Re: L/O - How do you make money? - Posted by JohnBoy
Posted by JohnBoy on May 15, 2000 at 19:11:52:
Now that you heard about the way you can make money with a L/O, you’re probably thinking, yeah, but HOW do you go about structuring a deal where you can make money on option consideration, monthly cash flow, and a back end profit, right? Say, why yes brother JohnBoy, that’s exactly what I was thinking.
Let’s create an example to give you a clearer picture on how this can work. We will use a typical sandwich L/O as an example:
Your the buyer looking to buy a home. I come along and say unto you, yes, I have a home available that I can set you up in with an option to buy. Since you have had some credit problems in the past you can’t qualify to get a mortgage or at least you think you can’t. But I say to you brother Allan, “I can help you become a homeowner and accomplish that American dream of owning a home”! I ask you how much cash you can come up with on this house if I’m willing to help you out and get you into the place? You say, why I can come up with $5k! I say, well, that nots quite what I was looking for, but I think I might be able to work with that. This is where you start to get excited! Next I tell you that I can give you a one year lease with an option to buy the house at the end of that year for $115k and the rent will be $1,000 a month on this nice little property. Then you say, “Why good God-O-Mighty brother JohnBoy, I’ll take it!”
Now the average house just like this one sells between $90k - $100k in the same neighborhood, but your not concerned about that because you want a house so bad and since you can’t qualify for a loan you don’t mind paying a little more in order to get into one. Besides, you only have an option to buy it later, not an obligation to buy. If market values go up in a year you will be in good or better shape anyway. If not, you can always walk away at the end of your lease. So everything checks out and we do the deal. Your happy, I’m happy, everyone is happy.
So now your thinking, yeah, that’s all just fine and dandy, but HOW are you making any money on this??? Alright! Your paying attention! That’s good!
Well, let me tell you how:
You see, I found this “motivated” seller that just happened to be the owner of this house. He “NEEDED” to get out from under the mortgage payment he was paying on this house and I just happened to come along and give him a solution to his problem by stopping the bleeding he was going through.
His mortgage payment was $800 a month and his loan balance was $90k. He didn’t have much equity and a realtor would have eaten up any of the equity anyway from their commission to sell the house for him. So yours truely here agrees to L/O the house from him for 5 years and cover his mortgage payment as the rent amount. He’s happy, I’m happy, everyone is happy!
My rent to the seller is $800, my option price is for $90k locked in for 5 years until I’m ready to exercise my option, which gives me plenty of time to make money on this until I get it sold.
You came in and gave me $5k as “non-refundable option consideration” and will be paying me $1,000 a month in rent for a year. Since all I did was just take over the property by picking up the house payment to bail the seller out of his bind he was in, the $5k you put up goes right in my pocket! Every month when you pay me the $1,000 for rent, I take $800 from that and my rent to the seller (actually I pay it directly to the lender to insure the mortgage payment is getting paid) and the left over $200 goes right in my pocket every month. If you elect to exercise your option at the end of the year then the option consideration of $5k you paid would be deducted from the purchase price your paying. So you would need to come to closing with $110k to buy the house.
How much is my option price with the seller? That’s right, $90k! So that means at closing I would collect another $20k profit after paying off the sellers mortgage.
So how much would I have made in this deal?
$5k up front from the option consideration, plus $200 a month for 12 months from the rent for a total of $2,400 in cash flow, plus $20k at closing when you exercise your option.
$5k + $2,400 + $20k = $27,400 total profit to me!
Now what happens if you don’t exercise your option? No problem! Your lease is up, I still have another 4 years to go! I can offer to extend another year to you, for some additional option consideration and raise the rent up some now that it’s been a year that has passed, or if you decide to walk away, I just start all over again with a new tenant/buyer and get myself another $5k as option consideration and collect another 12 months of cash flow! Bottom line is, I MAKE MORE MONEY!!!
Say, That’s wild brother JohnBoy! Thank You, Thank You!
Lets, expand the thought process on this just a little more:
Lets say you go out and do just 4 deals like this a year within the same profit margins? That puts you at making almost $110k a year for doing just 4 deals like this example! How many hours would it take to work at the job to earn $110k per year vs. the hours it would take to do 4 of these deals???
Say, Amen brother JohnBoy, for I have now seen the light!
And that’s how you make money with L/O’s.