L/O Questions..how much cash reserve needed? - Posted by Sage

Posted by JohnBoy on March 13, 2002 at 20:55:24:

“”“I understand many of the basics concerning l/o deals, but still am unclear on a few details.”""

It sounds to me like you need to get a course on doing L/O’s. The questions you ask would be found in a good course. Trying to wing it without properly understanding everything and without obtaining the proper contracts that can be supplied with a good course can cost you thousands more than a course will if you mess something up! Don’t cheat yourself by trying to go it without obtaining the proper knowledge and forms you need to do these. As to your questions:

  1. How much cash reserve should an investor have set aside for vacancies, repairs, advertising, etc. I see that an investor can gather a down payment from the tenant/buyer but what about unforeseen repairs, expenses, etc? Are repairs the responsibility of the investor?

You need to at least get plenty of option money up front from your tenant/buyer that will carry you for 6 months. You need to be able to put that money aside and keep it for any unforeseen problems that could come up so you have the money to get the tenant/buyer out and go in and get the place ready for another tenant/buyer and be able to cover your monthly payments while you go through all this. Then when you get a new tenant/buyer you take their option money to replace anything you used from the first tenant/buyer’s option money.

  1. Who pays taxes and who carries the insurance? Should a tenant/buyer get additional renters insurance?

The owner of the property is liable for taxes and insurance. Most mortgage payments will include the taxes and insurance in addition to the mortgage payments. Some may be paid separately by the owner if their lender doesn’t escrow the taxes and insurance. The owner will have a homeowners policy that will need to be converted to a hazard policy when they move out and rent the property out. If you are in the middle doing a sandwich L/O deal then you will need the seller to have you added to his policy naming you as an additional insured. The tenants would need to obtain their own renters policy to insure any of their personal property. The hazard policy won’t cover their personal property. The RENT you charge on the property should be enough to cover the mortgage payments, taxes and insurance and still provide enough left over to generate a decent positive cash flow.

  1. In a slow market, with higher than normal vacancy rates on rentals (and properties not selling as quickly), I am concerned that I will not find a qualified tenant/buyer quickly enough (even considering the contract can state I have 60 to 90 days to find one). Does anyone else have problems finding sellers who will agree to this contingency when they may already be behind in payments themselves?

If your contract states your contract is subject to you being able to find someone within 60 - 90 days then if you don’t find someone you can either negotiate for more time by extending the contract or simply walk away by voiding the contract if you couldn’t find someone. The only thing you are out is your time and advertising expense marketing the property.

If the seller is behind in payments and they can’t make any of the current payments while you market the property then you are going to have to take into consideration of the added expense it will cost to bring the payments current again. That means if you have no reserves and you will need your buyer’s option money to cover all the back payments and still allow enough for reserves left over then you are going to need a much larger down payment from your buyer to cover this. That means you may not be able to make the deal work to where it would benefit you enough to justify the risk. You may have to pass and find another deal that does make more sense.

  1. What price range do you look for? Median price for my city is 140k, should I stick to lower priced properties and target first time homebuyers and buyers with credit flaws?

I like to stay within the median price range and below. The reason is that there are a lot more buyers to attract in these price ranges. The higher the price bracket the less buyers you have to attract that can afford the higher payments. Doesn’t mean you can’t find buyers for the higher price ranges, only that it could take longer to find them since there are less people that can afford the higher prices than there are that can afford the median priced homes and below.

  1. How do you show the property if it is still occupied by the owner…obviously the owner would have to be agreeable to another tenant qualifying, making payments, etc. Are deals like this typically seen as too risky by the seller?

The owner has NO say as to who I put into the property. Their agreement is with ME! If anything happens to the property it’s ME that guarantees the seller that I will take care of it. If my buyer stops making payments then it’s ME that guarantees the seller their payments on their mortgage will still be paid once we finalize the deal! It’s ME that is responsible to the seller, NOT the tenant I put into the property. If my tenant messes up they are responsible to me! Not the seller! The ONLY time the seller will have a say as to who I put into the property is if I plan to assign my contract and need the seller to release me from any future liability. Then the seller would have a say or they could refuse to sign off on a release. That is the ONLY time a seller may have a say in who I let into the property. Of course, if you properly screen your buyers and work with a good mortgage broker that can get your buyers financing within a year or two then you can show this to the seller to make them feel comfortable with who you are assigning your contract to and getting them to release you shouldn’t be a problem. .

If the seller is still in the property then you get them to leave whenever you show the property. The best way to handle this is instead of just running over to show the property each time you have someone to see it, set it up to where you can schedule everyone to show up at the same time on a weekend and hold like an open house. Then get the seller to leave for a few hours while you have the open house. You might offer the seller some tickets to go see a show during that time to get them to leave. Or gift certificates to go out to dinner. Or whatever else that might work for you to get them to leave. This would be no different than some realtor holding an open house, so why should be any different for you???

  1. Speaking of risk, can the owner refuse to sell the home at the agreed upon date? What recourse would I have as the investor, and can my tenant/buyer sue me too?

There is always a risk of having a seller trying to back out of selling later. But in most cases these sellers NEED to sell so there shouldn’t be a problem since they can’t afford to keep the property anyway. But to limit your risk you need to have the seller sign over a deed to be held in escrow so you don’t have to go hunting them down later to get it. You need to have the seller sign a performance mortgage that you would record against the property to protect you from any future liens the seller could cause to be recorded against the property. If the seller breaches their contract with you or causes other liens to be placed against the property after you enter into your agreement and record the performance mortgage, then you can foreclose on the property with the performance to wipe out any liens behind you and get the property if the seller breached their end of the agreement.

So where do you get all these forms mentioned here? From a good course on doing L/O’s!

Check out Bronchick’s course at this link:

http://www.creonline.com/c-122.htm

L/O Questions…how much cash reserve needed? - Posted by Sage

Posted by Sage on March 13, 2002 at 18:55:13:

I understand many of the basics concerning l/o deals, but still am unclear on a few details.

  1. How much cash reserve should an investor have set aside for vacancies, repairs, advertising, etc. I see that an investor can gather a down payment from the tenant/buyer but what about unforeseen repairs, expenses, etc? Are repairs the responsibility of the investor?

  2. Who pays taxes and who carries the insurance? Should a tenant/buyer get additional renters insurance?

  3. In a slow market, with higher than normal vacancy rates on rentals (and properties not selling as quickly), I am concerned that I will not find a qualified tenant/buyer quickly enough (even considering the contract can state I have 60 to 90 days to find one). Does anyone else have problems finding sellers who will agree to this contingency when they may already be behind in payments themselves?

  4. What price range do you look for? Median price for my city is 140k, should I stick to lower priced properties and target first time homebuyers and buyers with credit flaws?

  5. How do you show the property if it is still occupied by the owner…obviously the owner would have to be agreeable to another tenant qualifying, making payments, etc. Are deals like this typically seen as too risky by the seller?

  6. Speaking of risk, can the owner refuse to sell the home at the agreed upon date? What recourse would I have as the investor, and can my tenant/buyer sue me too?

Guess I need some insight into the best way to talk with, and structure these deals with the owner. I understand it is key to find a motivated seller, or a seller flexible on terms.
Thank you