Best way to do this LO/ILC deal?... - Posted by HR

Posted by Hr on March 05, 2001 at 06:51:23:

Unfortunately, Vic: knowing my guys, they have the ice chest broken out Monday morning. LOL. I’ll call you. Thanks for the kind words.


PS. I agree with the sharing. It’s always amazing how one good thing can lead to another, and another, and another. That’s part of the fun: being part of that process.

Best way to do this LO/ILC deal?.. - Posted by HR

Posted by HR on March 03, 2001 at 22:01:45:

Hey folks,

I’ve got a 750sf single family, 2 bedroom property under contract for $6200. You would be amazed how good a shape this thing is in for the price, and it ain’t in a warzone. (It was in an estate and they were dying to just dump it). I figure it’s worth about 20k as is. Let me tell you what I want to do with this, and then let’s answer some hypothetical answers.

I have stuck with rehabs and flips, but I’m interested in getting into lease options and owner finance deals. In fact, I suspect selling some of my inner city stuff via lease options is the next stage for me. In any case, I want to do a lease option and owner finance on this deal as my first foray into these areas. So, here is my game plan:

  1. Attract a private money source and give 15% return on $7200 (purhase and closing costs). $7200, 15% interest, 29 months, $286.81/month payment. Throw in another $100/month for taxes and insurance making $386.81 monthly PITI amount.

  2. Advertise and sell this as a lease option with owner finance. Here’s how that will work…

I advertise “rent to own” in owner section (and rental, too?). I’m looking for someone who can do the 2-3k fix up work to make this thing nice (it really doesn’t need much; again, you’d be amazed how nice this thing is, relatively speaking). I do a lease option with them, rent due immediately, and they do the fix up work BEFORE moving in.

Lease Option terms: they put down $500 non-refundable option consideration (or more if I can get it, but doubtful, I suspect since they dropped about 1k in house in materials). Have them maybe put up $200 or so deposit to make look more like lease than option (with separate lease and option agreements, neither of which is recordable without breaching my contracts). They rent for $500/month. Ok, here’s a decision point…

I want them to lease it from me for 30 months. Basically, I want them to pay off my private money loan. Once they have paid off my hard money loan, then I will sell the house to them on an installment land contract (In the lovely banana republic of the South (aka known as Louisiana) we call an installment land contract a “bond for deed.”). BFD is extremely favorable to the seller in LA. If they default, no matter how much equity they have or have appreciated, if they don’t rectify the situation within 45 days, I have the property back without having to go thru judicial foreclosure. Sweet!

Ok, so here’s a decision point: do I do a one year lease with one renewal and a third 6 month renewal? How bout a 2 year lease with a 6 month renewal? Does it really matter?

I’ll give my TB a $100 rent credit towards the eventual purchase price of the house. I’ll rent for $500. Fair market rent for this place is around $400-450/month.

Sales price: $40,000k - $3000 rent credits - $500 option consideration = $36,500. Since I’m doing the financing, I want another 1-2k down. They will know this up front and the sale will be contingent upon them having it. While they will have fixed the house and paid off my hard money loan, I want them feeling stuck in the home. So, purchase price is really 36500-1500 dp at closing = $35,000. Fixed up, this price isn’t far from fair market value. (a little high). 35k, 12% interest (max in banana republic), 15 years, $419.32/month. Here’s the killer draw: that’s the same as they will pay in rent for renting where they are now, except they will own this without having to go thru a bank, etc. Maybe I’m in la-la land, but I think I will get a lot of takers, and so, as compensation, I’m thinking of selling interest only with a 7 year prepay penalty of 8k, too. Again, they will know this up front. I want a homeowner who plans to stay.

Honestly, I think I’m going to have to buy a phone company to handle all the calls and inquiries. My target market here is 1) handyman first time homeowner with decent credit/employment history and some cash, but who probably hides income because he’s self employed; 2) investor who wants low money down deal, with skimpy cash flow, but who will like my financing.

So, for any of you that do these deals (and I am looking for experienced comments only please; I too know the theory)… what do you think about this deal? How would you do it differently? I know I could just go right into a BFD from the git-go, but I intentionally want to do a lease option to get experience with that and feel my way thru it. Same with selling on BFD. This is a cheap, easy, low-risk deal to begin cutting my LO and BFD teeth on.

Here’s a more advanced question…

  1. If I sell on BFD, I don’t want that recorded at the courthouse. I want my LLC on title with status that looks free and clear. Can I include a clause in my BFD contract whereby my buyer gives me the right to encumber the property with a mortgage (but that I have to give it to him free and clear with marketable title when he makes the final payment.)? This way, I’m sure I could borrow an extra 15k from a bank using this property as collateral and allowing me to buy another property. I’ll also use the interest payments to pay down the bank loan before his 8 year prepay penalty is up.

