Can someone clarify this paragraph about Lease Option please?

Question

Hello BP community!

Reading a book on Lease Options now and got stuck on this one example. Please help me understand what it means.

Facts: Seller has a home worth $235,000 and will sell it to you for $225,000 on an 18-month option.

"The seller owes $150,000 on their mortgage and agrees to take $75,000, less closing costs at the time of closing ($225,000 sales price less $150,000 current mortgage balance). This allows you to get the mortgage equity during the option period. The equity from the principal pay down during this option period is estimated at about $200 per month so $3,600 total during the 18 month term." - this is word for word.

What do you guys understand from this paragraph?

Wayne Brooks · Answer

If you were actually buying sub2 you’d get some principal pay down benefit while paying the payments. But since you’re not going that, but I assume a fixed price option, that won’t be true. You can read a lot of inaccurate on the internet.

Bill B. · Answer

They’re just guessing at the $200/mo. It depends how old the loan is, how long the loan is, and they interest rate. But you can put $150k loan in to any amortization and then play with interest rate and years remaining. They will both change the payment and the portion that is interest. Then simply look at the payment and you’ll see what percent is paydown.

You understand with Thai plan if you don’t come up with the entire $150k in 18 months you will lose the $75k you put down right? IMHO this is a horrible plan not worth being typed on the internet much less put in any kind of book. You’d either want to offer the $75k with the assumption of the existing mortgage (still risky if it gets called due) or you’d want to put down closer to $10k for the option.

Maya A. · Answer

@Greg Scott

Is this 75K downpayment paid when contract is signed or at Lease term end date?

Dennis Cosgrave · Answer

I have done several lease options when purchasing property. I will offer to lease the property for up to a fixed period at a fixed rate. At the end of the lease period, I can purchase the property at a fixed price. I also include a clause that allows me to do any renovations that I choose without requiring permission from the landlord. On the lease purchase option agreement, I list my name as buyer with "and/or assigns" added. During the lease period, I make the renovations while only paying rent.

When the renovations are complete I list the property for sale at a higher price and I will either sell the option agreement or bridge the purchase and sale.

Wendy Patton · Answer

@Maya A. what would you like to know about them?  You have the book I wrote on them also?

Fred Cannon · Answer

@Maya   Here is my lease option that I give with a rental that I would consider selling.  In the addendum I write.  Tenant has option to buy at the end of lease for xx dollars.  Usually 3% higher than current market.   Landlord will refund 10% of all rents paid and credit 3% of sales price to closing, repairs, or price reduction.  It's just a hook with bait.   Tenants like it but no one has ever taken me up on it because of the required down payment they would need.

David M. · Answer

@Maya A.

Well, I’ve never done a lease option, but thought about it a lot and had lots of discussions with tenants about it.  The one sticking point is agreeing on a sale price.  The buyers always want it lower, the seller wants it higher, and nobody has a perfect crystal ball as to what the market price will be in the future.

Meanwhile, for just a lease option, there should be a no refundable cost for the option.  After that, it’s basically a regular purchase.

It looks like the example you had mixed in a lease option with other techniques which is why it got more complicated.

I hope that helps a bit.

Maya A. · Answer

Wendy Patton, Sandwich Lease Options

I was introduced to the concept through a video on YouTube by Kris Khron and it looked very inciting so I wanted to read on it. It's the only book I found on the subject.

Would love to hear from anyone that has experience doing LOs or knows other resources teaching about this RE niche.

Thank you All for your responses!

Can someone clarify this paragraph about Lease Option please?

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