Re: Is this reasonable to do ???( Lease Purchase) - Posted by JohnBoy
Posted by JohnBoy on January 27, 1999 at 23:26:08:
We have a real estate broker here in town doing what your wanting to do. The only difference is instead of setting his buyers up under a lease purchase, he’s selling the property back to them on a contract for deed with a one year balloon.
He lets his buyers go out and pick out the house they like and negotiate the best price they can get. Then the broker actually buys the house and sells it back to them on contract. He charges them $2500 for closing costs and amortises their contract over 30 years at 10.5% interest with a one year balloon. He has his buyers sign a “quit claim” deed back over to him that is held in escrow until thet refinance the property. If they default on the payments he has the quit claim deed recorded and takes back the property.
You can do the same thing under a lease option, but I would structure the lease payments to be equal to what the PITI would be on a 10.5% mortgage amortised over 30 years. Set the lease option up for one year at a time. Instead of charging your buyer a closing cost fee, charge them an “non-refundable option consideration” fee, plus first months rent.
Lets say they picked out a $100k house. Your going to buy the house for the $100k and lease option the house to your buyer until they get refinanced. Lets assume you were putting 10% down to get your loan on the property, financing $90k. Lets assume your able to get this loan at 8%. Your PI would be $660.39 plus taxes and insurance.
You structure the lease payments to be equal to a 10.5% loan payment plus taxes and insurance. So the PI on $90k at 10.5% would be $823.27. You would make $162.88 a month in positive cash flow. The only problem with this is your putting your money into the deal and your taking out a loan in your name. Your taking on all the risk for a little cash flow over a year or two. Even if they put up the dowm payment money your only getting a small cash flow out of the deal. Are your buyers willing to pay you MORE for the property than what you would actually be paying for it?
The best way to do these deals is, YOU find the property, YOU negotiate a price with the seller, then you lease option the property at 5%-10% above FMV to your buyer. You charge them $3k - $10k down (depending on the property) as “non-refundable option consideration” and a monthly rent payment for $100 - $400 a month above your payment. Their option consideration would be deducted from their sales price when and if they exercise their option. If you give them any rent credits, those would also be deducted from the option price when and if they exercise the option.
So lets look at the same deal if you were to go out and buy it yourself.
The property is worth $100k. Your able to buy it for $80k. Lets assume market rents on this house would rent for $900 a month under a regular lease. You turn around and lease option this house to your tenant/buyer for $110k. They give you $5k down as non-refundable option consideration. You set up your lease payments for $1100 a month. (you can always get above market rents when you lease with an option to buy).
You would get $5k down, $200 a month positive cash flow, and their balance due after one year would be $105k if they exercise the option. You would make $5k up front, $2400 during the year in cash flow, plus $25K at the end when they exercise their option. They owe you $105k after one year, you paid $80k for the property.
If you wanted to sweeten the deal for them, you could offer them a nice rent credit. Lets say you gave them 50% in rent credit on the same deal. They would have earned $6600 in rent credits over one year. Their option price is $110k. They put $5k down plus $6600 in rent credits. $5k + $6600 = $11,600 in total credits. $110k - $11,600 = $98,400 due if they exercise the option.
Your total profit would be $5k down + $2400 cash flow + $18,400 on the back end. $25,800 total profit! Of course that’s provided you were able to buy this property at 80% of FMV.
If your going to take any risk by putting a new loan in your name, then structure the deal so you can at least get a good return on the deal.