Newbie 1st L/O--Does this look right - Posted by Dave(MI)

Real Estate Investing
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Posted by Stacy (AZ) on May 03, 1999 at 14:49:50:

Brad-

I may have interpreted the original post differently than you. When I read the following:

“but wants $15,000 as option concideration to pay the realtor off(He loaned them money to move to their new home) the realtor is a freind of their familly and is
doing the sale for free”

I thought…“this guy wants debt relief”. I don’t see anything indicating he would ask for more than this. But you are correct in pointing out what could happen, so as to be prepared if it comes-up. We can theorize all day, but we won’t know until the discussion happens.

That’s why I like this forum…gets me thinking of other possibilities.

Stacy

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Newbie 1st L/O–Does this look right - Posted by Dave(MI)

Posted by Dave(MI) on May 02, 1999 at 12:33:31:

Hello Everyone,
I have located a 3/1 with a motivated seller.The
seller is willing to sell on a L/O but wants
$15,000 as option concideration to pay the realtor
off(He loaned them money to move to their new home)
the realtor is a freind of their familly and is
doing the sale for free.

FMV is $93,000 I offer $84,000
like this:$15,000 concideration now and pay off the
$69,000 loan in 5 years.

I have a tenant ready with $17,000 cash for a sub
L/O from me.,($15,000 I will use to pay the seller
$15,000 and $2,000 I will keep) He will pay $925.00
per Mo. This I will use to pay the seller $850.00
per Mo.It looks like this:

BUY…SELL
60 month term…57 month term
L/O Price-$84,999…L/O price-$118,900 (5%YR)
Opt.Concid.$15,000…Opt.Concid.$17,000
Mo.Pmt.$850 No credit…Mo.Pmt.$925-$325Mo.Credit
Amt.owed $69,000…Amt.owed $83,400 (APX)

I’m only making $2,000 up front,+$75.00 Mo.
+$13,000 in the end. Do you think I should be
concerned with taxes? Also I think the seller
should gve me a 5yr.note that calls for yearly
payments of $1,000 (from the tax wright offs he
is getting still)

Please, pick this apart to find problems to solve
Thanks for any help:)
Dave(MI)

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Re: Newbie 1st L/O–Does this look right - Posted by Joe(IN)

Posted by Joe(IN) on May 03, 1999 at 08:09:04:

Dave:
Get that $17K before you are committed to the $15K. Or at least leave yourself a way out if your T/B vaporizes.
Joe

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Re: Newbie 1st L/O–Does this look right - Posted by Stacy (AZ)

Posted by Stacy (AZ) on May 02, 1999 at 13:10:34:

Basically, if you have a T/B that is willing to give you 17K, I guess I can’t really complain too much about the deal. A few things to be careful of…the long 5 year term for this lease has the potential (theoretically) of being seen as an installment sale rather than a lease. I would prefer a one year lease with the option of renewing for 4 terms. This also gives more flexibility to add incentives for the T/B to get a new loan…every renewal period the monthly payments should increase to give them more incentive to get a loan, and to get you more of a spread, since market rents will probably be increasing each year as well.

Also, remember the 69K loan will have been paid down by the time the T/B decides to purchase the house. Make sure your agreement with the seller is to pay-off the loan balance at the time of sale, rather than a straight 69K. You could gain an additional few thousand in this deal, depending on when the T/B decides to buy.

Just my quick take.

Stacy

5

Re: Newbie 1st L/O–Does this look right - Posted by Dave (mi)

Posted by Dave (mi) on May 02, 1999 at 13:45:54:

Thank you for your responses. I don’t know a lot about how the tax situation would affect me in this deal…is that why I wouldn’t want this deal to look like an installment sale?

Happy investing :slight_smile:

Dave(MI)

P.S.has everyone finished reading Cashflow Quadrant? What an eye opener!!

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Re: Newbie 1st L/O–Does this look right - Posted by Brad Crouch

Posted by Brad Crouch on May 02, 1999 at 13:29:09:

Stacy,

Just curious . . . what happens when the property owner wants a “renewal fee” for each one year renewal? The profits go down the toilet.

When your tenant buyer wants to renew for an additional year, wouldn’t he typically pay an amount equal to half his original option consideration amount? If the property owner wants to do the same, your costs may be covered by the tenant buyers renewal fee, but doesn’t this complicate the deal?

This property owner seems to want to do a “retail” l/o deal, not leaving much room for an investor. I realize that there is a tenant buyer waiting in the wings with a potful of money, but if he decides on a better deal somewhere else, it might not be so easy to replace him.

The cash flow sucks.

