Posted by Daryl on May 27, 2000 at 13:31:26:
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Question for Steve(NC) or B.L. Renfrow (Others Welcome) - Posted by Daryl
Posted by Daryl on May 26, 2000 at 22:37:51:
Hey guys!
When you answered my post about L/O structuring I just had one or two questions. You said the way you like to make an offer is to offer to pay the sellers PITI amount, and an option price of the loan balance at closing.
Do you mean instead of me putting money down up front I would suggest paying their monthly PITI, pay off the rest of their underlying loan at the end of my 1-2 year term with my t/b , when(if) my t/b exercises their option I would just pay them their loan balance and I’d walk away with the difference? Considering their is not that much Equity in the house, I can’t see an owner letting me pay out their underlying loan if they only had $40,000 left on a $70,000 mortgage and they’re asking price is say $65,000(just a hypothetical example)
ALSO: I thought the most common deals for a L/O is when there is not that much equity built up and you usually(maybe I should say rarely) pay the FMV of a house. You must get your spread through rents???
I’m sure Due Dilligence has to be factored in but it’s just the basics of the offer to the SELLER I need to understand!
What is meant by Option Price? Know it’s not the same as Option Consideration.
Please Clear my head on this!
Thanks so much!!
Daryl
Re: Question for Steve(NC) or B.L. Renfrow (Others Welcome) - Posted by B.L.Renfrow
Posted by B.L.Renfrow on May 30, 2000 at 12:51:23:
Hi Daryl,
Sorry for the delay in responding. I have not checked the board in several days due to some other stuff going on over the holiday, and your post was brought to my attention this morning.
First, your last question:
Option price = purchase price. In other words, YOU (or your T/Ber, if you are the seller) have the OPTION to purchase the property at THIS price.
Option Consideration = your tenant/buyer’s “downpayment” of sorts. This compensates the seller (you) for keeping the property off the market during the T/Ber’s term. And it is NOT refundable, should they decide not to exercise their purchase option.
If your intention is to lease-option from the seller, then turn around and L/O to a tenant/buyer, you will see this referred to as a sandwich L/O. I have done several of these, but as you have no doubt seen from other posts, they DO carry some risks which you need to understand before deciding whether to do these types of deals.
A L/O from the seller only is practical in situations where either (1) there is little or no equity in the propoerty, or (2) there may be equity, but the seller can wait for it. As Steve noted, it works best in situations where the seller simply wants to get out from under the payment, but for whatever reason a subject-to deal won’t work (wherein you “assume” the seller’s loan - but they remain on the note until it is paid off).
As to whether or not you pay the seller FMV, you may or may not. Obviously, I TRY to negotiate an option price BELOW FMV. Clearly, though, if the seller, to use your example, owes $40k on a property worth $65k, you’re probably going to have to give the seller some of his equity, at some point.
Remember that in L/Os, there are three areas which generate potential profit:
- Option consideration from your tenant/buyer.
- Cash flow (the spread between YOUR monthly payments and your tenant/buyer’s monthly payments.
- Option price: the difference between YOUR option price and your T/Ber’s option price.
Some investors will only do L/O deals where they can make a profit on all three bases. Others will take two out of three. Also, keep in mind that when you are the seller, you can set your option price a bit ABOVE FMV, and the T/Ber’s rent can be slightly ABOVE market rent for similar properties.
Why? Because you are offering ADDED SERVICE, i.e. TERMS, and a way for your T/Ber’s to become homeowners. These benefits are worth more than just a typical rental, and most T/Bers will gladly pay for what you are offering.
Hope this clears up some of your questions!
Brian (NY)
Re: Question for Steve(NC) or B.L. Renfrow (Others Welcome) - Posted by Steve(NC)
Posted by Steve(NC) on May 27, 2000 at 11:51:06:
About paying off the loan balance?
Yes… it is for homes with little to no equity…mostly where the owner is making two houses payments and wants debt relief. Say the mortgage balance is $100 today and $98 in two years… and you get an “option price” with your tenant/buyer for say $105-110k. Well saying i would pay off the loan balance…gets you that EXTRA $2k when your tenant/buyer makes the purchase. (Sort of an advanced technique…wouldnt try it on seller if you dont fully understand it). You can still just offer to pay X$ …
The “option price” is totally different than the “option consideration”. Option price…is basically…the sale price you agree on with the seller and tenant buyer.
EX:
With seller: $100k
With Tenant/Buyer: $110k…the spread is yours when they buy (minus option consideration and rent credits if any).
The option consideration is the money you collect from the tenant/buyer to rent to own the property you control. For me it is 3%-7% of the sale price.
I am sure i confused you more…but hope you are learning a little bit.
Hope this helps.
Steve (NC)