How would you structure this deal for a win - win?

Question

I'm in the talk right now with a local investor to owner finance on a duplex that he owns through a lease option.

The current value of the duplex is at about $210-220k.

His terms that he talked to me about and through out are:

3 year lease option.

$300k purchase price (Nashville is in an appreciating market but not that much!) I think thats high based off comps.

With a down payment. (not sure the $ amount)

Rent: $2400/month.

He bought this in 2015 for like $150k

Its a great duplex in a B neighborhood that has been taken care of, but i'm just not sure on the terms to negotiate here.

You investors that have done a lot of owner financing how would you try and structure this deal for it to work well both ways?

I'd rather do a land contract after reading on it and learning more about it...

I've just heard and read that lease options usually dont pan out... I dont want to own this in three years... I want to own it this year or now.

This guy is also a commercial and residential Loan Officer.

Concerns:

1. I know he mortgage isnt $2400/month. theres no way... So why would I pay that? I only want to pay to cover his mortgage especially if i'm paying taxes, managing the property, and taking care of upkeep and vacancies!

2. A lot can happen in three years... economy can take (dont think it will happen but who knows), lose job, have triplets (its in the genes), I mean fear of the unknown is a real thing.... reason I say that is that I dont want to have the option of buying that in 3 years (i'd rather 1 year) I want to own it ASAP and cash flow.

3. This is my first RE investment... I have good credit 720+ not a two year work history with 1099... and my wife hasnt been at her job for 2 years either so owner financing is the easiest way for us to get into an investment right now! We want to househack.

Okay, sorry for the long post... just so many questions and i'm all about minimizing risk... What do you guys think and why?

Roger Poulin · Answer

@Alex Vargas, you are correct that most lease options don't work out, so be prepared for that.  This deal would cause me to ask a number of questions in addition to what you have addressed.

1) What are the market rents?  Rentometer.com can help with this. By signing a 3 year lease you should get a discount over the normal 1 year lease rate.  By renting both units you should should get a discount over the single unit rate.  Think about it.  You are taking on all his management head aches for the next three years.

2) Why the 300K purchase price?  Typically the sale price is close to the market price at the time of signing, or maybe slightly more. Think about this, you are assuming his headaches, guaranteeing him roughly 25% appreciation, you're paying down his balance, and he probably gets cash flow each month.

3) Who pays for repairs?  If the existing water heater goes out, will he replace the 50 gal. unit with a used 30 gal. unit that is not big enough for the house and will fail again once you own it?  How about the roof, will tar work until it is sold? He has 3 years to cheap skate repairs.

A lot can happen in the next three weeks. Look at the value of Bit Coin.  As an investor, you should always be trying to buy at (significantly) below market price.  To put your money in at a hoped for future market value is not investing, it is speculation.

It sounds like he is a experienced investor that is trying to take advantage of your aspirations.  This deal stinks and you you wise to get a second opinion.  Get a 1 year deal, or buy it today, or walk away. My guess is that he is not motivated to sell.  Only buy from people motivated to sell.

Luka Milicevic · Answer

Give him his price

Zero down, amortized over 20 years with a 10 year balloon.

Alex Vargas · Answer

@Roger Poulin Thanks for the reply. I'll reach out to Staria.

Roger Poulin · Answer

@Alex Vargas my first suggestion is the contact Staria Clark at Remax Elite and ask her about the duplex she just listed for a more reasonable price (tell her I sent you).

In my opinion locking you into 100% rent for both units for 3 years is unreasonable. There is a normal overturn of tenants.  Every time someone moves out you have to find a tenant, there is an expense to that. Who covers the rent while it is empty, YOU!!  Who paints it to get it ready for the next tenant and make repairs?  Who is going to be on the hook if rent is late or you have to evict?  You can't do all of that without a reward of some type.

Before you plan on Airbnb, know the rules and restrictions on short term rental in Nashville. They have basically outlawed them unless they are owner occupied or zoned commercial. Do the research.

Full disclosure, I have never entered into such a deal and I am a bad one to give such advice. A better plan would be to attend tonight's "Deals, Deals, Deals" meeting and talk to Tylor Cauble, or you could try to reach him today at Vastland Realty Group (he has a book coming out soon), but I shy away from bugging professionals unless I plan to involve them in the deal. You could reach out, and if he has time he is a great resource. For more info on the meeting, go to the REIN website and click on events.

Full disclosure, I have never entered into such a deal and I am a bad one to give such advice. If I were to do the deal with the duplex you described, I would offer rent be 75% of market rate. I would pay an option fee monthly of $100, to keep the option up to 3 yrs, and that fee would apply to closing cost when I purchase. I would do any needed repairs, but get that amount credited toward the rent payments. The purchase price to be 75% of appraisal.

I would make this offer expecting the seller to walk away, but once in a while the seller will accept my crazy offer or make a counter offer. I would be ready to give a little here or there. Those are the deals worth doing.

Call Staria!

Alex Vargas · Answer

@Roger Poulin Thanks for the reply Roger, and I completely agree.

I'm curious how would you structure your offer if you were me?

Alex Vargas · Answer

@Vince Mayer  haha thanks for the response Vince!

That is interesting, I wasnt aware you can exercise the option at any point.

And absolulety not! I never intended on going through with a $300k purchase price... I ran comps and know very well that its not worth that.

He wants $2400 total for both units... I would be responsible for the full $2400/month. He is currently renting both sides out for $1200/month so that is not unreasonable. And is normal for rental market in that area... I would plan on actually Airbnbing one side anyways which would bring in at minimum $1500/month in my market.

If I were to do a lease option I would do it for at or below market value purchase price... If he doesnt agree, NO DEAL!

I'm not that desperate...

Vince Mayer · Answer

@Alex Vargas With a lease option you have the right to exercise your lease anytime so if you qualify for a mortgage in one year you could purchase. The option price should be based on the history of prices in the area, not some arbitrary figure. You will only get a mortgage for what it appraises for at the time of purchase. Do you want to buy this duplex for $300K in one year? The rents should be based on the rents in that market. Who cares if it covers his mortgage or not.

By the way, any option fee you pay will not be refunded if you walk away from the deal once it's put in place.

I would negotiate this deal to reflect the realities of this area. The way you explained it, I think even he would be surprised if you took this deal.

How would you structure this deal for a win - win?

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