As you know there are three profit centers with lease/ options. The upfront option money, the monthly rent spread and the back end profit when the option gets excercised.
Your concern seems to be that they excercise the option too fast so you don’t get many months of the rent spread. Boy that’s a tough one. You could in the original documentation state that the option could not be excercised for a year unless an additional $1,000 is paid at the time it is executed, but that might kill the incentive for the tenant/ buyer to enter into the agreement at the beginning.
How bout if you put a clause in at the beginning stating that if the option is not excercised for a year, you will credit the tenant/buyer an additional $500 toward the eventual sale price. However this credit of $500 would offset some of the rental spread you would receive in that first year.
Not sure if any of this makes sense. I’ll be curious what others may have to say about this situation.
don’t want L/O’s to cash out quickly - Posted by d.henderson
Posted by d.henderson on May 15, 2000 at 12:04:44:
Hello All,
I’ve had this happen a few times. Had a house and L/O’d it, settling back to recieve the profit on the monthly payments, plus the option money. I want them to pay for 2 years, but they cash me out quickly. Is there any addenum that any use to keep this from happening for at least a year?
The two houses that this happened to, I had to ask a little less for them because of the area. Maybe I’m just being greedy. I really wanted the difference to add up to a better profit.
Thanks for any ideas.
always learning,
Dee-Texas
Raise your purchase price, and decrease their rent credit.
My buyers won’t exercise because their payments to me are only 50/ mo different than a mortgage would be. Therefore, I have condluded: on houses I don’t want to sell, keep the rent payment low, rent credit low, and option price and sale price high.
Hey Dee,
How are you pricing your units? If you are in fact pricing them for sale down the road (5% to 7% above FMV) and you get an accurate appraisal, you might be “forced” to take a second to make the deal work. You would then still have additional monthly cash flow if that’s what you’re after.
My experience has been that the Optionee (tenant buyer) has never been that concerned about the purchase price. Make the purchase price an amount that you wouldn’t mind if the Optionee were to exercise their option the day after they signed the original agreement.
Give the Optionee a one year lease/option with the right to extend another year. If they choose to extend have in the contract that the purchase price will increase 5% (or whatever you think they will agree to).
You can offer to finance the property with a wrap-a-round loan. Have them pay interest only or have them pay interest plus just enough principal so you don’t have a negative cash flow. Tenant Buyers concentrate on the monthly payments not on the purchase price.
I am not an attorney. Always consult an attorney. Ok, now that that’s done, I wouldn’t follow the advice for prepayment type stuff in the previous posts. Just speaking generally, we’ve already seen options sometimes treated as land contracts, forcing a foreclosure vs. eviction in the event of non-payment, and we’ve also seen some “non-refundable” option money refunded when the buyers claimed they didn’t know that. With a general anti-investor leaning in most courts, I wouldn’t structure an option deal that reduced the incentive to buy - after all, that’s what the option is for, it’s an option to purchase. I would personally be glad about this, take the big fat back end check and look for more deals. If you want to structure a few years of guaranteed cash flow, followed by a cash out, I would probably have the seller deed the property into a trust, assign you the beneficial interest, then re-sell by creating a second note for your equity, and put a balloon on it for whatever time window you want.
Are you saying that the cash flow is better than the backend profit? Or you just want both? You may be asking too little on the sales price. Load any credit in a second year and penalties in the first year. Are you having the mortgage broker look at their 1003 and credit report beforehand. Pick one that may take some time to solve any problem they have. Remember though 10K up front may well be worth more 1K a month for a year. When it’s not then find better sources of investments.
