How do I structure this as a first deal?

I have the potential for my first real estate deal with a very motivated seller but I am uncertain how to structure it.

I have a friend who has been offering his home in a lease option to me on two occasions in the past 2 years.

The home is in an upscale area, with homes ranging from 350 to 700k. His home is listed on zillo at about 400k.

He is out of state and resides in it about 3 to 4 months of the year.

I studied and produced a lease option purchase 2 years ago and got cold feet.
I have studied Lease 2 Purchase Handbook by Beaubien.

The home is 10 years old, could use a fresh coat of paint, and needs a few repairs, the most notable being water damage on an outer wall over the pool which is not attached to inner walls. Calking around window sills is also necc. Otherwise, the interior of the home is totally updated for today’s market; granite, tile, appliances, jacuzzi tube, etc.

My goal is to rent it for 2 years for myself prior to excersizing my option and find a buyer.

I do not desire a 3600 Sq ft home at this stage of my life but my goal is to sell it for whatever profit can be earned in 2 years and purchase myself a small condo for cash

In the past 2 years the home has appreciated about 150k, according to zillo

Of course I need more firmer numbers on the home

MY BIG QUESTION
Understanding that he is truly motivated, is willing to rent it prior to purchase, and wants a “win-win” for both of us, do i:

  1. Do I offer less than todays value to purchase the home in 2 years, with appreciation per year? I am going to cover the maintenance that falls under 500$, maybe $1000.

  2. Should I offer more than the current value, plus appreciation, expecting that my profit will come in 2 years of appreciation?

  3. Or something else that I have not considered?

I do not have to pay for the option because he desires to do business with someone he is familiar with. I also am not asking for a rent credit because he is going to rent it well below market value

I welcome all thoughts

Beaubian

Before structuring the transaction, you need to be confident in the numbers… primarily the property’s net operating income (“NOI”) - the annual net rental income after all expenses and vacancy are accounted for. It is generally very difficult to produce a positive NOI on a higher-end single family residence (“SFR”). Do not trust Zillow, Trulia, et al or real estate agents to provide you accurate numbers. Do you own research to determine values and rents.

Secondly, if at all possible, do not rely on speculation (i.e. an expectation of future increased value) as your primary profit mode. The current economic climate is extremely tumultuous making future predications of value nigh impossible.

That being said, with an option, especially if your option consideration/option premium is sufficiently low, a bet on future appreciation is a fairly safe one since your potential losses (the option premium) are relatively small. You mentioned that you “do not have to pay for the option”, but for it to be valid, something has to be provided as consideration (i.e. a small payment) for the right to buy the property in the future. You could easily reallocate a piece of the rent to the option as consideration.

Ideally, you’d offer a (call) option with a strike price (future purchase price) at some discount of today’s value estimated conservatively. Then you’d offer a lease at some discount to the current market lease rate. Keep in mind that you will have periods of vacancy during which time you will still owe lease payments to the owner, unless you address this in the master lease, so account for that expense. Further you will want to have your first option contract drafted by an experienced real estate attorney to, amongst other things, address issues related to title during the option term.

An alternative to a lease-option would be to buy the property “subject to” if you have any doubts about the owner’s ability/willingness to maintain the debt (i.e. not default)/not incur additional encumberances, which could compromise your equitable interest as optionee.

Your options are pretty much look alike with a slight difference, anyway i would like you to be straight forward and honest agent towards your first deal and hope for the best specially if you want to make real estate career.

Sounds like the making of a deal.

I would take out paper and pen and write down the known facts about the property and the market. Repairs needed and anticipated repairs, age of roof, HVAC etc… I would also write out the details of your exit plan. Pen and paper will often show you the flaws in your plans which you can then adjust.

Also would contact a real estate agent and ask for comps in that neighborhood on homes ± 200 sf within the past 6 months and how well properties are appreciating. You don’t need to provide the subject property address, just neighborhood. Based on how similar these are, the comps will give you an idea of whether Zillow is in the ball park.

I don’t know your market so can’t advise you on how easily it is likely to sell. You may already know.

If your seller is open to it ask for a provision to extend the lease option for at least one more 2 year interval in case you need it. If you run out of time and equity is up, the seller may want to reap the benefit. The tighter you wrap the deal up front, the more secure your position will be.

I have the potential for my first real estate deal with a very motivated seller but I am uncertain how to structure it.

WHY is seller so motivated to sell?

I have a friend who has been offering his home in a lease option to me on two occasions in the past 2 years.

Dealing with friends and relative has NEVER worked for me. Work on the NUMBERS not EMOTION

The home is in an upscale area, with homes ranging from 350 to 700k. His home is listed on zillo at about 400k.

Ask your self is this a GOOD number for a sale…if so why has it not sold?

The home is 10 years old, could use a fresh coat of paint, and needs a few repairs, the most notable being water damage on an outer wall over the pool which is not attached to inner walls. Calking around window sills is also necc. Otherwise, the interior of the home is totally updated for today’s market; granite, tile, appliances, jacuzzi tube, etc.

With all the other updates, why no paint and caulk, the least expensive items of repair?

In the past 2 years the home has appreciated about 150k, according to zillo

If has TRULY appreciated 150 K…BIG question…why NO SALE?

Of course I need more firmer numbers on the home.

YES YOU DO.

DO NOTHING UNTIL"

a. You have established the RIGHT numbers for the transaction.

b. Have THOROUGHLY evaluated your friendship relationship and how it will affect the transaction.

c. Are absolutely CERTAIN that you have removed all emotion from the deal.

d. Have FIRMLY established the reason it has not sold…AND…that it will sell in next two years as you HOPE for the price you anticipate.

e. In other words…INVESTIGATE before you INVEST.

f. I am looking at the numbers and your hypothetical profits, etc. and wondering, “What is the fly in the ointment.” If all is as you quote it should have been gone a long time ago.

GOOD Luck