Lease Purchase Opinion?

Question

My wife and I are new to investing in buy-and-hold properties and I wanted to ask the opinions of those more seasoned than we are.  I have connected with a wholesaler who finds motivated sellers, gets the property under contract and then connects with an investor offering a Lease/Purchase assignment for a fee of $2,500 + $1,000 closing costs ($3,500 to wholesaler on assignment).

The property is a 3/2 with FMV of $110,000 and rent of $1,000/month. The lease purchase is $100,000 with $5,000 down = $95,000 amortized over 25 years and a 3 year balloon.  Analysis shows perhaps $300/month cash-flow.

Does anyone have any opinions if this is a good investment?

Darren Smith · Answer

Alan. I've tried several options of using lots of different estimating websites (Zillow, trulia, abcrealestate, realquest, tax value, etc). Bottom line is nothing compared to looking at actual MLS comps. I've been off up to 20% of ARV (after repair value) compared to MLS. Even if my estimates from the multiple websites are accurate, it doesn't matter to buyers if there are no comps in the MLS to validate the value. The main thing the websites are missing is if there is anything the seller paid at closing that wouldn't show up in the sale price.

As far as getting MLS access, there are sites I've heard of, but not having used any I'm not going to mention them. Your best option is to make friends with or see how you can assist a realtor, and eventually see if you can become their "assistant" to share their access. That's how my partner did it.

As far as getting MLS access, there are sites I've heard of, but not having used any I'm not going to mention them.  Your best option is to make friends with or see how you can assist a realtor, and eventually see if you can become their "assistant" to share their access.  That's how my partner did it.

Brian Gibbons · Answer

Hi Alan,

I would ask for verification of:

Market Rent (property manager)

Market Value (comps)

Is this local?  can you walk through?

I would rather see you buy on sub2 directly from the seller - owner, now you own it.  Pay the finder a fee.

Then rent it out or lease option to tenant buyer with no rent credits.

Cleaner.

Bill Gulley might want to say something.

Alan Day · Answer

again many thanks to all for the opinions and great advice!

Alan Day · Answer

great feedback, thank you all for the opinions and advice of verification and caution!  Closing was probably not the right term, it was explained as a cost for the attorney to produce the documents for signature.

As I'm learning, TMV is something that seems to require an access to a realtors view of the MLS for prior sales.  I had thought that sites such as Zillow would offer a comprehensive view of prior sales but my understanding now is that is not the case.  Are there other tools (or some way to access to the MLS) that I can use that would help to determine the most accurate TMV?  Is Rent-O-Meter the best way to determine rentals in the area?

Bill Gulley · Answer

I'm not sure what the OP is asking, a guy does L/Os, is this your property, you buying with the L/O. Another thing, this L/O guy is charging a grand for what closing, there isn't a closing. :)

Rodney Getsy · Answer

Caution.  Verify everything and check on the wholesaler.  I fell for a local wholesaler (I'll stop there) and have been suffering the bad results for years.  Get your own FMV.  Check out the local rents in that area.  Who is going to be the property manager?

On paper sounds ok, but independently verify the numbers.

Best of luck!

Alan Day · Answer

thank you for the opinions and suggestions!

Alan

Darren Smith · Answer

I agree with Wayne that this sounds more like a purchase contract with the seller holding a mortgage than a lease option.  That said, it may still be a good deal since it just meets the 1% criteria (monthly mortgage is 1% of purchase price), but I would definitely want all the rents and comps verified.  If the property is currently rented at $1,000 with good renters, then you're walking into a more solid deal.  However if you'll have to find renters and pay all the expenses until that happens, you may be out thousands of dollars until you get your first rental check.

Most importantly, being your first rental investment, make sure it's somewhere close to where you live or work where you can easily drive there.  I speak from experience on that and it cost me a bundle.

Wayne Brooks · Answer

There is generally no financing offered in a lease purchase.  You would lease for up to a certain amount of time, say 24 months, then you would have to go acquire your own financing to purchase.  Some owners offer financing for a straight up sale, but not with a lease purchase.

Lease Purchase Opinion?

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