Ok, folks, it’s late and I’m getting tired. I’m losing grasp on coherent thoughts. I think you get the idea on what I’m trying to do. Any thoughts, or different ways to slice this pie, are appreciated.

In fact, I’ll buy a beer to the person going to Atlanta with the best suggestions!

Thanks in advance for any suggestions.



Re: Best way to do this LO/ILC deal?.. - Posted by JPiper

Posted by JPiper on March 04, 2001 at 03:18:18:


Not sure what you?re looking for here. Sounds like you?ve got it all figured out. They say Rube Goldberg did too?.so you?re in mighty good company (lol).

I?ve done quite a bit of lease/optioning, and quite a few land contracts?but rarely have I coupled both. The reason is that there is no real reason that I can see to do it. I don?t sell too often anymore with a land contract?.usually I use it to sell owner finance in a particular area where I have to get licensed as a landlord to do a rent to own?so in that area I avoid that with a contract for deed.

But generally speaking I think a lease option is a better deal for the seller than a contract for deed. The primary area where I think this is true is in the tax area. The land contract in essence ?sells? the house?.whereas the lease/option when done correctly doesn?t. The problem with ?selling? the house from a tax point of view is that for active investors it triggers a set of unfavorable consequences. The first of those is that given enough ?sales? in general, the taxes are due upfront on the entire deal, eventhough you haven?t received the money (dealer treatment). Another possible advantage is that the lease/option does create depreciation expense. And finally, somewhere down the line when and if the tenant finances you out, you can do a 1031 exchange, or at a minimum be eligible for the favorable long term capital gain.

So why do a land contract as a means of allowing the exercise? Only you have the answer to that one. I?d rather cash out in a 1031 exchange, and take my cash into another deal without paying tax. Once you do the land contract you quash the idea of 1031?it?s all over. And if you?re a dealer, you trigger all the taxes at the instant you sell.

Here?s what makes sense to me?.1) buy the property 2) lease/option it 3) put your loan on to pull the cash out 4) cash out when the T/B exercises 5) 1031 exchange to the next deal. Remember, the tax cost is the largest single cost in any deal. And you have a way around it!

If you?re bound and determined though to experience the land contract?.just do yourself a favor?don?t bother putting it all in writing. You can honor what you intend to do?and I know you will. But sometimes you may find that having too much in writing works against you in a courtroom or with the IRS. Just leave it simple?.a lease with an option.

On a lease/option I like to call part of my upfront money the security deposit. Now it?s refundable of course?.but ONLY if they don?t default, clean the place up, etc. I like the advantage of having that element in my rental contract for the possible eviction down the road?.and if they screw up it?s non-refundable anyway. They also know they can get something back if they return the place in decent shape.

As far as time goes?I like to write a 2 year deal. But I write it up one year at a time, with a renewal. I don?t like to write a lease in excess of one year?.I hear if you do in my area that the lease needs to be recorded to be enforceable. Don?t know if that?s true or not?so I keep my leases at one year (and then renew them).

I wouldn?t try to micromanage too many elements here and get them ALL in writing. Keep it simple?no telling when one of those things you put in writing fouls you up in some other area when the guy defaults and goes to court over it.

Also, I?d be careful with the idea of the guy rehabbing the place. He may do it?but then again, he probably won?t. And if he does, you probably won?t like how he did it. You think it?s tough finding a contractor? Try finding a contractor who will actually pay you in a reliable fashion?.lol, good luck. I?ve come to the conclusion that you?re generally better off doing the fix-up yourself (cheaper and better). More importantly, you lose a lot of control of the process?so I?d think about that one. If you do decide to move forward with it?.make sure you have that aspect of it in writing?with controls placed in there for you. And make sure your attorney reviews all of this in light of possible equitable title issues (how do you allow a guy to fix a place up and not create equitable title issues unless you pay him?).

By the way, I was complaining to a local competitor who has sold me a few places about how none of my tenant/buyers ever seem to fix anything. He told me that he had a sure way of getting people who would. So I took the bait and asked how. He said he never fixed anything up. He said his places were so bad that a guy HAD to fix it up before he could move in?.lol.

Prepayment penalty of $8K in your bond for deed deal? Is that legal in your area? That?s a stiff prepayment penalty. I?d check that out with your attorney.

Lease/option is my favorite way of ?selling? my low end places. But I like to keep it simple, I do the fix up first, I get more money upfront, and I don?t formally offer any permanent financing. I do mention the possibility of it?.but I use it more as something I might do, AFTER I see how they perform on their agreements, and WHEN I see how my cash position is at the time. Nothing in writing, no guarantees.

