Where's the Money in a L/O Other than the Option Consideration? - Posted by Kenny P.

Real Estate Investing
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Posted by Doug Pretorius on August 14, 2000 at 10:19:21:

You didn’t give us the FMV of your townhome, but let’s say it’s $100,000.

L/O it for 1 year at $1500, with $200 rent credit, and a purchase price of $110,000, with $5,000 down. That way, you get $5k upfront, plus $100/month for 12 months, plus $2,600 when they exercise. If they can’t afford payments which are 20% above market, then lower the payments but raise the price and D/P, after all 10% above FMV is not the least bit unreasonable for easy qualifying, fast move-in time and a purchase 12 months off, especially if your area is appreciating well.

If they’re willing to rent for $1000 (and $1000 is at or below FMR) I’d try to L/O for $1000. If they won’t take it, they simply aren’t motivated enough, find a seller who NEEDS you!

Doug

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Where’s the Money in a L/O Other than the Option Consideration? - Posted by Kenny P.

Posted by Kenny P. on August 14, 2000 at 08:35:04:

I hear others say that you make your money in a L/O on the front end and back end but other than the option consideration, I don’t see it. Let’s look at 2 examples:

Example 1: When I move out of my townhome next year I will L/O it. Fair market rent is $1200. So let’s say I L/O it for $1500 a month and give a $300 month rent credit. I also charge a $5000 option consideration. Okay, assuming the tenant makes all his payments as scheduled, where’s my profit other than the option consideration? The rent credit I’ve given him reduces the amount he owes me off the FMV of the property so in reality it’s the same as receiving rent for $1200 except that I’m discounting the property for the tenant with these rent credits. In 3 years when the option is exercised, he buys the property using his accrued credits and I scratch my head and ask why I just didn’t sell it from the beginning. I don’t see the profit here other than the $5000 I got in the beginning.

Example 2: In my paper today, seller was offering a L/O for $1400 or rent straight out for $1000 a month. He was also requiring $5000 in option consideration. If I do a sandwich L/O, can I really expect to up the rent to $1600 (given that I’m paying $1400) and require $7000 option consideration ($2000 more than what he was asking)?

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There are 3 profit centers in L/O’s - Posted by Jim IL

Posted by Jim IL on August 14, 2000 at 16:10:20:

Kenny,
There are THREE profit centers in a sandwich L/O deal.

  1. Upfront CASH (option money, which is non refunable by the way.)
  2. Cash flow per month (the difference between your payments and the rent you collect.)
  3. Back end profit. (the difference between your price with the seller and what you sell it for, minus the option money and any rent credits you give.

Now, with that said, lets look at an example:
Here is a brief outline of a deal I just closed.
Home Valued at ~$70k last year
My price from seller: $58k (what he owed)
MY rent/pymnt: $550/month (Sellers loan payment)
Rent credit for me: ZERO (no room for it)

Sold it like this:
Price to T/B’er: $75k
Option money: $3k
Rent/pymnt: $875/month
No rent credit, they NEVER asked for it.

We closed with a simul close a few days ago.

Profit:
$3k upfront
$325/month cash flow (8 months)
$14k backend
Total Profit: $19,600.00 (minus a few closing costs etc.)

Not bad for investing NOTHING but time.

See, you need to determine what FMV is now and do not be afraid to charge a T/B’er HIGHER than that. You will find that T/B’ers only care about TWO THINGS Kenny.

  1. How much upfront?
  2. How much per month?

And, if the T/B’er agrees to your terms, and then tries to exercise and cannot get a loan, that is their problem not yours.
I personally will work with them and see what can be done to close.
I have both dropped the price to allow them to buy and reduced my profit, and also carried paper for the difference.
It all depends on what YOU want to do and are willing to do.

For your TH deal, determine the FMV and then set a price above that.
Assuming it has a current FMV of $100k, sell it for $115k.
Charge the T/B’er $1300/month in rent, and do not offer rent credits unless asked.
Get as much upfront as possible, but a good $5k should be easy to get.
So, you then have a deal that breaks down like this:
$5k upfront
$100/month cash flow (not a lot, but some and you retain the advantages of ownership like tax credits etc.)
Lets assume you owe $100k on it when they exercise.
This means a $10k profit on the backend.

Look at those numbers Kenny. Not bad eh?
And, here is the BEST part.
Hope the T/B’er does NOT exercise, and you keep the cash flow and the option money.
Then, you do this all over again with someone else, raising the dollar amounts on everything of course.

And, for the deal you see in the paper, let it go.
This is obviously an investor and they (if they are good) have taken all the profit out of it for themselves.

Then again, you never know until you ask.
Try offering them NO OPTION MONEY or very little and $1k/month in rent.
If they say “No”, respond kindly and say to yourself,
“NEXT!”
But, maybe, just maybe, they will say, “Yes”.
You never know until you ask.

Hope this helps,
Jim IL