L/O question for Jim Piper. - Posted by Tim Jensen

Real Estate Investing
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Posted by TRandle on March 02, 2000 at 10:19:44:

Brandi,
I agree 100%. The awesome thing about REI is that there are so many ways to work it. I feel like I know tons of ways to get deals done, yet I realize I’ve only seen the tip of the iceberg. If you remove morality and ethics from the equation, (which means I assume you are on the right side of those issues), the mechanics of the deal are not necessarily black and white. What works for one person may not work for another. As we share our thoughts, opinions, and practices, we have an unspoken responsibility to those who know less to ensure we are not too righteous in our opinions, leaving someone with the impression that our chosen path is the “correct” one. Again, good post…

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L/O question for Jim Piper. - Posted by Tim Jensen

Posted by Tim Jensen on March 01, 2000 at 21:26:04:

Jim,

I first want to say what a pleasure it was to meet you. I must say, you looked nothing like I thought you would. :slight_smile:

Anyways, we were discussing assigning L/O’s and you explained to me how you charge the T/B a assignment fee for your position in the L/O.

In the example you L/O a house for 100k and sold it to your T/B for 105k with 5k down. That 5k came in the form of an assignment fee. I am wondering, can your T/B use the 5k they paid you for an assignment fee as down payment?

I know they can use the 5k as down payment if it was in the form of option consideration, but I am not clear on it when it is an assignment fee.

Thanks,

Tim Jensen

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Re: L/O question for Jim Piper. - Posted by JPiper

Posted by JPiper on March 02, 2000 at 11:21:13:

Hi Tim:

Good to meet you as well, I enjoyed our conversations?..glad you decided to attend.

There are lenders, generally subprime, who will do a refinance on a lease/option. Therefore, no down payment is required. An appraisal is done to establish to value of the property, then an owner-occupied loan is made on the total appraised value of the property.

Can?t tell you on a conforming type loan?.I?ve yet to do a lease/option with anyone who had credit sufficient to get a conforming loan. However, I did set one of these up a couple of years ago, in which the couple called a loan officer that I do conforming deals through. She was of the opinion that the assignment fee would work as a down payment through FHA. The couple decided that for the moment they would continue with the lease/option because it was building equity faster than the loan would.

Keep in mind that all payments and fees paid by the tenant/buyer should be carefully documented.

JPiper

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Re: L/O question for Jim Piper. - Posted by Heath J

Posted by Heath J on March 02, 2000 at 05:49:12:

Tim:

My name is not piper, but my answer is coming from many years of dealing in L/Os.

I would never assign a L/O deal and I suggest you don’t either!. Keep control of the property and keep all consideration and profit from sale. Keep any additional consideration from future sales in the event buyer backs out. Keep this train of thought and be a winner invester. I followed this pattern and have done many great deals and continue to do so. I know of someone who assigned an option. (Not Good Tim, Not good at all). Some will tell you it’s ok but I personally say don’t do it!

Heath J

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Re: L/O question for Jim Piper. - Posted by JPiper

Posted by JPiper on March 02, 2000 at 11:50:27:

Heath J:

My guess is that almost any creative transaction can be structured in a variety of ways to achieve virtually the same outcome. What gets altered in the process is the RISK in a transaction, or perhaps the taxes. Don?t know how many years you?ve been doing lease/options, but it?s only a question of time until the subject of risk will be something that will cross your mind.

With either an assignment or a sandwich lease, you are going to pocket some upfront money. The sandwich lease provides monthly income and a backend profit. An assignment can be done by extending a note to the tenant buyer. That note can provide monthly income and a backend. The assignment can be structured to equal what a sandwich lease provides.

The difference is that when structured correctly, the assignment takes you out of the deal. This means that when the day arrives that a tenant a) does not pay b) refuses to leave c) trashes the place?..then you are WAY ahead of where you would be if you were in a sandwich lease. Let?s see?.we?re talking making the payment while the tenant doesn?t pay you, waiting until you get possession, and then perhaps repairing the damage that was done. Care to estimate the damage that can be done to a house by someone who is upset and wants their money back? Of course, I?m sure that doesn?t happen where you live.

So let?s sum this up. With an assignment I can structure my deal to equal the sandwich lease?.only I use a note to accomplish it. My note ?could? end up being unsecured. Isn?t a sandwich lease unsecured too, other than by the lease document? What changes is that with the assignment I remove the risk of the transaction.

Granted, a sandwich lease gives you the opportunity to ?do it again?. So after you pay YOUR monthly payment for a couple of monthly while you extricate your tenant from the house, and AFTER you make the repairs and continue to make the monthly payment, you can then get more upfront option consideration from the next tenant, and hope that it exceeds your out-of-pocket costs. HOPE, however, is something I like to count on as little as possible.

Now here?s a thought though. I wonder if the original lessor/seller would call you if there was a problem with the assignment? I wonder if you could step back into the deal to solve his NEW problem? I wonder if you could do something that would put more money in your pocket?

Just so that you know, I begin EVERY transaction by looking at what I?m risking. If it looks like you?re not risking anything?..LOOK AGAIN?..YOU MISSED IT.

JPiper

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Prime example of “To each his own”. - Posted by Brandi_TX

Posted by Brandi_TX on March 02, 2000 at 10:00:32:

This was something I noticed a lot in Atlanta. People would spend hours in deep conversation being told exactly what to do and what not to do when it comes to investing. They would be all squared away and leave that conversation “knowing” exactly what they were going to pursue and what they were going to avoid at all costs.

The very next day they would spend a few more hours with someone else that told them to do the exact opposite of the “advice” (read opinion) they had gotten the day before. Now, instead of being all settled - they were confused and frustrated.

There are a lot of opinionated people in this world that do not realize there is more than there side to any given story. Unfortunatley they come across as all knowing and wise, and granted some are very brilliant people. However, be weary of the person that cannot acknowledge that the advice they give may not be right for you.

Brandi_TX

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Re: L/O question for Jim Piper. - Posted by Bud Branstetter

Posted by Bud Branstetter on March 02, 2000 at 09:55:46:

I don’t know Jim’s reasons for doing an assignment. The first time I heard of the assignment concept was from Claude Diamond. It is a technique to get more cash upfront instead of the cash flow or back end profit. You do eliminate any management problems. You also shift the responsibility of performance to the new TB. While I like the larger payday and the monthly cash flow I do not dismiss the advantages of having some cash and being out of the deal. On that typical 100K house where there may be a potential 10 to 15K profit in a year or more would you rather have 7K now or get 4 now and wait for the rest.

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Re: L/O question for Jim Piper. - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on March 03, 2000 at 17:58:31:

Jim,

You are absolutely right about the fact that there’s risk in sandwich lease/options. However, the risk in such lease/options (assuming one has a really long term L/O) is probably very close to the risk of any outright ownership of a “jubject to” purchase, or a purchase with new high LTV loan.

Another question is whether or not that risk is worth taking in the present market conditions. It may very well be worth taking in the favorable rapidly appreciating market. In a slow market one may want to just assign for a fee.

For instance, I just got a house back which I bought a little over 1 year ago for $87K, with retail value then of about $93-95K. I L/O-ed the house for $107K (which seemed extremely high then). The house was returned to me in a somewhat below average condition, though no malicious damages. However, due to a booming market locally, the house will retail at about $113-115K now, and will sell for about $120K with creative financing.

So, I am re-painting, re-flooring, changing faucets and ceiling fans for a total of about $4K. In my market not only can I afford to stay in the SHORT TERM deal but I’ll make a bundle every time I get a house back. Perhaps, in a different market I would not be that aggressive.