Posted by Craig-SoMD on July 04, 2003 at 23:43:32:
It is a good deal for the tenant buyer because they are able to get into the house they will be buying, possibly before they may have the credit or cash to close right away. They will be paying a fair rental rate. Often they will be getting something every month(so long as they pay on time) that will be credited toward the purchase price. And the price you lock in today, although more than today’s price, should be less than FMV at the time they intend to buy, a year or two down the road.
Here is an example where I just put a tenant buyer in a property. My locked in price - $167,000. My tenant buyer’s price - $197,000. The payment I make - $1225. My TB’s payment - $1450. Monthly on-time credit - $500, first year only(possibly $6000). Up front option consideration - $6000. Term - two years. FMV in two years based on very conservative appreciation rates for the area - $220,000. The very least I will make on this, total, is $24,000, and I am making it in upfront option consideration, monthly cashflow, and backend profits. If they don’t follow through with buying the place, I will make even more money on this deal. And I know it is a great deal for the tenant-buyer.
I own a house in NJ that I was thinking of doing a L/O with. I am not sure how this actually works and what things I need to consider. Can someone tell me how this should work?? Thank you.
Posted by Ben (Ohio) on July 03, 2003 at 12:06:31:
Here’s an example from my website (from my perspective as an investor)
Joey and Susie were living happily in their 3 bed, 2 bath home in a nice suburb. One day, Susie’s high paying job was transferred out of state. They had to move and the company was not going to help them out (typical). They had two weeks to pack up and be gone. They were paying $1050 per month in principal, interest, taxes, and insurance (PITI) and their home was worth about $125,000. After conversing with them, I offer to take over their payments and I secured an option to purchase their property at $125,000 within three years for a $2000 non-refundable payment, called option consideration. They were then able to relax knowing that their biggest worry was taken care of. I then contacted the many hungry buyers (or ‘tenant/buyers’) in my database and told them about this great home. I found someone to move in who wanted to buy the property, but were smart enough to know that Lease Purchasing is an intelligent way to buy a home. One year later, they closed on the house and paid most of the costs of closing. (Joey and Susie, having refinanced and taken their equity out long ago, and having been enjoying a year’s worth of extra tax deductions, were thrilled: I coordinated it all and they never got calls about backed up toilets or any other messy tenant issues.)
So, basically, you’d get some non-refunable option consideration securing the right to purchase the home at a set value, plus monthly lease payments from a tenant/buyer. Typically, a lease would run 1 year and may have an extension option in the contract as well.
A key to doing this is having good contracts–it’s not terribly hard if you can grasp the two main parts: the option and the lease and how they might inter-relate with things like rent credits and if they default on the lease (for e.g. by paying late), the option is voided.
OK, I get how/why you purchased the property but can you explain how you made money? How was this a good deal to a tenant/buyer if they are then having to buy it for more than FMV in order for you to make a profit? I don’t understand that end of it as well as I’d like to.