Just a few thoughts,

Brad

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Re: Newbie 1st L/O–Does this look right - Posted by Stacy (AZ)

Posted by Stacy (AZ) on May 02, 1999 at 20:44:03:

Hi Dave-

Start your investigation at the following article by Bill Bronchick:

http://www.creonline.com/legal-05.htm

There have been several discussions on this board about the term of lease/options over the past couple of years. The term should be limited to 1 to 3 years according to Bill, but you can follow-up yourself for more information.

Stacy

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Re: Newbie 1st L/O–Does this look right - Posted by Stacy (AZ)

Posted by Stacy (AZ) on May 02, 1999 at 20:31:24:

Hi Brad-

I certainly wouldn’t offer-up an annual renewal fee to a motivated seller. I guess it’s possible he could ask me to add it into the contract, but I would sure resist it. He’s supposed to be motivated, and not that savvy, but I guess it could occur. I would ask him if it was so important for him to include it that I should walk. If he’s truly motivated, he’ll definately back-down. He’s getting his mortgage paid, which is obviously his motivation after the 15K comes in. I doubt this question would ever get asked.

On your last point, about the current buyer deciding not to do the deal, I am assuming by the original post that the T/B is motivated and ready to sign. The 17K up front was a killer in my mind, until I got the impression it was a slam-dunk. If he walks, the potential for getting a new T/B to front 17K is a bad risk, especially for a house in this price range. But, it sounds as if he’s already to do the deal today.

Your comment about half the original option consideration to renew for the next year is correct…strait out of the textbooks. This is another way to “help” the T/B to decide to get a new loan. However, in my mind, the length of the lease threw me off a little. It seems to imply a long period before a purchase…up to 5 years. I envisioned a T/B three years from now paying less than market rent to stay in a nice house…where’s the incentive? But an $8500 renewal fee would certainly accomplish the same thing. As you said “the cash flow sucks”. Obviously an annual increase in monthly payments would help the cash-flow.

Your points are good. But, the main point is, how likely is the T/B to follow-through. Without him, not a deal I would commit to.

Stacy

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Re: Newbie 1st L/O–Does this look right - Posted by Brad Crouch

Posted by Brad Crouch on May 03, 1999 at 14:23:11:

Hi Stacy,

If the seller was “savvy” enough to get 15K as initial option consideration, seems to me he would be looking for a “renewal fee” for subsequent renewals. We use the amount of “half” the original option consideration as a “guide”, considering ourselves pretty “savvy” investors. Of course it could be less. But to not expect ANY renewal fee just might be unrealistic.

Naturally, we could let this be a “dealbreaker” and just walk away. But it seems to me like we are being “trained” here on this site to try finding ways to put deals together and only “walking away” as a last resort. Hence the predisposition to make even a bad deal work.

Sounds like this seller is pretty “savvy”, but you are right . . . he may back down if he thinks the deal is in about to be “blown”.

There is actually a way to make money on this deal even if there are substantial renewal fees. If you have the master lease and your seller wants say, $7,500 for a renewal fee (you might try to negotiate less, in advance), you could charge your tenant buyer an additional 1K on top of whatever your renewal fee was, and make some spread there. It may also convince the tenant buyer to simply find another place to L/O, leaving you kind of “in the lurch”, trying to find another tenant buyer with that much cash to get in.

Maybe a better term length might be 2 years, 11 mos. and 29 days . . . renewable in 1 year increments, 4 or 5 times.

Actually, a tenant with an “expired lease” is considered a “holdover tenant” and is automatically converted to “month to month” tennancy. You can let a guy stay in the property like that for as long as you like. No lease 3 years long or longer “triggers” the “due on sale”. Unless accompanied by an option to purchase. Maybe this is another reason to use two separate documents when dealing with a tenant buyer?

Yes, I think the main point is how reliable is the tenant buyer. And will he really come into the deal, as laid out? If he changes his mind, you’re screwed. Personally, I don’t like the feeling of other people having ME “over the barrel”. I think a deal like the one described would make me feel uncomfortable. Just not enough compenation for my risk.

Take care,

Brad

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Re: Newbie 1st L/O–Does this look right - Posted by Tyler

Posted by Tyler on May 05, 1999 at 01:09:28:

I think you’re right. The 15k option money would make me nervous as *ell.

I tell you what…unless there were no other possible L/O deals in site, I’d go find a better L/O deal without this huge option consideration, and pocket some of that cash on the front end.

A buyer willing to put 17k down as option money (especially on a house like this) is few and far between. I’d be trying to stick as much of that in my pocket as I could…

NT