Best way to do this LO/ILC deal?.. - Posted by HR
Posted by HR on March 03, 2001 at 22:01:45:
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:
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.
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…
- 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.