Don?t know if I win that beer Hal, but I ought to win something for the most words anyway. LOL.


Re: Best way to do this LO/ILC deal?.. - Posted by Vic

Posted by Vic on March 03, 2001 at 23:56:26:


I might not have the best suggestion, but hmmm… about that beer thing. Can I get one anyway? And I’ll make it easy too - you won’t even have to go all the way to Atlanta to buy it. LOL

I remember hearing you talk about this the other night, but I wasn’t totally following the conversation.

For what it’s worth. Essentially what you’re talking about here remeinds me alot of what Merle does, but with a twist. I think your idea is sound except for the fact that it has too many working parts. First you need to get a hard money loan, then you have to find the right buyer, then you’ve got to hope they understand what you tell them (which ain’t gonna be easy), then you’ve got to hope that they can remember what they agreed to 30 mos. later. That’s a whole lotta things to be concerned with.

With that said however, I like the idea of it all. I just don’t know how practical it will be.

The other thing that would be a concern is not recording anything pertaining to the BFD. I don’t know if you can do that or not. I’m pretty sure that you would be req’d to record something in order to satisfy the law. Usually, it’s only an agmt. to purchase.

If you don’t record, then the buyer may not be able to take advantage of the homestead exemption.

Also, there will be a mtg. recorded of 3 times the purchase price when you do sell on a BFD. So I don’t think you will be able to sell on a BFD then take out another mtg. The property would be overencumbered. You’d have to have a really, really, really cooperative (read dumb) buyer (which won’t be that hard to find here) to do all this & then once something goes wrong you’d better hope that they have a really dumb lawyer who won’t claim you took advantage of these poor people. Sounds like a lot of risk.

If you could do it though, I bet one of your subs would be a good candidate for it, huh?

I like the creativity of it though. In essence what you’d be doing is getting a hard money loan after (instead of before), then L/Oing the property, then after 30 mos. converting that lease to a BFD, which would then not be recorded, & then you would take out a new first & buy another property with that…man that’s complicated, but if you can pull it off, that would be great. All that just to cut your teeth on L/O’s. I think I’d be inclined to find a less complicated way. But if you do do it, let me know how it works out.


How about “selling” high end places? - Posted by AMP

Posted by AMP on March 06, 2001 at 11:54:50:


Thanks for another informative post. You caught my eye when you said “Lease/option is my favorite way of ?selling? my low end places.”

So, what’s your favorite way of “selling” high end places?

By high end, I assume you mean > $100K, where the buyers would benefit from itemizing mortgage interest, RE taxes, etc.

Thanks again!

Lifelong steaks for you from my cashcows… - Posted by HR

Posted by HR on March 04, 2001 at 08:34:03:


I was hoping I’d catch your eye with this post. I appreciate your (and Vic’s) responses.

Let’s set the record straight: I owe you WAY more than a beer. How about beer, steak, wine etc? Remember our conversation at last year’s convention? I really enjoyed the pearls of wisdom you gave me, and I put them to good use.

I know Old Fernandez was listening in on that conversation too, but for those who weren’t there, Jim and I were talking about low-income inner city properties as a rei niche. I was telling Jim that I could buy a bunch of stuff in borderzone areas (slightly above warzone) for cheap and make some good money on cashflows, etc. I didn’t know till that conversation that Jim did this, so we had a nice conversation and I got lots of good ideas. (Now you know why I hang out in the bar! Despite popular opinion, I’m not a huge drinker, but I do know where the real action takes place!)

Anyway, Jim, since last year’s convention, I’ve bought five of these things (in addition to some other rehabs and flips):

  1. 1800sf fire damaged 6 bedroom home (2k pp; 18k rehab; $750/month section 8 rental; appraised at 68k!)

  2. 4br owner finance deal (12k pp; 3k down, 2k owed June 2001, $1750 due each June 1 2002-2005, that’s a no interest, one annual payment owner financed deal). I put 18k into the rehab and will rent out $850/month section 8.

  3. Am buying this week a 4000sf 3/1 duplex. It’s a raised basement duplex with huge garages underneath. Those basement spaces are going to be my storage space for my rehab corp. The top two apartments will rent out $600/month section 8 each. PP= $2k. Rehab costs: 28k. (This deal actually required the mortgage company, who was selling, to pay $1500 at act of sale to sell the home; I love it…)

  4. Bought a HUGE 4 bedroom duplex with huge lot for 6k. Will put 50k into rehab (big rehab job). Will rent $850/side ($1700 net to me) section 8.

