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:
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.