Re: ? for John Boy or other Sub2 practitioners… - Posted by JohnBoy
Posted by JohnBoy on September 07, 2003 at 16:14:21:
No, this was not an over-exaggerated example. Interest rates have been at low levels for the past few years, causing home values to increase. Your idea of 95% of the country where homes would not increase by that much is over-exaggerated. Maybe in your area and in some other areas, homes may not increase that much, but it most areas they do increase.
In my area the average home value has increased by 8% per year. In others, they have increased far more than that, especially in CA.
A home worth $150k a year ago, where values have increased by 8% would make the home worth $162k today.
If you got at least $5k in option money from the t/b’er, then the amount they would need to exercise the option would be $160k. If you gave rent credits it would be less. If you extend another year, even less.
If for some reason the house does not appraise for enough in a year, then you have several options…
Agree to renew the L/O for another year.
Lower the option price to get cashed out.
Have the t/b’er pay the difference.
Carry back a second mortgage for the difference.
How realistic is it that the t/b’er will exercise the option and/or be able to buy the property?
Depends on whether or not they still want to exercise the option. Depends if they cleaned up their credit in order to qualify for a loan. Depends on if you are willing to extend them more time if needed. (if they have performed on their end as promissed then this is never a problem on my part).
If they don’t exercise the option, then you get another t/b’er and start the process over again. More option money. More monthly cash flow. More profit over the long run. If they do exercise the option, great! You get paid off and cashed out. Go replace it with another property.
It’s not about cheating people and making it so they can never buy the property. Although some investors do it that way, that is not the right thing to do. We want them to buy the property. If it takes longer for them to buy it, or if we have to start over again with a new t/b’er, then so be it. We just make more money from it.
It has been estimated that 65% of t/b’ers never exercise the option. This is not because the property won’t appraise and is over priced. It is mostly because of the t/b’ers own doing. They decided they no longer want the property. They didn’t perform on their end of the deal by cleaning up their credit, or they breached their contract, failed to pay on time, failed to take care of the property, got transferred to another area, etc, etc, etc.
We make it fair for them to be able to exercise the option. We extend them time if needed as long as they have performed on their end of the agreement, paid the rent on time, and taken good care of the property. If not, we don’t extend and replace them with another t/b’er.
Whether they exercise the option or whether then can exercise or not is all on them. They have been given a fair opportunity. Whether or not they perform or decide different is up to them.