Is this reasonable to do ???( Lease Purchase) - Posted by M. Paul Abraham


#1

Posted by JPiper on January 28, 1999 at 13:45:33:

Good point Tim.

After the contracts are signed, the optionee still has to perform. Evaluating any deal needs to take into account possible risks…in the investment world they call it risk-adjusted return.

Very good point, and one that I think needs to be stressed. Things don’t always go as we plan. Taking a careful look at your risks, and whether you are adequately protected AND compensated is extremely important.

JPiper


#2

Is this reasonable to do ???( Lease Purchase) - Posted by M. Paul Abraham

Posted by M. Paul Abraham on January 27, 1999 at 22:28:29:

I am a Loan officer in the Atlanta area and see a lot of customers who have cash to buy but not the ability (Yet).I would like to let these customers go out with a realtor and find a house that they would like, I would then buy that house and lease purchase it back to them.

  1. Would this work ?
  2. And if so What would I need to Look Out for?

Any advise would be great , I have one rental already but it was my former house. I like the idea of lease-purchase better than plain rentals

Thanks in Advance!

M. Paul Abraham
Loan Officer


#3

Re: Is this reasonable to do ???( Lease Purchase) - Posted by Tim Pannabecker

Posted by Tim Pannabecker on January 28, 1999 at 12:10:12:

M. Paul,

Your lease option idea is a great idea. With low interest money and an appreciating marketplace the lease option method is excellent. However, I would not buy a property to lease/op unless I was willing to add that property to my portfolio. By that I mean, you are responsible for the mortgage, the optionee may default, and for the people that think the option money will carry you through an eviction of a “professional” tenant - they simply don’t have a clue.
Don’t misunderstand me, I do lease/ops I just take it very seriously. If you screen your tenant well, you should do great. But, make your money going in, get some discount or factor the desirability of the neighborhood coupled with your area’s appreciation rate into the equation.
My rule of thumb is to lease/op properties that I want to keep (because most likely I will) and create a mortgage and flip properties that I don’t want to keep. (JP has a great article on how to create your own mortgage)
In any case, lease/ops beat renting hands down.

Hope this helps,
Tim


#4

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.