Lease Option vs Seller Financing

[Account Closed]

Hi!  I am a newbie and I've yet to get my first deal.  I am excited to be entertaining one, but I want to make sure I get a good deal.  My goal is to buy and hold in order to generate cashflow.  The property I have in my mind is currently held by a private motivated seller who just wants out of the game.  I don't have the cash to purchase the property, so I asked if he'd consider seller financing.  He came back with a lease option strategy (?).  The way I understand a lease option is I would have to pay him an amount monthly, with the option to buy after whatever term we agree on.  My question is why not entertain the idea of seller financing when theres no mortgage on the property and you'd still be getting the payments (potentially the same amount as a lease option), but you're giving me the option to drop the property back on you when you want out of the game now??

I tried running the numbers using the BP Rental Property Calculator and added in the lease option payment as an "additional expense" (considering this a "cash" deal), but Im not sure if I can trust the results because I feel like Im missing something??  I not experienced at all, but I just don't see how a lease option is the best strategy in this case... for either party.  Can someone help me understand what I am missing or shed some light here?  Please let me know if you need more info to help me sort this out.  Thanks in advance.

[Jim Costa]

If he sells all cash he will have to pay taxes unless this was his primary residence or he does a 1031.  Explain his tax advantages for owner carry.  IF he wants a large amount of cash do an 80-20 or 70-30 loan.  Buy low sell/refinance high.  Depending on your credit.  If it is just the cash you don't have, have the seller finance the down payment.  Talk to a mortgage broker and see if you can get a loan.  Get a new loan for 80% of the purchase price and have the seller finance a 20% second.    the 80% first will get you out of pmi (private mortgage insurance), lowering your payment (allow you to write off interest and depreciation).  Sounds like he wants to get out and a little flexible.  Negotiate if you can give him 80% now with carrying a 20% 2nd if he will take a lower price.  If you can shave another 10% off you can refinance after a year.  You should be able to negotiate, specially with no realtors involved.    Get creative.  I don't know your area or numbers so I will use round numbers and you can adjust accordingly.  Lets say the place is worth 100K and rents for $1000.  Tell him you will get an 80% first if he will let you spread out the down payment over the next 24 months.  That will be 80K now,  5K in 6 months 5K in 12 Months  5K in 18 months and the final 5K in 24 months.  He will get 100% in 24 months.   You will have essentially borrowed 20K at 0% interest.  You will have to come up with about $250/ month to pay for the first and to pay him off but after 2 years you will have about a $5-600 cash flow, your first property with no money down and 20% + equity depending on purchase price.  If he wants to lease option have him give you a moratorium on rent for 6 months to get the place leased and do similar to above.  Allow your rent to go towards purchase price.  

Have him create a first and a 2nd.  The 2nd (same as above) you will pay off in 2 years.  Give you an option to refinance and pay off the first in 2-5 years.  This will give him higher cash flow than renting selling or lease option.  Allow you to buy with no upfront money pay a little extra for 2 years and have huge cash flow after 2 years so you can hopefully refinance.

Good luck.