Gett'n clobbered on my first lease option - Posted by Chad

Posted by phil fernandez on October 27, 2003 at 14:40:13:

How’s he going to do that without losing even more money. A whole saler is going to want a big discount and the deal is already way too skinny.

Gett’n clobbered on my first lease option - Posted by Chad

Posted by Chad on October 27, 2003 at 01:02:31:

Trying to make the best of my first lease option attempt…

House value 103K, my strike price 99K
Option for 3 years, renewable for 3 if payments on time
Rent $850/mo
Option money $1500 paid so far, another $1500 to be paid once I get my own tennant in.

I picked this up in Idaho and I live in California. I have already spent close to $300 in advertising and $560 for prorated rent. Have to pay Nov. rent if it doesn’t lease soon. I have come down on everything and I am to the point that I am offering it for …

$3500 option money, $850 rent with $100 rent credit, price 109K, on a two year option. This thing won’t go and I am thinking of throwing in the towel and calling it a loss on the advertising $, the $1500, and the rents already paid. The lawn has to be getting tall, and it is sitting vacant.

Can anyone suggest a better way that I could make this thing work better for me? The owner is pretty flexible because I don’t think he wants it back. I feel like I negotiated a pretty good deal for my first time (the three year with a three year renewal was tough to get). I guess I could try selling my option to another investor for what I am into it for. Any help would be appreciated. I am prepared to consider this my first screw up, so be harsh on me. Thanks.


Re: Gett’n clobbered on my first lease option - Posted by Sean

Posted by Sean on October 27, 2003 at 21:59:54:

Well you definately are in a mess,

First, you paid effectively full retail (in fact ABOVE retail)… something I would not do… I know some guru’s say paying full retail is ok on sandwich L/O… I agree you don’t have to neccessarily steal a house to make sandwich l/o work, however you aren’t even lower than house value minus sales commission… which means you effectively just gave this seller more than retail price for their house…

Second you gave a seller a large option deposit… why? A big reason for doing L/O is up front cash, by promising the seller 3% option consideration on a 100k house, you will lucky to see much of any cash at the front end when you find your T/B.

3rd, you didn’t ask for any lead time to get your tenant, from what I gather… should always try to get at lest 3 months without a payment in order to get a tenant into the home before you are making payments.

4th… your spread is way too small, I personally would not touch a deal with only 10k in it provided EVERYTHING goes perfect… as you are learning 10k doesn’t go very far when things don’t work out the way you want them to.

5th, you L/O a house in another state, which is definately not how you want to do it, particularly first one.

So, that’s what you have done wrong, and frankly I don’t see what other things you can do other than just cut your losses and run. Break the lease give up your 1500 and cut it loose.

Remember you want to be dealing with MOTIVATED sellers, any seller demanding full retail and a big deposit is NOT a motivated seller. Again you don’t have to steal a house to make a sandwich L/O work, but you definately don’t offer them 98% of value with a large deposit.

I think you get the idea that you can raise the sale price by offering L/0 100k house should easily get 110k with L/O… however paying 100k for a 100k house is a no no… if you aren’t comfortable offering less than value perhaps try this:

Sellers asking price 100k
national average sale is something like 93% of asking, so I’ll pay you 95% which equals 95k
The typical RE sales commission is 6%, and 6% of 95k is 5,700
95k - 5.7k =~ 89k

So I will pay you 89k which as I just showed you is effectively a purchase price of 95k which on an asking price of 100k is very realistic.

Personally I’d want more than that, but still by simply doing that, you now market the house for 110k and you have a 21k spread, vs your 6k or whatever you have… makes it a much better deal, and you didn’t “steal” it from the seller.

I’d find a way to cut and run on this baby, and chalk it up to a learning experience.

Rule #1 - DEAL ONLY WITH MOTIVATED SELLERS - Posted by Bill Bronchick

Posted by Bill Bronchick on October 27, 2003 at 10:46:40:

That seems to be the challenge here…

You need to deal with someone who feels about their house the way a person feels about a bad relationship - they’ll do ANYTHING to get out.

