People Buy L/O Contracts? - Posted by DanM(OR)

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.

People Buy L/O Contracts? - Posted by DanM(OR)

Posted by DanM(OR) on April 19, 1999 at 10:29:41:

Hello REI Friends,

Well, I am specializing in L/Os(ala Bronchick) right now and have also started a Note Business(ala John Behle). It’s in the beginning stages and I am doing research on my local marketplace. While doing so I ran into a company that says they buy Lease/Purchase contracts. That threw me for a loop. I could not fathom why or how they would do this. Is this a niche that I have not considered?

Please help put light on this area for me. I am sure that many other people would benefit.

Your friend in REI,

Dan Matejsek

Re: People Buy L/O Contracts? - Posted by John Behle

Posted by John Behle on April 19, 1999 at 13:00:25:

If you find a buyer - great, go ahead and broker them, but make sure you do not have any liability. I would not recommend you invest your funds or an investors funds in a L/O. It’s a different animal than a mortgage, with different risks.

I’m not saying it’s bad, just that L/O’s carry different risks than mortgage investment and you need to be very aware, trained and prepared to handle those risks.

It’s like with trust deed investment versus hard money loans - different risks. The same with hard money loans on pre-foreclosure deals - different risks, due diligence requirements, monitoring, etc.