Lease Option Program - Buy & Hold Investors - Opinion

[Brian Sinclair]

We are putting together a program that will allow Buy & Hold Investors to find properties they want to make rental income with and controlling interest in them without having to having to get a bank loan to purchase them. 

What do you think of this program?

Let's say we purchase a property and Lease Option it back to you for 3 years. The option price is set today, so you gain the appreciation for the next 3 years. There are NO rent credits.

Requirements:

Location = Any, it doesn't matter to us.

Annual Cap Rate = 10% or higher

Annual Cash-on-Cash Return = 15% or higher

LTV = 65% or Less

Proof of Funds = 10% Option Fee, Repair Cost & 6 months of Lease Payments

**ONLY NON-Owner Occupied Properties**

Fees:

$2k - Loan origination Fee (included in Loan)

$2k - Processing Fee (included in Loan)

10% - Option fee (Paid at signing of Lease Option)

5% - Increase in Option Sales Price from the Original Purchase Price

2 Months Rent - Security Deposit (Paid at signing of Lease Option)

What we need to evaluate a deal:

Property Address

Minimum of 5 exterior photos & 5 interior photos

Purchase Price

Market Rental Rate

CMA from the MLS and from a Licensed Realtor. CMA is to include the Retail Comps and Rental Comps

Proof of the repairs which needs to be in writing from a licensed and insured contractor. Must include cost of materials and labor, plus the about of time to do the work.

[Harriet Baldwin]

As with any product, if you can get folks who are interested, why not (not legal advice).  

If I understand it correctly, in this structure you are basically financing the purchase, but not the rehab.  In our market, the fix up costs are often higher than the purchase price for the home, so this product would not be super exciting.  I realize that in most markets, that is not the case!

I may be missing a few details, but looks like your client would need over 50% of purchase price up front? Or, since the proof of funds list doesn't include down payment, are you getting that on the back end? Perhaps the 65% LTV is based on ARV, not purchase price?

My math: 35% down, (65% LTV), 5% for 6 mos rent (at 10% cap rate), 10% option fee, 1-2/3% for 2 mos' security (again, 10% cap rate-although not listed in proof of funds, so maybe not required over and above the 6 mos' rent required there?), so almost 52% cash upfront plus any fix up monies and 35% of $4k closing costs (yes, included in loan but still have the 65% LTV ceiling).

As a potential buyer, I would want to compare this to a hard money lender - this seems like a similar structure, but the (effective) lender holds the deed and isn't financing fix-up costs, which would make it less interesting to me.