Lease Option? Land Contract? Or Walk Away?

2 Replies

I have an interesting deal that I'm looking at and need some guidance and advice. Here's the story:

A tenant had a 3-year lease option to purchase his residence but was unable to exercise his option due to not having good enough credit to get a mortgage. He is looking for someone (me in this instance) to step in, offer the seller a $25k down payment to extend the option for 12 months, so that we can turn around and sell the property next spring. It looks like the seller is willing to do this. He's offering me a 50/50 split of the profit when we sell. My share would probably be around $35-40k.

I certainly haven't ever done a deal like this, so what kind of due diligence do I need to complete? What questions should I ask?

Also, any ideas on the best way to structure a deal like this to best protect my investment? I don't have all the specifics yet, but I think the tenant is going to want it to be a straight lease-option between me and the seller, but I have also been given advice that a land contract may be a good way to go. What are your thoughts?

@Kyler Pace What will the property be worth in a year vs what is the strike price on the option? What if the current tenant cant' exercise the option in a year, what happens to you?  It seem to me $25K to get into what sounds like a sketchy deal is a pretty big risk.

There are a lot of variables and not enough information to evaluate. When lease option or land contact comes up red flags go off for me. 

Thanks, @Ned Carey . The property is currently worth roughly $630k, and the option price would be $503k. We would still get the original contract price the tenant had from 3 years ago. As far as what I do if they can't exercise the option, that's exactly what I'm trying to figure out. How do I best protect my position? One thing that could help is putting in a tiered split of the profits. So, if we exercise the option and get it sold by the end of next May, 50/50 split, June 55/45, July 60/40, etc. That should incentivize him to make it happen. And, in worst case scenario, I take out a hard money loan (or find an investor), exercise the option, then sell it. Yes, it is definitely risky. I'm also going to talk to an attorney to get advice.