Structuring a lease to that require rehabs

[Dee Xixi]

In my town, I found a duplex that needs a good amount of rehab. I talked to the seller about a lease to own which he accepts but I am a little bit unsure on how to structure the Lease to own so that if I cant pick up the option I am able to recoup my rehab money. I am thinking on doing the rehab gradually, one side has tenant and the other side is vacant. starts the rehab on the vacant side then move the occupied side afterward. Any ideas on how to structure the deal please.

[Jon Holdman]

Who would you recoup your rehab money from? The owner? Doubtful. You buy an option to purchase, invest money, then don't exercise the option. And then you want the owner to pay you back for the work you've done? That wouldn't be something I would sign up to.

Are you planning to keep this or sell it? If you're going to sell it, structure this as an equity split. That is, you take control of the house (a deed would be better than an option, if the owner will go for it.) You do the work. Once you sell, you get all your costs back. The owner gets what they need to pay off their loan or an agreed upon as-is price for the property (e.g., the option price you would agree to now.) Then the two of you split the profit 50/50.

If you're going to keep it, be sure you have your financing lined up solidly. Buy the property subject to or with a wrap. Do the improvements. Hold for at least a year. Now, do a refi that gives you (at least) enough to pay off the owner. Maybe you can get some cash back, too. Maybe not. You will need to have your ducks in a row as far as the refi. If it turns out you can't refi, then go to plan B and sell the place. If you've done a good job with your numbers and the rehab, you'll be able to pay off the owner, pay yourself back, and put some cash in your pocket.