The very fact that you agreed to pay them $3000 in option money defeats the premise of a motivated seller.

I would try to get out of the deal (get them to sign a general release, which you can find on my website) and consider it a very expensive “seminar.”

Re: Gett’n clobbered on my first lease option - Posted by Todd_OH

Posted by Todd_OH on October 27, 2003 at 07:10:17:


Based on the numbers you have indicated, this was a “skinny” deal to begin with. Especially since this is your first deal, my suggestion is negotiate with the owner to get out peacefully. Even if it means you have to give him some more money, but hopefully try to minimize that. There is always a possibility of turning a deal around, but I think your time is better spent looking for a deal with more profit potential immediately. On your next deal, I would suggest you focus on the following…

  1. Invest in your own back yard. Get some experience close to home before you go “global”.

  2. Get a larger equity spread. At least $10K, and preferably closer to $20K. The $4K equity spread you described ($103K - $99K) is practically already eaten up by your out of pocket costs.

  3. Don’t pay the owner so much money down. If your Seller is requiring ANY option money on a $100K house, then your Seller is not sufficiently motivated.

  4. Find a more motivated Seller. (See #3 above). Surely they exist somewhere in your own state, and preferably your own city :slight_smile:

  5. If you don’t know the rents in an area, it is extremely important to get a low rent payment to your Seller.

  6. If you don’t know an area, or are unsure about the deal, make it look more like an “Option” to begin with, rather than a “Lease Option”. In other words “I’ll start making lease payments if and when I find a buyer in the next 60 days…”

Hope this helps…

FYI: I am having email problems, so please post questions/comments to this board rather than sending me email. Thanks.


Re: Gett’n clobbered on my first lease option - Posted by Dimpil

Posted by Dimpil on October 27, 2003 at 04:27:39:

Why so far from home? If you are new it’s hard to manage from that distance. Have you seen the home? Do you know the area? Are rents comanding that there?

I guess its only funtickets… - Posted by Chad

Posted by Chad on October 27, 2003 at 19:56:54:

That’s my new name for money so that I won’t get all emotional about it. I win today because Bill Bronckick, whose worn out green book on “Flipping” that was just under my arm a few minutes ago, replied to my post. I was preparing to flip through it looking for something I might have missed the other 100 times I have read it. That book is the original cause of the “fever” I caught a year and a half ago. God bless you Bill, because I never want to be that person I was before I picked up your book again. I have built up quite a knowlege base since then, but always go to your book for comfirmation. Someday I will land a great deal and be able to get your course on lease options. Until then I will keep on trying and learning from the street. I will file this deal under character builder. My problem was that I have been sitting on the sidelines too long and decided it was now or never. I do have some momentum going here and will not let this stop me. Thanks for your post.


good advice (nt) - Posted by mattc - mi

Posted by mattc - mi on October 27, 2003 at 12:33:51:


Re: Gett’n clobbered on my first lease option - Posted by Chad

Posted by Chad on October 27, 2003 at 09:04:00:

Thanks for the advice. I had a feeling that we left ourselves too skinny on this one. The seller was motivated, but not enough. I believe his motivation would have been much higher had I waited two weeks on this one. My thoughts right now are this…

The seller has let me know that if I were to excercise my option by early next year (something that makes him more comfortable) that we could settle on a price around 95-96K. I could then offer the property for sale for around 107-109K with owner financing. I would need to find a lender that offers loans with no seasoning for my buyer. A 90% loan would satisfy the current owner, I would ask for 3K down, and I would take a note for the remainder of the purchase price. I suppose I could then sell the note at a discount and get my return out. I don’t know if this is possible, but these are my thoughts for now. Maybe you could comment. Thanks.


Re: Gett’n clobbered on my first lease option - Posted by Chad

Posted by Chad on October 27, 2003 at 09:08:59:

Being in California, the market in Idaho seemed so easy. There is always interesting deals in the paper there. I have seen the home, it is a very nice 3bed 2.5bath with a two car gargage. It is only 2 years old and in a new subdivision with lots of activity, including more construction. I imagine property values will go up about 5% a year. I grew up near the area, but I was not into real estate at that time so everything is basically new. Rent are commanding approximately $675-$775/mo.


