First Potential Lease Option...Is This A Good Deal?

Question

I got a call off of one of my craigslist ads from a guy who has recently been told he's transferring in 30 days so he is needing to do something with his house fast.  He doesn't have enough equity to wholesale or rehab so I'd like to give a shout out to Jason Hanson for the BP article "Are You A 1 Trick Pony" article which I read the night before taking this call, prompting me to read about lease options so I'd stop wasting leads with less equity.

Jason's article: http://www.biggerpockets.com/renewsblog/2008/9/24/are-you-a-one-trick-pony-how-to-profit-in-todays-real-estate-environment/

Since I have never done this before I'm hoping you guys can give me some advice on whether it makes sense.

Specifics:

The home is valued at $133K based on good MLS comps.
Comparable houses in the neighborhood rent for $1250/month

Seller owes $95K but won't take less than $118K
Seller needs 3-5K to get set up in new location
Seller mortgage payments are currently $650/month.

My plan is to offer a lease starting in 45 days with $3K down and $800/month (covers all his expenses and maybe a bit more) with a 36 month term and an option to buy for $118K.

I have been getting lots of tenant leads lately so I'm confident I can find someone to put down $5-7K (minimum) and pay $1200/month with an option to buy for $130K.

In that scenario I'm thinking I would net $2-4K on the up front option fee, $400/month, and $12K if it sells down the road.

1)How do the numbers and deal structure look?

2)Also, I read another Jason Hanson article "10 Documents You Must Use When Doing A Lease Option"  Those documents sound expensive for me and time consuming for my lawyer (maybe not he works with lots of investors).  Unfortunately I don't have much cash or time to throw around on this deal.  So IF the deal makes sense, any advice on how I could find boiler plate lease option documents quickly without leaving myself dangerously exposed or should I bite the bullet and call my lawyer Monday AM?

Thanks in advance for any advice.

Michael Carbonare · Answer

Josh,
The first thing I noticed is the seller is in control here.  He has a 30 day window yet is telling you what his bottom line is.  Really?  If you don't bite, what's his Plan B.  Your offer needs to be made based on your assessment of value, not his.
The second thing I see is that the homeowner wants at least $3K from you.  That's in the ballpark of 3%. . .which is what you can expect to receive from your tenant/buyer.  You won't get $7K option money for a house in this price range.  If you take that gamble you'll lose.

John Jackson · Answer

Josh Gaddy   read what MC stated, as well as the other right on target posts here.
But, what MC said is exactly my first thought..
The owner wants $3k????
REALLY???
The only time I give the owner $3k is when the option fee is about $12k.
MC is dead on..what the owner wants is just below what you can expect as an option fee on this.
The owner needs two doses of reality. Don't be afraid to tell the owner that you'd also like a free and clear condo on South Beach, but that aint gonna happen. 
I've told owners I'd like a Piper Malibu, but I'm still in the 182. (sorry..plane talk)

Bill Gulley · Answer

http://www.biggerpockets.com/forums/83/topics/89398-sandwich-lease-option---good-bad-idea

My comments apply. :)

Josh Gaddy · Answer

Thanks for all the replies guys this is really helpful.

Ned Carey You make a good point...I can afford several months of a $800 payment but if they do thousands worth of damage I'm up a creek. 
 Joseph Bodek I like the idea of assigning the lease option here especially if I can't negotiate a free option with the seller.  If he sticks by 3K maybe I can sign him up and find someone for $4K and pocket $1K.  
Brian Gibbons I am going to have to read through your link about CFO's a few more times but it seems to be about finding a creative way to have consideration in the deal without using cash?  Thanks for that info, I definitely don't want to be caught in a bad legal position.  Also, the deal is in SC but I haven't had a chance to seek quality legal advice yet so do I certainly like the idea of assigning the LO and getting out like Joseph mentioned.  I really would like the 300-400/month in positive cashflow though.
Steve Might I have been marketing a rehab that I recently completed as a lease purchase and have gotten tons of people interested in who "claim" they can put down 5-7K....I haven't checked them though so as Michael states I may be dreaming.  (I recently inserted a tenant and sold out to a national buyer though so I stopped marketing for TB's)
Michael Carbonare I see what you mean.  Ideally, I'd like to put nothing down and have 60 days to find a TB and make a profit on the front end, monthly, and at final sale.  I believe the house is worth $130K based on good comps which puts the DP at $3,900.  I'll can start off my negotiations at 0 but what if the seller stands pat needing money down...move on to the next or do you have an idea I can use a backup plan?

At the end of the day I'd obviously prefer the deal where I make a profit on the DP, monthly, and at the sale.  If I am off base with the high DP that TB'ers would be willing to pay then is there another way to go?  I don't think negotiating a 45-60 day inspection period will be a problem but I definitely need a 3-4K DP to make me feel comfortable with the risk of carry or fix up from a bad tenant in a sandwich LO format.

Maybe a wholesale LO make the most sense as a backup here since I 1)still need to learn my best legal format 2)there will be too little DP left to be comfortable with a sandwich LO?

You guys have really opened my eyes here and I am so glad I posted this.  I'm hungry to make this work but I've got to start off on the right foot.

Brian Gibbons · Answer

Michael knows what he is talking about here.

You need to control the situation.
You need to know what TBers will pay, generally 3%.
You need to have 45 days to 60 days to perform, as the TBer has to give 30 days notice.
You need to show the Seller his options compared to renting it out vs selling w an agent vs selling on terms vs a short sale.

There is some teaching to the seller in Cooperatives - Lease Option Assignments.

Mark Forest · Answer

By tenant leads you mean that you have come across people who can and will do this?

Account Closed · Answer

Hi Josh:

The numbers do look good on this one but if a sandwich worries you and if Brian is right about the magistrates in NC then I would do it as a wholesale lease option and take the up front money and move on.
Best,
Joe

Brian Gibbons · Answer

Ned Carey is correct, sandwiches have risks, you are in the deal and must make the seller happy and the tenant buyer happy til the deal is consummated or it falls apart.

You live in NC so the magistrates think of lease options as disguised installment sales.  You have to foreclose instead of evicting.

I use instead of a lease option a contract for option.  See http://www.biggerpockets.com/blogs/3/blog_posts/26565-a-contract-for-option-is-better-than-a-lease-option

Charlotte NC market has great white collar income.  Is this house really desirable for the best schools in Charlotte?  People will pay more for a better school district.

Location is key to get big Option payments.

And Credit Improvement Program is a make or break your Tenant Buyer getting a mortgage.

The credit improvement service I use does three things:

1. Gets negative marks off (like a paper mill like LexingtonLaw.com)
2. Gets new marks on (like a secured installment loan and secured credit card).
3. Negotiates with charged off accounts and offers 20% of debt negotiations in return they get the mark off (sometimes).

See http://www.biggerpockets.com/blogs/3/blog_posts/27778-credit-improvement-is-critical-for-lease-option-assignments

If you have questions, let me know.

Best Wishes,

Brian

Ned Carey · Answer

If you can pull it off the numbers look very good.

However my view is a "Sandwich" Lease option, where you lease option a property and then re sub lease option it out to someone else is one of the riskiest strategies out there.

Can you really get that large an option fee?  What happens if the tenant doesn't work out and the property remains vacant longer than you expect?  What if the tenant tears up the property and you now have to come out of pocket to repair it? Can you carry this property if the worst come to pass?

This could be a very good deal. Just don't go into it with your eyes closed. Recognition the risks that Lease Option advocates generally don't talk about.

Ned Carey

First Potential Lease Option...Is This A Good Deal?

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