Let’s Put Some Numbers to It - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on May 26, 1999 at 12:38:42:
Tim,
Ray provided some good information. The engineer in me wants to look at it another way. If I could, let me add some numbers to the mix. Now, I haven’t yet completed a lease/option transaction, but here’s where I think you might stand dollar-wise…
Your Option Price: $100,000
Your Rent: $800
Your Tenant/Buyer’s Option Price: $104,200
T/B’s Rent: $900
Now, I intend to collect $3-$5,000 option consideration for each $100,000 of purchase price. Let’s assume we only get $3,000. At the end of the year, the T/B decides NOT to exercise because the market value of the home has dropped 3%. Where do we stand?
The tenant/buyer has provided you with $3,000 non-refundable option money PLUS you had a positive cash flow of $100/month for 12 months. Total in your pocket at the end of the year: $4,200.
If you structured your deal to allow a minimum 2-year lease term, you have time to find another tenant/buyer and collect another $3,000 as non-refundable option consideration. So, what’s the new scenario:
Your Option Price: Still $100,000 (if not renegotiated)
Your Rent: Still $800
Your T/B’s Option Price: $101,000 (market dropped 3%)
Your Rent: Probably still $900
If this tenant/buyer exercises their option, you’ve collected $9,400 on this property in 2 years.
If this tenant/buyer DOES NOT exercise their option, and you’re worried about a good reputation, you can give the house back to the owner and pay them the difference between your option price and what they can sell for today. Here are those numbers:
Your Option Price: $100,000
Current FMV of Home: $94,000 (FMV dropped another 3% in year 2)
Offer Owner the Difference: $6,000 (he’s back where he started from)
You Collected: $8,400
Remainder: $2,400
Now, that’s not a lot of profit for you over a 2 year period, plus you might have had a few minor repairs and re-rental costs involved, but you still don’t lose anything. And, the owner’s got to feel pretty good about getting a $6,000 payday from you. Reputation saved. He can resell the home for $94,000, yet he’s really collected $100,000.
Of course, if you don’t care about your reputation, you can walk away from the house after that second year with the entire $8,400 in your pocket. But, I’m like you. I want to maintain a good reputation.
Of course, the problem with this scenario is being able to come up with the $6,000 to pay off the owner. But, with enough of these lease/options in place, you are, hopefully, making a little more money than you’re spending. Besides, your options won’t all come due at the same time.
I hope this helps.
Bill K. (AZ)