Posted by Sean on April 19, 1999 at 12:13:46:
Did they say they bought lease-options or that they bought lease-purchases? Some people think there is a definite difference, in that a lease-purchase the person is obligated to buy, but a lease-option the person has the option to buy or not to buy.
I don’t see anything wrong with buying a house knowing that it’s lease-optioned to someone who has the right to buy in a few years. I assume that’s what they mean when they say they buy lease-purchase contracts.
The “downside” to dealing with lease-options would be the possibility that the person might not exercise the option. That would mean they’d forfeit their consideration amount and you’d be left owning a property. Some of us on this site aspire to do that.
We’re assuming the lease-purchase agreement provides the owner with a steady stream of cash flow above and beyond their costs/debt service (PMT). We are also assuming that we’ll receive a predictible balloon payment based on the contract (FV). There are a specified number of payments (N) and we know what yield we want (I%). Plug in those numbers and you should have no difficulty solving for the amount you are willing to pay (PV).
Then you can approach the tenant/buyer and offer to give him a bigger credit if he’ll make larger monthly payments, or offer him a discount for exercising the option immediately. This can greatly increase your yield.