Seems you have the systems down right, and the concern is genuine. What you probably have out of perspective is what properties for what clients, and/or what you do at the end of the year also.
First at the end of the year, and the client does not qualify, you should also be able to give the property back to the original owner and be happy with the $900 difference down and the $100 a month cash flow you enjoyed; or find another client and go again.
Second the right property for the right client is most important. On the properties with small margins you should be on higher priced/better clients. I know that may be an oxymoron at times, but they have the better chance of qualifying later and may be doing a L/O for reasons other than credit. The bad credit clients should be used for properties where you obtained at 80% LTV or lower. This really helps at year end when you face the senario you mentioned.
Mixing small margins and bad credit can lead to bad results. Match the properies to the clients a little closer.
Ok, I find the motivated seller, The house has market value of 100K, His mortgage is 95K. I l/o from seller for 97k, with 800 mo. pmts. He is 2 pmts behind. I spring for the 16oo to bring up to date , or whatever can be agreed upon between He and I. Now I am successful in finding a t/b that will pay 900 mo. and will give 2500 option money. I see this as being a good transaction so far, Now the year has passed(or whatever time arrangement) and t/b gets a loan and buys for 110k. Sounds great, but if he could not get financing initially to buy in the traditional way, He will no doubt at this time only manage to get a 80% ltv loan. I leave the closing with 88k minus the pay off or 97k, and a second which i will probably not collect. In the past few years, many of my sales have been the 80% or less sometimes. Agreed, I am not selling to the top shelf buyers, but this buyer would not be top shelf either. With all the posts describing how much money everyone is making, I must be missing something.
Please understand, I WANT this to be a winning system…
Im not trying to find why it wont work…Im trying to find how it WILL work. What am I missing…? Wilton
Before you let a tb in the property you should have their credit reveiwed by a good mortgage broker. This mortgage broker would be able to help you and the tb underswtand what they will need to do over the next year or two in order to qualify for a loan. If there is nothing the tb could do to bring their credit rating up in this time period then you wouldn’t let them in. It’s that simple. If the tb fails to do what’s required by them during that time period then it’s their problem they won’t get the loan, not yours. You’ve done your part by outlining what they will need to do, if they don’t follow it then you get a new tb at the end of their lease. More option consideration, possible higher rent and a higher sales price down the road. The bottom line is, if your tb fails to perform, then you make MORE MONEY!
Also, your post refers to doing a l/o for only one year. You give your tb one year at a time, but if your doing the l/o from a seller where your going to sublease with an option to someone else, then you get as long as of term as possible. One year on your part isn’t enough time. You should get at least 3 years or more. You can set it up to where you write up a 1 year l/o with the right to renew for another 1 year term for next 2, 3, 5, 10 years or what ever.
If you had 3 years controling the property you can renew another year to your tb if they can’t qualify the first year. You can charge another option fee for more or less, raise the rent or keep it the same, and raise the option price depending on the market. Your in control of the property, you make the rules and set the terms. It’s up to your tb to perform and follow those rules if they want to buy the property later. You can only lead a horse to water, but you can’t make it drink it!
The other thing your missing is that a lot of lenders will treat a l/o as a refi Vs. a purchase. It’s easier to qualify a get a higher LTV on a refi than it is on a purchase.