Re: got a lease purchase now what - repost - Posted by JohnBoy
Posted by JohnBoy on December 30, 1998 at 18:14:11:
Let me see if I understand your post correctly.
You say you got a lease purchase agreement at a selling price of $235k with 50% rent credit. You’ve been in the deal for 6 months at $1800 per month rent. That gives you a credit of $5400 towards the purchase price of $235k. This leaves a balance owing of $229,600. Did you put any money down on this deal? If so ad that to the $5400 in rent credits. If not, you got to get a loan for $229,600 to pay off the seller plus about $5k in closing closing costs if you actually BUY this property. How do you plan on getting a loan for $229,600 on a property that appraises for $219k??
Even if you could get a 100% financing from a lender you would have to come up with $10,600 plus at least $5k in closing costs to get the loan for $219k. This doesn’t include any of the $10,400 you already paid in rent over the last 6 months plus any down payment you may have made. Where is the deal in this??
If you got a new loan at 100% of appraisal for $219k plus the $10,800 in rent you already paid, plus the $10,600 you would have to come up with to buy down the balance owed of $229,600, plus the $5k in closing costs, you would have over paid by $26,400 on this property. How would you make $5k - $7k if you buy and resell this property??
You would need to sell this property for $245,400 just to break even with what you would have into this deal. Even if you could structure a deal out of this to make $5k - $7k profit, it’s not worth the risk involved on a $219k property. Based on the actual appraised value of $219k, a “FAIR” not good, but “FAIR” price to pay for this property if you were to actually “BUY” this would be $175k tops!
The only way to justify paying more would be to get good terms where you could sublease this for a minimum of $200 a month positive cash flow and get $7k - $10k down from your tenant/buyer as “Non-refundable option consideration” and by you giving your tenant/buyer the option price of $235k. Your option price should be set at no more than the current FMV which is $219k with you getting the 50% in rent credits on a minimum 3 year lease/option.
This means you would need to enter into the deal with 0 down, $1800 a month rent with $900 a month in rent credits with the purchase price locked in at $219k for 3 years.
You turn around and sublease option the property at $2000 a month for 1 year, with 25% rent credit ($450 a month), get $10k down as non-refundable option consideration with your price set at the $235k to YOUR tenant/buyer.
After the first year you would have built up $10,800 in rent credits leaving a balance owed of $208,200 to pay off your contract.
At the end of the first year with your tenant/buyer, s/he would have a balance owed to you of $219,600. $235k - $10k down = $225k - $5400 in rent credits ($450 x 12 months) = $219,600 balance owed to you if they exercise the option to buy.
Your profit:
$200 a month cash flow for 12 months = $2400 + $10k down up front = $12,400.
$219,600 balance - your balance due to the seller of $208,200 = $11,400 profit on the back end.
Total profit = $10k + $2400 + $11,400 = $23,800.
The deal your describing in your post is a deal where your the tenant/buyer paying the retail price without any room to make a profit. If you’ve already entered into this agreement then you have nothing to bargain with by offering $229k with 100% rent credit. You’ve already made the deal for $235k with 50% rent credit. Why would the seller change the terms of this deal after your 6 months into it?? If you can’t exercise the option, your out of the deal and the seller just gets a new tenant to start over with!