Potential 1st Deal with 2 Options...Looking for Advice

[Lane Babin]

A friend and I just finished looking at a good potential lead on our first REI. We came upon the deal by word of mouth and networking. I'll lay out the scenario first and then give some info on what we have come up with for how to approach the seller with the potential deal. I would appreciate some input from those of you that have more experience if possible.

Seller:

The seller is an elderly lady that owns 3 properties that were acquired from family over the years. The properties are located in a somewhat lower-middle class neighborhood (nearby comps are in the $85K-$120K range if properties have been updated). All three homes are older and need a fair amount of work to sell at top market value of the nearby comps. She has rented the properties for years for only $250-$300/month to help out single mothers (this is how she stated it). She is a school teacher by trade and doesn't have much income. She is currently renting one of the properties and lives in one. Her ultimate goal is to sell all three properties and move to Florida with her daughter and grandchildren. She also mentioned that she doesn't have much money in saving and that these 3 properties were her long term savings.

Properties:

Property A (2 bed/1 bath): Estimated rehab = $20K. Estimated ARV = $85K. This property has an additional side lot with its own address and already has sewer and water form the city.

Property B (2 bedroom/1 bath): Property is currently being rented, and the tenants are scheduled to move out in 2-3 months. Estimated rehab = $20K. Estimated ARV = $85K.

Property C: (3 bedroom/2 bath). Estimated rehab = $45K. Estimated ARV = $120K. This property has a small 1 bed/1 apartment attached that the seller currently lives in.

Seller's Current Plans:

The Seller currently plans to rehab Property A (note that she doesn't have the $20K necessary to rehab the property enough to sell at the anticipated ARV if it was fully updated), and list it with an agent sometime in May. She then wants to rehab Property B and sell it as well. She would then like to continue teaching for 2 more years while rehabbing Property C after which she plans to move to Florida. She also mentioned that she has been having problems with her handyman/contractor as he doesn't do the best work. She has been trying to do most of the work herself, and she is not in the best health. She also mentioned that she is already looking at houses in Florida with her daughter (which leads me to believe that she would not be opposed to moving there sooner).

Potential Deal Analysis:

My business partner and I currently have $20K each that we can throw into the deal. So, we are kicking around the best strategy to approach the seller with. I'll list our currently strategies below:

Strategy 1 (Lease Option): We are thinking about asking the seller if she would agree to lease us both Properties A & B for double her current rental rates (approx. $400-$450 per month each). We structure this as a 12 month lease for each property whereby we will agree to purchase the properties from the seller at any time within that 12 month lease (currently anticipating to offer her approx. $40K each to make the deal work). We then use our funds to rehab the two properties while we are paying the seller monthly rent. After rehab is completed, we buy the properties from the seller at the previously agreed upon price ($40K each) and we then sell the properties at the full ARV.

Our goal here would be to rehab and sell the properties within 3-4 months max.

Strategy 2 (Package Deal Purchase): The second option is to buy the properties outright from the seller for $35K-40$K each as a package deal. For this option we would have to use approx. $20K for our 20% down on each of the property mortgages. We then have $20K left to rehab one of the properties. Once the first property is sold, we will then have the cash on hand to rehab the second property and sell it (or we find private money to fund the second rehab simultaneously to the first property).

We also intend to separate the additional side lot form Property A and either partner with an investor to build a property on the lot to sell or rent, or sell the property outright for additional cash.

I would like to get some advice from those of you more experienced in this. Our primary option would be Strategy 1.

Thanks,