New Lease Option Deal

[Shiloh Lundahl]

Over the past few weeks I have posted about the lease option strategy that I use and some people have been critical of it (which is fine) especially when compared to turnkey investments. I am open to criticism. Here is my last lease option property that I purchased and an explanation of the deal. 

I advertised it on Facebook Marketplace with the following paragraph: 

Hey everybody. I have an opportunity thet might fit someone. I bought a house that is in bad shape. It needs a lot of work done to it. It’s a 4 bedroom, 2 bathroom manufacture home. It's going to need new floors, new paint, some new doors and some drywall and doorframe repair among other things. If you are handy, and want to take on this project as a rent to own home, then I’ll sell it to you for $165,000 and as you fix it up and if it appraises for higher than that, then you can still buy it for $165,000 even if it appraises for $20,000 or $30,000 more than that. The rent to own program goes for three years during which time you can work on getting your credit where it needs to be in order to buy the house. There is a $2900 option fee to get into the rent to own program and the rent for the house is $1345 a month.Let me know if you are interested.

I got several inquiries and within a week I already had a tenant buyer put down money for the option fee.  They will move in in about 2 weeks. He used to own his own contracting business.  

Purchase price 125k

Closing costs 7k with hard money lender

Cleaning $300

Closing costs 5k with long term loan

rent $1345

My PITI 1095

Monthly Cash Flow $250

Second position lender to cash me out of my 18k left into the deal will get $180 of the cash flow.

Zero left into the deal, $70 a month in cash flow

Sell for $165,000 in 1-3 years

Estimated profit over a 3 year period of time $30,000 - $35,000

Total amount of work 4 hours including writing this post. 

[Jay Hinrichs]

Quote from @Shiloh Lundahl:

@James Wise It seems like there may be some confirmation bias going on. I thought you were wiser than that.  

So you are stating there there is no situation in which a lease option would be a good option? 

The Libra in me will balance the scales on this conversation. I believe were Jim is coming from is the rampant abuse of this niche that was done in the rust belt and inner city areas of the country.. Especially a city like Detroit with minority buyers and In Texas with non English speaking buyers. And thats why Texas has such strong laws against LO  etc. 

Where Shiloh is coming from is nicer areas that are not inner city thereby producing a somewhat wiser more knowledgeable buy that has a good chance of success with this transaction structure. And big one is a reputable seller. 

what i saw in Detroit in the day ( and I suspect it was somewhat the same in Cleveland low income areas) which pretty wild abuse. With virtually no chance of the LO buyer ever being able to purchase the home as these were glorified renters.. And then the risk to the investor seller was just like any other investment. 

And to answer Shiloh question for sure LO has its place I personally sold two of my personal residences with LO.. This was done when market conditions were slow and I wanted to move on and not wait for a sale.. ONe of them in CA the buyer trashed my house but I was successful in suing them for waste AND even collected from them as they owned more property in the same county. The other one was Oregon and same thing I found a house I wanted to move to and did an LO with a corporate family that was being moved and they could not close until their home in Boise was sold and closed. The was before Boise was a red hot market. In both cases I did not need an outright sale to buy the new home.  I also bought my home in the Napa Valley on an LO  while I went through a formal assumption process that took about 6 months that was 92.. I needed to move to get my kids in school and the assumption was not going to happen fast enough.