850 monthly rent (+ $400 from cottage)
$125 per month rent credit
$139000 sales price

This seems to work out well with a $10K+ profit, depending on the spreads. Am I missing something? What about the cottage? Do I need to subdivide, or can I keep it as income property to attract more tenant/buyers?

My big concern is this. I live in a fairly poor area (average household income is $17,000). Average rent is around $500, but nice houses go for about $750. Much property is owned as vacation homes for people from around NYC. While there are tons of motivated sellers (slow RE market) and lots of renters, I’m not sure how many can afford to go LO, especially with this price range. I really don’t want to get burnt right out of the gate.

Suggestions are greatly appreciated, as always!

PS - She also has another house, which they just dropped the price from 215K to 150K. She wants to know if I could do something with it. (Second marriage for both. They had two houses to sell when they started their new life.) I haven’t seen it. She says it needs some interior sprucing up, paint, etc. They own this one free and clear and are currently renting it. (Don’t know how much.) Taxes are about $4800. It’s a 5BR, 2BA ranch on 9+ acres. I haven’t even begun to think about this one, but the price drop is intriguing. Again, the economic atmosphere here concerns me. Thoughts? Thanks!

Re: Need help structuring a LO offer - Posted by DanM(OR)

Posted by DanM(OR) on January 01, 1999 at 10:51:19:


I am not an expert, so I will stand aside for correction. However, I think you are being way too generous on your rent offer. Usually the strategy is to take over payments (best case). Rememeber, he/she who names the price first, loses.

Usually, even L/Os are attractive to owners, you still want to find motivated sellers. How motiveted are they? You need to put yourself in control and ask more questions. What does the seller(s) really need. You need to descern between their needs and wants.

Don’t offer the $900. Just to point out one thing. You are offering more to the seller than you plan on asking for. Not usually done this way (honestly never heard of it). My opinion would be that you need to make sure that there is a profit set up for you with the house by itself, up front, in the middle (cash flow monthly) and on the back end.

Ideas (consult your lawyer): Setup a one year L/O which will give you time to look into subdivision. If possible, setup the L/O without the cottage subject to subdivision. Maybe have an alternative that would include the cottage at a higher price ($150k).

Just some ideas to chew on. Best of luck to you!

Happy New Year!