L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by Gary

Real Estate Investing Triple Net Leases
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Posted by Scott (AK) on May 24, 2000 at 20:19:26:

Gary,

Yes you would have to adjust the T/B’s purchase price accordingly each year…

If purchased before (first year date) price is $xK

Purchase price from (12 months + 1 day) to (2 yrs) is $XXK (adjust price upward).

Purchase price from ( 2yrs + 1 day) to (2 yrs 10 months) is $xxxK (adjust again)

I would make my contract state the T/B had to tell me IN WRITING if they intend on exercising the option 60 days before the option expires. This is EXTREMELY important on the 3rd yr because you need time to sell it on the open market if the T/B is not going to exercise.

I would not kick the T/B out(if they are performing otherwise as agreed) I would just make sure the rent and the purchase price is adjusted each year. The adjustment of rent would be another pusher to get the T/B to exercise.

You may know you will most likely need to take a keen interest in leading the T/B to the lender and walking them to the front door.

Hope this helps.

Scott

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L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by Gary

Posted by Gary on May 24, 2000 at 08:12:58:

I made a L/O offer on house for $255k (also market value per OC Title) with rent to me at $1,400/mo. Market rent in area is $1,600 to 1,800/mo. The L/O term would be 1 year renewable for 2 more. Seller likes idea but he has a concern. With 10% appreciation in the area, he is uncomfortable with losing out on the appreciation if my tenant/buyer dosn’t exercise until year 3. I explained that if my price from him escalates during the term of the lease, I would somehow have to do the same to my tenant/buyer. How have other L/O experts handled this? If there is a way to comfortably handle this for all parties, does it include provisions in the event 10% appreciation doesn’t continue?

Thanks for your thoughts,
Gary

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Re: L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by Soraya

Posted by Soraya on May 25, 2000 at 02:04:25:

Make a deal contingent on finding a qualified tenant buyer.

(Find a tenant buyer that will agree to increasing the purchase price 5% each year the L/O is extended. Don’t tell the Seller your deal with your tenant buyer.)

Tell Seller he will get a 5% increase in sale price (or you could use 50% of the appreciation rate which ever is greater.) starting after end of year 2.

Your purchase price is $255K and the purchase price for your tenant buyer should be at least $295K (or whatever you need to make it worth your while to do the deal).

Negotiate with Seller so the monthly rent you have to pay is $1200 or less. (At $1200 your cash flow will increase by $2400 per year.)

The Bottom Line is the Seller gets 5% increase from a $255K base and you get a 5% increase from a $295 base plus the additional $200 monthly cash flow,

(You could also negotiate a fixed increase in purchase price after the second year rather than a percentage increase.)

Soraya

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A better approach . . . - Posted by JoeKaiser

Posted by JoeKaiser on May 25, 2000 at 01:19:18:

When talking to a seller about lease options, I make it a point to make sure they understand that in essence, this is a sale and only the paperwork has been changed (from a deed to a lease option) to protect the innocent.

So, while it may say “lease option” on the top of the page, we’re all treating it like it’s a done deal and the paperwork is only what it is for the sake of our mutual convenience.

Guess what? When you sell, you don’t get a piece of the appreciation.

They’re selling to me on contract, period. It just so happens it’s a lease option contract, but that’s the picture I paint.

Joe

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check out the PACTrust (NT) - Posted by Anne-ND

Posted by Anne-ND on May 24, 2000 at 15:16:37:

.

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Re: You controll the deal! - Posted by Lori Samson

Posted by Lori Samson on May 24, 2000 at 14:01:10:

This will seem too simple for those of you who gave complicated answers… I tell them, “it is not our policy!” Simple. Use the old doorknob approach (one hand on the door and if he doesn’t like it your out the door and then what are his options (no pun intended) Lori

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Shades of Paul Simon - Posted by Bud Branstetter

Posted by Bud Branstetter on May 24, 2000 at 11:45:40:

With the appreciated in many areas that we have had recently it is time to brush off the old Paul Simon equity sharing courses. Then to it could be done with an option to him to buy back at a price that first locks in your profit.

