Posted by matt on July 10, 2002 at 17:17:18:
BMP,
You have shed new light on this. Thank you.
Matt
lease option on top of a lease option? - Posted by Matt
Posted by Matt on July 10, 2002 at 12:44:38:
Does anyone have experience on selling a lease option on a lease option you have bought? For example:
I buy a lease option for 1000.00. This gives me the right to buy the property at 59,000.00 any time between now and 2 years from now. I pay the owner of the property 600.00 a month. I turn around and sell a lease option on this property for 2000.00. The buyer can buy it from me for 64,000.00 anytime between now and 2 years from now. He/she moves into the property and pays me 800 a month.
By doing this, I get my a 100% rate of return on my 1000.00 I put down, plus 200 a month positive cashflow, plus 6000.00 of capital appreciation.
This works great, but does anyone have experience with this, and if so, is it possible?
Re: lease option on top of a lease option? - Posted by Brian M. Powers(MI)
Posted by Brian M. Powers(MI) on July 10, 2002 at 13:06:56:
yes it is done all the time…it is commonly referred to as a sandwhich lease option as you are “sandwhiched” in between the L/O with the seller and the L/O with the buyer.
its a great way to invest in property without money or credit.
i dont know if it were just hypothetical or not but the numbers in your example deal look pretty skinny.
BMP
Re: lease option on top of a lease option? - Posted by ned - il/mo
Posted by ned - il/mo on July 10, 2002 at 14:07:11:
Brian,
If that is a skinny deal what constitutes a good one?
1000 bucks + 200 month + the difference in the option prices. Sounds ok…
I am new and still getting an idea of how some of these creative methods work. So my ‘sounds ok’ means very little.
Thanks,
Ned
Re: lease option on top of a lease option? - Posted by Brian M. Powers(MI)
Posted by Brian M. Powers(MI) on July 10, 2002 at 16:22:28:
lets look at the numbers and i’ll show you where i am coming from:
Option Fee Cash = $1000 ($2000-$1000)
Monthly Cash Flow = $4800 ($200 x 24 mos.)
Backend profit when and IF your buyer excercises option to purchase =$5000 ($64,000-$59,000).
If everything falls perfectly this deal will generate $10,800 in profit.
Of that $10,800, $5000 is unrealized and sitting on the backend until you find someone who can qualify and buy for $64,000.
so now lets assume that you will get your $2000 option fee and the monthly CF of $200. that gives you $5800 of potenatial realized profit over the next two years. the $5800 is all you can “count on” in the deal. the $5000 on the end will be a “bonus” if you get your buyer to buy.
so you are taking on all the risk in the L/O over the next 2 years for $5800.
then there are a host of potential problems that could eat into your $5800 such as:
major repairs (furnace, roof, etc.)
holding costs if you cant line up your tenant/buyer right away
costly process of eviction
bad tenants who can cause costly damage
something unexpected that you thought might never happen
and there are others.
any of these potential and realistic problems could eat up that $5800 quickly.
and the $5000 backend profit in the option price does not leave very much wiggle room for things like short term down swings in the price of homes in the area, incorrectly determining comp value at the outset of the deal etc.
if you are willing to take on the risk for that type of profit then you should do it. i’m not saying its bad or wrong…you need to do what is comfortable. there is no “formula” for deciding what the profit in a deal needs to be for it to be a good deal. it is wehatever works for you.
personally i feel there are better deals to be had than this one.
jusy my humble opinion.
BMP
Re: lease option on top of a lease option? - Posted by Matt
Posted by Matt on July 10, 2002 at 15:51:35:
thank you for your reply and help. I am wondering, if this is skinny, what would a good deal look like? This is a real deal I am working on, so it is not hypothetical. The full market value on this unit is 64k for sure (that is what the past 6 units have sold for and they are all identical). thank you in advance for your continued input.
Re: lease option on top of a lease option? - Posted by ned - il/mo
Posted by ned - il/mo on July 11, 2002 at 08:58:16:
Well… since you put it like that and use the facts to show us the risk v.s. profit potential - it doesn’t sound so OK now…
I am learning so much on this site.
Thanks