Would a noter buyer buy this cash flow? - Posted by osirus

Posted by dandrews on February 27, 2002 at 08:42:56:

But how about this senario. MH notes. I have a few written as rent-to-owns. Are these different to a note buyer in that they are fully amortizing? The tenant-buyer gets an option to buy in 36-72 months, for example. Purchase option is $1.00. It really is a sale, but written as lease with purchase option for the intent of taking it back more easily than a repossession would be.

I have written quite a few of these this way since I am more tuned into landlording than to lending. But have I have often wondered if they are marketable to note buyers. I am asking in principle since obviously, you would need more info.


Would a noter buyer buy this cash flow? - Posted by osirus

Posted by osirus on February 11, 2002 at 20:41:48:

Sandwich lease options are my choosen method of real estate investing. Here is an example of a typical deal.
Let’s say the house is worth $100,000 and the seller’s payment is about $764 with the principal balance being $95,000. Seller agrees to lease option house to me for the mortgage balance of $95,000. Next I sub-lease to a tenant buyer for 12 months at $110,000 and $964/month and collect a $3k option consideration. My total potential profit is as follows:
cash flow= $2400 ([$964-$764]x 12)
backend= $15,000 ($110,000 -$95,000)
option $=$3000
total =$20400

Now lets say instead of staying in the middle I sell my lease option to another investor so that it is as if they step into my shoes and collect the $2400 cash flow and $15,000 backend.

Would a note buyer be interested in buying this unsual cash flow? If yes, how much would note buyer might offer? Any help is appreciated.

I’ve got Questions… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on February 12, 2002 at 13:03:00:

A lease option that provides rental income is NOT a true instrument of indebteness…Although there are some investors that might purchase a years worth of rental income at a discounted cash amount, these investors are few. They are also buying rental income streams on well seasoned rental investment properties where there is a lot equity that exists in the property.

My concern in looking at your deal involves these questions, which you must ask yourself;

  1. You have a home you stated is worth $100K, you’ve “sold” under a lease option for $110K. Where is the security in this?

  2. Your anticpated “back end” of $15,000.00 (the difference between what is owed on this home of $95K and your inflated $110K sales price) often will NEVER be realized when the tennant buyer is unable to complete and consumate their purchase of the home. What happens if that unfolds?

  3. The monthly cash flow spread of $200.00 per month (difference between what you are to collect in rent of $964.00 and the $764.00 mortgage payment) is about the only thing that I see could really be considered tangible cash flow. However the same question beckons here: What happens IF the tennants are slow, or stop all together in paying the rent?

Most investors want some security or assurances that if all else fails they will somehow protect their principal and get repaid. What are you offering here?

If you follow the thought process, I think you’ll see why it is VERY difficult if not almost impossible to attract an investor to put up their cash for this type of deal UNLESS there is some other ample security or collateral that can “sweeten” the dish.

To your success,
Michael Morrongiello