Re: I guess its only funtickets… - Posted by W. Bronchick

Posted by W. Bronchick on October 27, 2003 at 20:31:12:

Thanks, Chad. Only, I wish I could have helped you before you
laid out the cash on this deal!

Oh well, sometimes it’s better to abandon ship than to go down

Re: Gett’n clobbered on my first lease option - Posted by phil fernandez

Posted by phil fernandez on October 27, 2003 at 14:36:33:

Your 2nd that you would take would pretty much be unsalable due to the high 100% plus LTV. Why not just keep the 2nd and collect monthly payments on it.

Stop digging, Chad! - Posted by DaveD( WI)

Posted by DaveD( WI) on October 27, 2003 at 10:41:54:

If you continue this program, you will have to reach further into your pocket. Where’s the 10% down going to come from? Your pocket. Why would you then offer owner financing with only 3K down?

Three “k”, as you know, is a fair non-refundable option condsideration coming into you from your tenant-buyer, but it is a horribly tiny downpayment for owner financing. You need at least 10% down to even consider giving away any more control than a sandwich lease.

BTW, the idea is to get an option for $10, not $3000. the second idea is for you to rent-in for under market, then rent-out for slightly above. The third idea is to have your strike price at least 10% under the market, so you know you will make money regardless if the market moves up, down or sideways.

You are burying yourself in bad terms. Please stop digging, Chad! You can do some of these things if you have big upside in your deal, but this one is simply way too thin. If you cannot substantially rewrite this to better favor you, I think you should take your beating and move on. This is a real-world ugly seminar you just attended. And for heavens sake, next time don’t give the seller $3000 option down (unless you’re leasing a 500k house, expecting to make 80k!)

Re: Gett’n clobbered on my first lease option - Posted by gerald(tx)

Posted by gerald(tx) on October 27, 2003 at 10:30:03:

For all the reasons Todd has listed above, “Cheer up, things can only get worse.”

I think it would be best to take my loss, lick my wounds, learn from the experience, and live to fight another day. From this distance and this skinny a deal, problems will always be looming. Trying to extricate yourself with a profit will demand a lot of brain damage.

It ain’t worth it. You’ll know better next time. Consider it a lesson on the highway of life.

Re: Gett’n clobbered on my first lease option - Posted by phil fernandez

Posted by phil fernandez on October 27, 2003 at 14:47:09:


Not to hammer you to death, but also the fact that you state that there is new construction in the subdivision where your house is located doesn’t bode well. With mortgage money plentiful and financing easy buyers would want the brand new house assuming prices are comparable.

Also I’m sure that the CA market and Idaho markets are drastically different. Seems like what’s going on in the CA market might have influenced your buying decision in Idaho. Every real estate market is different and you have to know the market like the back of your hand before investing in it.

Re: Gett’n clobbered on my first lease option - Posted by Doug Pretorius

Posted by Doug Pretorius on October 27, 2003 at 09:45:06:

That’s your problem right there. Market Rent is about $725 and you’re paying $850. No wonder you can’t get a tenant! For a sandwich lease you shouldn’t pay any more than 90% of market rent, and charge no more than about 110%, to get it to move quickly.

In my opinion the price is not as important as the payments, as long as you’ve got enough margin to cover your costs should your T/B cash you out. Most never buy, so all of your profit comes from their option fee and monthly payments.

This seller was not motivated at all, they’re an investor, and they’re making a killing on YOU.

Todd is right on about not putting anything down. If the seller insists on having some money for security, give them advanced payments, in exchange for an additional 10%+ off those payments.

So by my calculations, your payments on this “deal” should have been no more than $580/mo, instead of $850.

Re: Gett’n clobbered on my first lease option - Posted by Jk

Posted by Jk on October 27, 2003 at 10:57:44:

Have you tried to wholesale the deal to any other investors in that area? Another investor might want to pick it up and renegotiate with the Seller. Perhaps you can atleast get your money back on this one.