Maybe I misunderstood… - Posted by raelynn mitchell
Posted by raelynn mitchell on June 02, 1999 at 12:32:50:
because the first time out I got the impression he was looking to assign the L/O to someone other than the tenant buyer after putting them in the property (kind of like selling a seller carryback note to a 3rd party after creating it). (forgive me if I got it wrong the first time) Second reading gave me a different picture; that what he was doing was allowing T/B to take over his position by assigning it to T/B.
Different goals create different results. If your primary goal is positive cash flow every month, keeping the t/b making pymts to you is one way to do it. If your only goal is that chunk of cash they are willing to part with so they can have a chance at buying a home in the not too distant future, then the goal is different.
Nothing wrong with either version of the L/O; just depends on your goals and your risk factor (and the eviction laws in your area). Some states have a short eviction period (try 21-30 days). California (my state) does not, so it makes the risk a bit more. In all fairness, offsetting that risk is that you have a chunk of $$$ received from them to deal with the eviction process and expenses if required. Then you get to do a SECOND L/O with a new t/b, and get an additional up front chunk of cash. All in your perspective.
In Dan’s situation, he has the original seller release him from liability, so he has eliminated the risk. The risk is squarely with the seller (and in most cases any eviction if he has released you from liability).
It might be a good idea to get a separate release of liability from the seller once you find a t/b. A separate form means he can’t come back later and say “I didn’t notice this thing…” or yada yada yada if the tenant buyer later doesn’t pay. Also, since you’ll be finding someone paying the l/o seller, it would help to pull credit on the t/b and show it to the seller, that way he can’t come back and say “I don’t know this guy from Adam”. Giving him a chance to look the credit over makes him more comfortable with releasing your liability. You got him what he was looking for in a tenant–someone he would reasonably expect to make payments on time and take care of the place and maybe buy it in the future, provided he wants to sell.
One of the things that drew me to lease options, however, wasn’t the monthly cash flow or the up front chunk of money (although it certainly was a nice extra!), but the back end spread between what you buy the property for from your seller and what you sell the property for to your tenant/buyer when they buy. That can in some cases equal substantial dollars, especially when looking at rising real estate values. It can be a good buy for the t/b because he gets to buy 4 less than market if market has been good, and it’s a good deal for you when you set up the L/O because due to the t/b’s circumstances and offering easy financing, you charge him more on his option to buy than you pay on your option with the seller. In Ron Legrand’s course, he mentions putting everything in terms of “plus the loan balance”, which means the price you pay your seller at the end when t/b buys is actually going DOWN every month a payment is made! Picture working on a L/O, having payments come in every month that generate a little more than your outgo, then when the time is up and the t/b buys (here the longer the lease term, the better because you might be able to stretch this a little), you get this nice $20k or $35k or $50k check, and all you have to do is show up at escrow and collect. It’s like getting paid 3 different ways for doing the same job.
Another thing that drew me to lease options was learning that most lenders look at a lease option as a refinance deal when they approach it, so they look at the market value a little more than the selling price.