Can I get a small lump sum of cash doing a L/O? - Posted by Jim C

Posted by Bill Gatten on January 09, 2001 at 11:28:34:

I would certainly allow at least a partial credit for it and for the amount the tenant is paying over and above fair market rent as well (only fair isn’t it?). Inflating the price of the house a bit to absorb it will make the tenant happy (assuming you haven’t inflated the price after they agreed on the deal). You just want to be sure that you don’t go above a fair (albeit on the high side of fair) comp value in your pricing.

And no, it’s not hard to get. These people are trying to figure out a way to own property without having to come up with a 20% down. Five or six percent is a dream-come-true when they don’t have to qualify for a loan right away.

In my case, because I use the PACTrust almost exclusively, I can also offer them tax benefits, and cut myself in for 50% of the future appreciation as well, and ‘still’ not have any trouble getting the up front money.

Bill

Can I get a small lump sum of cash doing a L/O? - Posted by Jim C

Posted by Jim C on January 08, 2001 at 17:58:02:

Is there any way to get a small lump sum of cash when doing a Lease/Option other than assigning it to someone?

I would love to start off doing Lease/Options, but I would need a small lump sum of cash when I do it. Is it possible to get this at the beginning of it?

Thanks!

YES you CAN! - Posted by Jim IL

Posted by Jim IL on January 10, 2001 at 22:38:57:

Jim,
Yes you can get a lump sum of cash on the front end of a L/O.
This will be your “option fee”, which is non-refundable and does come off the purchase price of the home when/if the T/B’er exercises.
If they do not exercise, you keep this as payment for your taking the home off the market while they decide to buy or not.
In fact, lets lay out a simple example of a standard sandwich L/O and show you what is what.
This will be a home worth $100k now.
Price from your seller to you: $95k
Rent per month from you to seller: $850/month
No option money at all.
24 month term, renewable twice: total 6 year term at $95k price
You sell to a T/B’er like this:
$110k price (a little higher than market value now, due to appreciation)
Rent per month from T/B’er: $1100/month (Market rent here is $1000 so you charge a premium rent for the option.)
No rent credit
12 month term
$5,000 non-refundable option money, gets subtracted from price when/if they exercise.

Profit if exercised by the T/B’er after 12 months.
$5k option fee, kept by you no matter what
$250/month in cash flow ($1100 rent collected -minus- $850 rent paid)x 12=$3,000
Back end profit:
Buyer pays $110,000-$5000=$105k-$95k to seller=$10k backend profit.
And if the T/B’er does not exercise, you keep the option money of $5k, and do this all over again with a new T/B’er, higher price, more rent, and more option money.

There are essentially three profit centers in sandwich L/O’s.
They are:

  1. Upfront option money
  2. Monthly cash flow
  3. Backend profit.

And ALL can be created without any equity in the house if you get a long enough term from your seller and decent payments per month.

Sorry of this was long, I’m a little tired tonight.

HTH,
Jim IL

Re: Can I a small lump sum doing a L/O? - Posted by mike

Posted by mike on January 08, 2001 at 22:46:24:

If I understand what your question is, you will ‘price’ the property so the downpayment recieved from the T/B [ tennat buyer] is over and above your costs. So for example 3000-5000k downpayment becomes your profit up front.
Hope this helps.

Re: Can I get a small lump - Posted by Bill Gatten

Posted by Bill Gatten on January 08, 2001 at 21:01:01:

Of course it’s called an Option Fee. You can collect all that the market will bear.

Personally, I have no difficulty in getting 5 - 7.5% up front, especially when I can offer the optionee the tax benefits re. the mortage loan interest and the property tax expense.

Bill Gatten

Re: YES you CAN! - Posted by Jim C

Posted by Jim C on January 10, 2001 at 22:51:10:

Jim,

Thanks a lot for answering my question. Thanks especially for taking the time to lay out an actual example. That was really helpful.

Just one quick question. Why don’t you give the seller extra money each month to put towards the purchase price (I’m assuming that is what rent credit is)? And why don’t you make the monthly payments for the T/B a little higher so you can give them some money each month towards the purchase price? I thought that was a benefit for both the seller and the T/B? Isn’t that one of the reasons why a T/B would do a deal like this? So that they would have enough equity in the property to have enough for a down payment?

I was just a little confused about this. Thanks a lot!!!

Re: Can I get a small lump - Posted by Jim C

Posted by Jim C on January 08, 2001 at 22:27:13:

But doesn’t the option fee get put towards the purchase of the house if the tenant chooses to buy in a few years? Or am I wrong and it is just a fee?

And if it is just a fee and doesn’t get put toward the purchase, you don’t have any problems getting that money from the T/B? I know you said that you didn’t, but it just seems like a lot of money to put towards a “fee”.

Thanks a lot!!!

Re: YES you CAN! - Posted by Jim IL

Posted by Jim IL on January 10, 2001 at 23:02:48:

Jim,
You said:
“Just one quick question. Why don’t you give the seller extra money each month to put towards the purchase price (I’m assuming that is what rent credit is)? And why don’t you make the monthly payments for the T/B a little higher so you can give them some money each month towards the purchase price? I thought that was a benefit for both the seller and the T/B? Isn’t that one of the reasons why a T/B would do a deal like this? So that they would have enough equity in the property to have enough for a down payment?”

A: That is more than one question, but I’ll not dock ya this time.
Lets see.
Why give rent credit when the T/B’er has not asked for it.
I usually do not give rent credit, because the T/B’ers do not ask for it.
If they do, then we give then very little, and only when the end price will allow it.
Many times, the option money the T/B’er puts upfront is 3-5%, which with good payment history and some credit repair along the way will allow them refi with an FHA program or some lender like this.
It will be an owner occupied loan, so easier to get.
Sometimes, if the T/B’er does not have enough into the deal to close it, but is close, and does not have more cash, we’ll carry a note for the difference, or change the price a little.
It just depends on how badly I need to close the deal and get cashed out.
Personally, I write all my L/O’s up with sellers for rather long terms, so I hope the first few T/B’er do not exercise, allowing me to make more money in the long run.

Just my $.02,
Jim IL