All Forum Posts by: Mike B.

@Brian Gibbons 

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

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.

there's a lot of good post here on BP about lease options. It's definitely a good strategy worth doing more research on.

Generally speaking, you would get the property on a three to five-year lease (or longer if the seller is good with it) with the option to purchase. The $10,000 lease option fee you would pay to the seller is not bad assuming it's a SoCal property. You would then need to ensure that your agreements allow you to sublease the property, do renovations, market the property etcetera. You could then keep the same tenants or get new tenants as needed. You collect the rent from the tenants, then you pay the seller directly. The rent amount that you've agreed to pay the seller should be less than what you would charge your tenants. Therefore you make the spread between those rent amounts as your cash flow.  

Then within the lease option term that you have, you would exercise your option to purchase and enter into escrow for the purchase of the property. The $10,000 option fee you paid to the sellar up front would be applied to reduce your purchase price.

There's more to it and certainly a wide variety of strategies that you could use within the lease option. If you're interested in this technique, you should definitely look into it more. 

you may want to consider doing a lease option a rent-to-own deal. There's a lot of good info here on BP if you do a little more research that could help you decide. But in a nutshell-- 

You would lease your house to someone on a two or three-year term and have a separate agreement for that tenant to have the option to buy your property. The purchase price would be fixed and you would receive an option fee payment up front to secure their option to purchase. That would help get some cash in your pocket now for your move and maybe even some left over startup money for Oklahoma.

The tenants that you would place would specifically be interested in purchasing your property within that 2 to 3-year lease term, but they just need to improve their credit a little bit or save up some additional money for their down payment on their mortgage loan.  If the tenant completes the purchase within that lease option term then the option fee payment would be applied to reduce their overall purchase price. If they do not ultimately purchased the property within the lease option period, then they forfeit that option fee and move out. By that time hopefully you will no longer be under water and you could lease or sell the property then, or do another lease option again.

The lease option strategy, especially on properties that you own, is a bit more of a hassle free solution to renting your home when you're open to selling it. One of the biggest benefits of doing the lease option is that the tenants will be responsible for all utilities and maintenance. This usually means that you don't need Property Management.  Another bonus is that a realtor will not be necessary when you do the sale since you are selling your property directly to a buyer.

Good luck in your decisions. If the lease option sounds appealing to you -- then definitely do some additional research and consider consulting with a real estate attorney and title company before moving forward.

The lease option will be like renting the house out with added benefits.  If the seller doesn't need to be fully cashed out now, its a good option. 

What you're proposing would be a sandwich lease, which requires more particulars yo do correctly.  It's not really something to try out... Do some good research on the topic. 

Univest Bank ultimately said they would do it but my property is too far out of their footprint area. 

Greenville Savings Bank said they do not do HELOC on rental investment properties.

Wells Fargo would do it pretty easy but they only lend 60% LTV on investment properties.

Ariel is right.  Without seeing the full and complete lease agreement, I'd bet you are prohibited by the property owner from subletting and you'd have to gain approval of the owner to add new tenants as, outlined in the lease.  When you're renting a property it's not designed to be a profit center for you as the tenant since that puts more unknown and unmanageable risk on the part of the owner.  The owner would want to approve of any other tenants.  You can't do things with the property that teh owner does not know about and approve of, in writing.   However, if you have their approved and it's signed in the lease that you're able to do those things, then by all means employ your strategies, knowing that now you mostly likely take on all the risk if some Airbnb renter doesn't pay or damages the property or gets injured on the property, etc...

Just make sure everyone is all clear and in agreement, in writing, before you get into any creative situations.

Thanks Jared. I'll check them out.

The property is in New Castle, PA.

I bought the property all cash about 7 months ago so I have no loans or liens.  The property is tenant-occupied and cash-flowing well so the heloc loan payment would be covered with the rent payments, but I just need the larger sum of cash now to use towards another ongoing project.

Graham -- 

There are tons of ways to structure these transactions, every state is a bit different. Just a few points for you to consider to hopefully get you on the right track:

* Option to Buy and Lease are separate documents with separate purposes.

* Tenants pay a NON-Refundable Option Consideration Fee in order to receive that option. The fee locks in their rental rate, purchase price, and reserves the property for them to have the option to buy so you cant sell it to someone else during the option term. If they don't buy, they lose the option fee funds. If they purchase, the option fee amount paid will be reduced from the purchase price to lower the purchase price on the sales agreement, after they exercise their option to purchase.

* The property is not sold and title is not transferred until the tenant exercises the option to buy. Therefore the tenant remains solely a tenant, just renting the property, until they choose to purchase. The tenant has no equitable interest or rights in the property until they close escrow/title.

* Set a Fair and Realistic purchase price that will be fixed for the option period. The price generally will be current fair market retail value or if you can reasonably account for appreciation during your option term and set the price accordingly.

* Option term should be no more than 5 yrs max. Ideally you offer 2 or 3 yrs depending on your circumstances with an option to have a one time 6 or 12 month extension. Rent rates and purchase price can be adjusted if the option is renewed/extended at that time. The 2-3 yr time frame is key for several reasons, mostly for seller/owner profits and tax purposes.

* Do Not offer "Rent Credits." Only charge reasonable fair market value rents (maybe higher end of the rent range). Do Not offer anything as a "deposit," "down payment," or "credit," prior to opening escrow. This lends to going down the path of possibly providing the tenants with financing, installment contract, disguised sales, delayed closing transaction, equitable interest, refunds, lawsuits, loss of profits... etc. There are easy ways to accomplish the same things and provide the tenants with an incentive, without creating the liabilities. 

* And of course one of the biggest benefits for the owner/investor is that when doing the lease option, the tenant will be responsible for all utilities and maintenance. You can also structure in some additional terms about who and how significant repairs are handled, but that will also tend to tip in the owner/investors favor. 

* When selling a property on a lease option, realtor commissions are not necessary.

* Check your state laws and talk to a REI attorney and escrow/title company about facilitating the transaction and all the needed paperwork for your area. Conduct additional research on the strategy as well.

* Always be Honest, Reasonable, and Fair. Act in good faith. The lease option, especially on properties you own, can be a really good, hassle-free(ish), REI strategy that creates win-win solutions. There's more to it when you get into the details, so look into it a bit more. Good Luck out there.

Lots of benefits and certainly worth checking out more if you're interested in pursuing that strategy.