Feasibility of BRRRR'ing a lease-to-own

[James Cerasoli]

Hi All,

I'm planning a move to Charlotte, NC in June 2020 to get out of LI and experience living somewhere new and exciting like Charlotte especially with its thriving real estate market. I am looking to buy my first property in Charlotte with little money down and was initially thinking of marketing to find seller finance prospects. Then I thought of the idea to instead market to properties saying that I'm interested in 1-3 year lease-to-own deals.

I figure this would be a win-win for both sides considering the seller would collect a non-refundable deposit, cash-flow for the years I'm leasing it and they wouldn't need to pay a realtor. Another plus for them would be that I plan to make renovations on the property and fix it up cosmetically so that I force equity into it. I would care for the property as if its my own and handle issues and repairs so the owner wouldn't even need to worry about needing a property manager.

And then the advantage I would have is to acquire a property in a high-appreciating market with little money down, have the option to rent it out to a 3rd party (If agreed to by the owner) and if at worst case, the market for some reason plummets I can back out of the contract. Then once the 1-3 years are up, I purchase the property outright and hopefully forced some equity into the property along with natural market appreciation so that I don't have to come up with too much for a down payment on the mortgage. 

If anyone could give any insight on how feasible this idea is based on experience it would be greatly appreciated and I'd love to hear anyone's experience if they've actually tried this for themselves.

Thanks!

[Randy E.]

Originally posted by @James Cerasoli:

Hi All,

I'm planning a move to Charlotte, NC in June 2020 to get out of LI and experience living somewhere new and exciting like Charlotte especially with its thriving real estate market. I am looking to buy my first property in Charlotte with little money down and was initially thinking of marketing to find seller finance prospects. Then I thought of the idea to instead market to properties saying that I'm interested in 1-3 year lease-to-own deals.

I figure this would be a win-win for both sides considering the seller would collect a non-refundable deposit, cash-flow for the years I'm leasing it and they wouldn't need to pay a realtor. Another plus for them would be that I plan to make renovations on the property and fix it up cosmetically so that I force equity into it. I would care for the property as if its my own and handle issues and repairs so the owner wouldn't even need to worry about needing a property manager.

And then the advantage I would have is to acquire a property in a high-appreciating market with little money down, have the option to rent it out to a 3rd party (If agreed to by the owner) and if at worst case, the market for some reason plummets I can back out of the contract. Then once the 1-3 years are up, I purchase the property outright and hopefully forced some equity into the property along with natural market appreciation so that I don't have to come up with too much for a down payment on the mortgage. 

If anyone could give any insight on how feasible this idea is based on experience it would be greatly appreciated and I'd love to hear anyone's experience if they've actually tried this for themselves.

Thanks!

Hi James,

I won't say it can't be done, because every owner is different, every house is different.

But speaking for me personally, I'm trying to figure out what would make me, an owner, agree to your deal.  You've pointed out the pros for why it is a good deal for you and why you think it's a good deal for an owner.  Here's my side.

1) "I figure this would be a win-win for both sides considering the seller
would collect a non-refundable deposit"

This is really the only aspect that has a snowball's chance in heck convincing me to do this.  Let's say I have a house/condo worth $150K.  In order to do a Lease-option there would have to be a premium on the sale price.  Let's say $165K.  Now, how much cash would it take for me to lock myself out of selling the house for $150K today, in order to "maybe" sell it to you in three years?  $5K?  Nope.  $10K?  Nope.  Remember, this is Charlotte, a hot market.  A well-kept, accurately-priced house will sell quickly.  I can have $150K in my account in one month.  Maybe in two weeks if I sell it for $140K.  How much will it take to wait three years to cash out on a house I want to sell today?  For me it would take at least a $25K non-refundable down-payment.  If I think about it too long, I might say $30K.  If I'm going to wait three years for my money, I want to make sure it hurts you to walk out on the deal.

2) "cash-flow for the years I'm leasing it."

Unless you're paying me a monthly rent 25% more than market rate, this is not an added benefit over renting it to anyone else.  And the fact that you plan on sub-leasing it to a third-party makes me like this set-up even less.  My take is, what if your tenant severely damages the property.  Let's say three month's lost rent (approximately $4000K) by the time you get him evicted, and once you get in you discover $16K of damage.  After you've just paid the non-refundable deposit and maybe spent $4K on carpet/paint/whatnot before the first tenant moved in, are you really going to want to lose another $20K because of this bad tenant?  Maybe you decide that the best business decision is for you to bail on the deal and return the house to me unrepaired.  Now I'm spending the deposit you paid me to repair the damage your tenant caused.  Nine months after "selling" you the house, I have it back in my possession with no extra money in my pocket but having undergone a lot of effort ... for nothing.  As a real estate investor, this is the scenario running through my mind.

3)  "and they wouldn't need to pay a realtor."

That's not a bonus for me in this situation.  If it costs me $7500 to get $143,500 today, versus waiting three years, I'd say that was money well spent.

4) "Another plus for them would be that I plan to make renovations on the property and fix it up cosmetically so that I force equity into it. I would care for the property as if its my own and handle issues and repairs so the owner wouldn't even need to worry about needing a property manager."
That is no different than any other Lease-Option, so that's not really a bonus.  Also, if the house is already in rent-ready condition, no renovations are necessary.  No cosmetic touches really matter.  And if you're serious about buying the house in three years, I don't care whether you "force equity" into it or not, because I won't see any profit from that.  My concern would be that you might not buy the house and leave me with a property in worse shape than before we signed the deal.  Hmmm, maybe I should increase that downpayment to $45K?

The only way this sort of deal would appeal to me in a hot market would be if the house is in subpar condition, I'm having trouble renting it at market rate, and I don't have the money to repair it. Say I have a house that has an ARV of $150K, but it is currently worth $100K. Maybe then I Lease Option it to you at a sale price of $115K with a non-refundable downpayment of $15K-20K. But again, if I can get $100K today, why wait three years to get $115K?

This is only my opinion.  I'm sure there might be other owners willing to do this.  But, I'm not sure the houses will be in the condition you're expecting.  And I'm not sure it will come at a price that will make you feel like you got a steal.

Good luck.