How to Structure This Deal Creatively...

Question

I have a seller looking to sell is properly quickly due to living out of state. Currently it isn't occupied.

He has chose not to sell on the retail market because the neighborhood is upscale and the property isn't in the condition it needs to be to sell retail.

Initially I wanted to wholesale the property, but after running the numbers compared to what he owes it just doesn't work.

ARV- $440k

Owes- $350k

Repairs- 30k

Mortgage- $1500

My question is if the seller is interested in doing a lease option what are some ways I could structure this deal to make it work.

I've never done a lease option so any tips/advice would be greatly appreciated.

Thanks

Mike B. · Answer

@Brian Gibbons

Great tips as usual.  Thanks for the valuable input and clarity.

Brian Gibbons · Answer

@Mike B.

For rookies, sandwich LOs are not the best.  Entering into a LO with the seller and assigning (I use an option release) the deal is best.

Other points:

1. NORTH CAROLINA IS NOT THE BEST STATE FOR LEASE OPTIONS.

From @Karen Rittenhouse of N.C.

A couple of cautions: do not overcharge on the lease option  consideration. I’ve seen investors get large amounts down and refuse to  return it when the tenant moved without exercising their option. In  court, the investor defends that they can keep this money because of the  contract wording. Judges are not impressed. You do not want to go  before a judge and try to convince him/her why you are entitled to keep a  large deposit. Investors will likely be required by the courts to  return this money. Keep the deposit realistic. We ask for three percent.

Here in North Carolina, if the lease option tenant stops paying, we  cannot go through a normal eviction process. Magistrates in our court  system no longer have jurisdiction over these types of transactions.  These “evictions” are kicked up to a higher court. There are attorneys  involved. Because of the lease option consideration, North Carolina  (check your state laws – we are not the only ones) deems that the tenant  has an equitable interest in the property. It is not quite the same as  going through foreclosure, but it is not as easy to get someone out as a  typical eviction. Again, the courts often see investors as trying to  take advantage of an unsuspecting tenant, no matter what they signed.

We are very careful who we put into a lease-to-own. They must be able  to afford to purchase the property and be someone we feel will be able  to eventually get a loan. As far as putting any tenant into a lease  option, nope, we don’t.

Used to be easier; used to be more common; more legislation has made it less attractive."

2. Giving a long lease to a tenant is not recommended.  12 month lease with possible extensions are much better practice.

Also according to the Garn St Germaine act of 1982,

DUE-ON SALE CLAUSES Sec. 341. // 12 USC 1701j-3.

(d) A lender may not exercise its option pursuant to a due-on-sale clause upon--,

(1) the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property;

(2) the creation of a purchase money security interest for household appliances;

(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(4) the granting of a leasehold interest of three years or less not containing an option to purchase;

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or

(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

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The SAFEST way is to give a 12 mo lease to a Tenant and give a ROFR.

BJ Henderson · Answer

Thanks @Brian Gibbons. You gave me enough information to get started in the right direction. That's really what I was looking for.

@Dave Melton that was the plan, but didn't really know how to set it up. While I tried to do that the seller was not interested, but thanks for the insight.

Mike B. · Answer

There's a lot more involved in these types of deals than just structuring a deal.  it's nothing like wholesaling.  What you're referring to doing is a sandwich lease option or a lease option assignment, depending on if you want to stay in the middle or just pass the property along.  Either way, you have to be upfront with the owner about your plan and show a win-win to them for you to be involved.  You will have to take on responsibilities with the property and be able to carry the property if it is vacant or has tenant issues, unless you're easily able to assign the deal right away.  There's a lot of good info here on BP and elsewhere about lease options that you should definitely research more before moving forward with the property owner.  As for the numbers, it really depends on a combination all together of that local market, the seller's expenses, fair rental and sales prices, condition of the property, duration of the lease and option, willingness and ability of a tenant, etc...

Generally speaking, (these numbers are just for example) you could offer to lease the property with an option to purchase in 5 yrs.  You'd pay $1000 cash right now to hold that option to purchase at a pre-fixed purchase price of $450k within the 5 yr period.  You will cover the cost to update the property then you will handle all maintenance of the property and any repairs up to $500.  You will pay the owner $1500 a month rent.  You will have the owner's permission to sublease the property and sell your option to purchase.  Then you will sublease the property for $1800 a month (assuming thats fair rent for the property) and charge a new tenant who's interested in buying, an option fee of $15,000.  The new tenant will have a 2yr or 3yr lease term with the option to purchase the property at $450k-$500k or whatever the fair purchase price would reasonably be in 2yrs...

There's dozens of ways to structure these deals, just make sure to check the numbers, and make sure everything is reasonable and fair to all involved.  Do your research and then check with professionals in your area. Good luck BJ.

How to Structure This Deal Creatively...

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