Maybe some smart investor will come up with an idea to create resident and non-resident beneficiaries, triple net leases and land trusts all together.

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Re: L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by Scott (AK)

Posted by Scott (AK) on May 24, 2000 at 11:38:14:

The good thing about L/O’s is they allow you as a buyer to be flexible also.

With a home in that pric range, if the 10% per year continues, the equity can be a lot of money upwards of over $80K before closing costs. With that type of profit I think one can be flexible IF the seller is willing to assume some of the risks also.

I would make sure MY profit was figured into the deal first. I would base my buying price on a fixed price and then offer the seller an "equity split " AFTER I get my profit. But I would only offer the split on the second or third year.

Example:

Lets say (just for numbers sake) you are to buy at $250K after one year, and you sell at $280K. I would make ALL the first years profit my own.

On the second year you structure your contract to say you buy at $250K + a split of the profit after you make yours (i.e. your buyers price that year is $310K, you buy for $250K…$310K - $250K = $60K. "OK Mr Seller, I get the first $40K and we “equity split” the other $20K 50/50…end result you get $50K the seller gets his $250K + $10 for his half of the $20K = $260K)

Then figure the third year the same way just adjust the numbers.

Also, this situation would be contingent on the continuation of the appreciation. If you want to get real nitty gritty start basing the buying prices on the rate of appreciation and sell on a price “based on appreciation but at least a solid figure”

NOW…any good negotiator knows when a seller makes a request of you, they MUST give something in return. I would attempt to push the burden of some of the risk onto the seller by making it contingent on finding a T/B or something. Also you might ask for a lower monthly payment if they have any room to work in that area.

So, as you can see, there is 1001 different ways to work the deal, but manageing the risk is number one. Make the seller bear some also, he can’t get everything he wants, if he does he’s unmotivated and you should move on.

I’d tend to get a little flexible on the equity split if the seller woould flex on the monthly. Give me my profit now and we’ll structure the deal so your profit fits into the “MAYBE” catagory.

It’s just a situation that shows, not one contract will fit every single situation and you need to be savy enough to word yours so you can be a little flexible in your deals. It’s just a numbers game where you have to learn to put your thoughts on a paper that binds it all together.

Hope this isn’t TOO complicated, and I hope I expressed myself so you can understand.

Scott

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Sounds like… - Posted by soapymac

Posted by soapymac on May 24, 2000 at 08:22:49:

at a minimum, this individual wants to have his cake and eat it, too, while you are assuming all the marketing risk.

If the market goes DOWN 10%, would he be willing to adjust his price downwards also?

No? Why not? What’s sauce for the goose is sauce for the gander, also.

Truthfully, I don’t believe this person has the right mindset to do an L/O…quite possibly because he does not understand the benefits to him. Are there other benefits to him? I don’t know, but you probably do.

If he doesn’t like how an L/O works, wish him well, give him your card…NEXT!

Cordially,

Roy MacLean
“soapymac”

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Re: L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by WilliamGA

Posted by WilliamGA on May 24, 2000 at 08:21:13:

Gary,

I would try to explain to your seller that appreciation is not a given, right now you have it but next year prices may be down 10%. Unless this guy has a crystal ball, he really has no way of knowing.

He has a house he needs to get rid of. He is probably motivated if he is entertaining a L/O as opposed to a cash sale so just talk to him. Explain that by seting the price NOW, if the market does fall off, he is still protected. You are giving him what appears to be full market price for his property today, covering his note right now, and if it doesn’t work out he gets his house back in the same or better condition. Explain to him the risk to YOU by locking the price in now, at the current retail price without any discount.

If he is really motivated, there should be no problem.

Good Luck!

WilliamGA

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Re: L/O: Owner Wants A Piece Of Appreciation Action- Ideas? - Posted by Gary

Posted by Gary on May 24, 2000 at 17:24:10:

Scott: It makes very good sense. However, it would only seem to work if you raise the second and third year price on your tenant/buyer. How would you do that? Would you kick out the T/B if he could not exercise the first year and bring a new T/B with a higher price? Or, would you build an appreciating sales price into the contract with the original T/B?