  5. Am buying a 4 bedroom home for 10k. Needs 12k in repairs. Will rent $850/month section 8.

Once I slap a mortgage on these and pull my money out, I figure they will generate $2500/month net +CF to me. That, plus the equity in these things, Jim: I figure that conversation with you last year made me at lease 150k. Just this last year alone.

So, do I owe you a beer?

LOL. I owe you at least a few steaks from the profits of these mighty little cash cows.

As I mentioned in my original post, I think the next phase for me is to learn how to “sell” them with lease options. Maybe I can bend your ear for a little while on this subject while we are in Atlanta.

Cheers, and, as always, thanks for the advice.


PS. While talking with Phil on the phone a month ago, he recommended I come to Atlanta with some pictures of these places. I told him I would. Also, while talking with Ed Garcia, he couldent’ believe that you could buy a home for 10k and it’s not a slum property in a warzone. He’ll believe me when he sees these pics. While my neighborhoods aren’t great, they are not warzone. They are borderzone: lower working class rental neighborhoods with a mix of rentals/section 8 rentals and a few homeowners sprinkled in. No graffiti. No abandoned cars, etc. I know you know the neighborhoods, but I suspect it’s hard for a Californian to believe you can buy this stuff this cheap. I can’t blame him.

PSS. Ed, Phil, and a few others are on that steak list, too. Man, I’m going to have to sell one of these things just to pay for some of these upcoming meals! lol

PSSS. I print out and save great posts and put them in their own topic files. Selling stuff on lease options has been a back burner topic I wanted to get to some day. So, I printed out that post from years ago between you and Ed regarding lease options vs cash sale as an advantage to selling. I reread that, and was thinking of those ideas, when I made my original posts. That was a GREAT interchange between you and Ed. In fact, it may have been imho the single best thread ever on this board. Definately top 5. So I’m aware of where you are coming from on some of your thoughts.

Re: Best way to do this LO/ILC deal?.. - Posted by HR

Posted by HR on March 04, 2001 at 08:38:44:


That’s good advice. I need to talk to you to find out just how much prepay penalty I can charge, plus advantages/disadvantages of BFD vs. Regan’s escrow agreement again.

I think I’m going to sell this with a lease option, without a lot of docs, and keep it simple as you and Jim suggest. I’ll get more ideas in Atlanta, I’m sure. The deal should close in early April, so I should be set by then.

Why don’t we catch a beer while looking at 4 bedroom duplex? The vinyl siding is almost done, as predicted.

Thanks for the advice,


Re: Lifelong steaks for you from my cashcows… - Posted by Nater

Posted by Nater on March 05, 2001 at 24:00:38:


Could you post the link to that thread?? I remember that exchange and would love to read it again.


Re: Best way to do this LO/ILC deal?.. - Posted by Vic

Posted by Vic on March 04, 2001 at 22:22:21:


In regards to your post to Jim above - There’s also a subsidiary benefit in the chats you had with Jim, in that you’ve learned so well what you’ll are doing that I’m now able to learn from you on those types of deals. Had you not learned well, then you wouldn’t be in position to show others.

I can see very soon that you are going to have your program on automatic pilot. You seem to be just about there now.

Even though I’ve only seen one of your properties, I can vouch for you in that it is not in a war zone. It’s in a very good rental zone. I know the neighborhood of one of your other ones (Banks St) & I know that that’s also a good rental zone & not a war zone. So when you say your properties are in border zones, you are absolutely accurate. Might even be a little better than border zones. Those 2 areas might even see some appreciation in the near future.

It’s obvious that you’re on track & I guess I’m lucky to be in the same city as you where I can see first hand what you (& indierectly Jim) are doing. It’s great stuff. It won’t be long & you’ll be able to coast, if that’s what you want to do. But knowing how bitten you are by the real estate bug, I’m sure you’ll push into other avenues.

For anyone who might be reading this, if you get the chance to be on your REIA board, go for it. It allows you invaluable opportunities to rub shoulders with the real doers, like Hal & others. How much is that worth?
There are many other perks of being on the board too. So the little bit of work that you actually put into it, comes back to you many times over.

Hal, yes let’s get together this week. I’d like to see the progress being made on that double. We can hang out on the street with your subs. I’m sure they’ve already got the ice chest with the beers all nice & cold, huh? LOL


Re: Lifelong steaks for you from my cashcows… - Posted by HR

Posted by HR on March 05, 2001 at 06:47:29:

Here is the link that starts the thread. Also, if you are not aware of it, Ed and Jim have a deep respect for each other. Each also knows each side of the argument inside and out. They tease each other in the thread, which could be misunderstood, unless you knew they were good friends…