Lease/Option: Balance @ time of purchase? (Long) - Posted by PatrickMD

Posted by Dan_nc on December 27, 2000 at 17:30:30:

BJ, I’m no expert either but LeGrands take on that is you may be above FMV today but you’re not closing today. The sale will take place 12, 24 or more months in the future and, assuming you are in an area enjoying average RE appreciation, your price should not be that far out of line. You may even be BELOW FMV at that time. The other line of thinking is that many appraisers, with a sales contract in hand for say $185k, will miraculously come up with an appraised price at or very near that figure. I’ve seen it happen.
Hope this helps, Dan

Lease/Option: Balance @ time of purchase? (Long) - Posted by PatrickMD

Posted by PatrickMD on December 26, 2000 at 23:11:44:

Hi, everyone here at www.creonline. Merry Christmas, Happy Chanukka, and Happy New Year!

I tried to set this up by the book (Sheets’ & LeGrand’s), so please tell me what you think.
I prequalified a seller of the following: Recently built owner-occupied 2 story 3br/2ba with master jacuzzi SFH; 2 car gar; deck; small, fenced corner lot; great neighborhood of similar houses in a small town.

Comps came back with, "estimate is above neighborhood average of $138K. (there are townhouses & duplexes within a mile.) Highest reasonable: $186K; Lowest reasonable: $159K. Three neighboring houses within .17 mi. sold for $149K, $159K,& $175K within 20 mos. of the present date.
The seller needs $5K. for an impact fee for new house. They’ll consider L/O, they just want to be free of the mortgage. The seller liked the idea of being able to get the bank to credit 75 percent of the lease price toward the new house’s mortgage amount.
They have an assumable 1st for $130K @ 7 percent;
a non assumable 2nd for $39K @ 12 percent; totalling $169K.
The monthly payment equals $1,588 ($1,135 plus $453) per month. They have an appraisal for $175K, are asking $174K.

My front door offer: Lease/Option it from them “Subject To” for $5000. plus the mortgage balance at the time of purchase, with the right to sublease it; with 4 1-year options to renew. Agree to make monthly mortgage payments of $1588. Assume maintenance. $10. earnest money; $0 deposit;

My back door plan: Sublease it for at least 3 years on a Lease/Purchase agreement to a tenant/buyer; $9K nonrefundable deposit; $1,688 rent per month; ask what they can afford to put toward the down payment per month, over and above the rent (try for $200.); purchase price 5 percent over the asking price, or $182,500. T/B assumes maintenace.

Analysis: My profit centers: $9K deposit, $100 monthly until the T/B assumes the mortgage or refinances, $10K down and about $3,500 difference between my lease price and the T/B’s price at closing. About $21K total.
Buyer’s incentive: If they only assume the 1st, they’ll save $200 per month over renting. If they refinance only the 1st, they’ll save $282 per month. If they refinance the $169K combined mortgages, they’ll save approximately $564 per month.

This is my first deal. In your expert opinions, is there a low-risk, no-risk deal here? Have I overlooked anything? Thanks in advance, Pat.

L/O - Posted by Jim IL

Posted by Jim IL on December 27, 2000 at 01:17:12:

There are two things that come to my mind immediately when I read your post.
First, the price to your T/B’er.
I feel you could add more to that. I usually go at least 10% above the FMV now.
The second thing that i see is the term of the L/O.
Rather than go with 12 month terms, with so mahy renewals, I’d go for 24 month terms on the buy side, with at least 2 renewals.
And, when you sell to a T/B’er, do not go with a term longer than 12 months.
Do not include language to extend or renew the option with the T/B’er.
IF they need that, renegotiate, and get more money from them. Higher price, higher rent, more option money.

Other than that, not a bad deal.
I might also work really hard at getting the seller to go for this with less than $5k option money.
But, that is just me.
I really like to get into a home for little to nothing down.

Take care,
Jim IL

Re: L/O - Posted by JasonTX

Posted by JasonTX on December 27, 2000 at 14:47:49:

I am trying to learn from this post so would someone help me understand why getting a house under lease for 91% of highest reasonable value is a good deal.

I thought that 85% or lower of FMV was the target to shoot for when leasing/buying.

Am I missing something?

Re: L/O - Posted by BJ MD

Posted by BJ MD on December 27, 2000 at 14:10:56:


I have been trying to get an answer to this question all day from different investors’ websites and have yet to get a straight one. Perhaps you can be of some help. (I’m just learning about l/o so please bear with me) If you mark up the sale price of the house to your buyer/tenant to an amount that exceeds the FMV, how can they qualify for a loan for that amount? Don’t they have to get an appraisal that will reveal that the house is priced too high and get their loan app rejected? Thanks.

Re: L/O - Posted by PatrickMD

Posted by PatrickMD on December 27, 2000 at 09:51:47:

Thanks for your thoughtful response, Jim IL. Ron LeGrand is emphatic about not being held to a long term lease - he wants us to have the luxury of a five year term divided into 1 year increments. I thought of a higher price to the T/B, too, but I was trying to stay under the comp analysis of “highest reasonable price - $186K.” The comp saying the house was “estimated above the neighborhood average of $138K” has been acting as a very conservative force on my structuring my back door. Maybe that’s too conservative. I mentioned the nearby townhouses and duplexes because I think their sales are skewing the average downward.
My personal priorities may be intruding on my thinking. I like my small towns to be directly adjacent to major metro area services. This is a very small town that’s a 1.5 hours commute from either downtown Baltimore or Washington, D.C., and 45 minutes from Frederick, the three largest local employer bases. The positive geographic factor is it’s in a beautiful rural area near the Mason Dixon Line. It’s only 20 minutes to Ski Liberty ski resort and Mt. St. Mary’s College in one direction, and 15 minutes to Gettysburg National Historic Battlefield and Gettysburg College in the other. I won’t know if it’s a good deal 'till I make them an offer, will I?

Renewal Term Length - Posted by WayneMD

Posted by WayneMD on December 27, 2000 at 06:00:02:

Hi Jim –

If I am not mistaken, my Bronchick L/O course strongly recommends a short lease (12 mos) with many options to renew the lease. That way you control the property for a a lengthy period but with the safety of being able to bail out after only 12 months. Why would you want to do differently?

Re: Assumable mort. vs .85 FMV - Posted by PatrickMD

Posted by PatrickMD on December 28, 2000 at 11:20:21:

Thanks for your input, JasonTX. They just want to get out from under the present obligation. I was going for the assumable mortgage terms here, $130K @ 7 percent. I thought I just may get lucky.In the real world, if I offer $148,750. for a house that’s a couple years old in a neighborhood of $160K - $175K comps, I’ll be shown the door. Both CS and RL teach us to satisfy the seller’s problems, to be “creative transaction engineers.” By trying to offer them what they WANT, $5K for their impact fee, and the balance at closing, the price should be in a falling trend.