Exit Strategy for Lease Option Buyer

[Keith W.]

This is a 30 thousand feet overview of the process. Correct me if I"m wrong, then a couple questions at the end.  

1. Motivated Seller has a property in pre-foreclosure
2. We set up a Subject 2 agreement with the seller
3. We pay the arrears to make loan current and pay mortgage going forward
4. Have a Lease Option Tenant with an annual lease that auto-renews (Option expires after 3 years)
5. This rent covers the mortgage plus provides cashflow
6. After 3 year term, Tenant purchases the property at a predetermined price minus downpayment (maybe a portion of rent goes to the principal?)

Questions: 

What would be a fair consideration to pay seller to walk away with? Perhaps a percentage would work here?

How much should we expect the tenant/buyer to pay for the non-refundable "option" payment?

When the tenant is ready to purchase, do they get their financing from a traditional bank? 

Does this mean they have to come up with another downpayment? 

[Steve Vaughan]

Originally posted by @Brian Gibbons:

@Keith W.

Sub2 then lease option is not always the best. The loan can be called by the bank. Not will be called but could be called.

So an all cash payoff within 6 months or so (fast) versus a long hold (slow 36 month plus) is strongly advisable.  I like rehab sub2 , fix and resell fast model better, less risk of loan being called.

Use a land trust.

If this is a MASS property, like 600K SFR FMV

Lease Option Sale Terms

• market rent monthly
• 3% from TBer $36K
• 1 year lease then a possible 1 year extension if the TBer performs, new lease and new option in 12 months.  It is called a rolling option.
• Strike price tied to new appraisal, buyer pays all closing costs and appraisal fees.
• Watch your language: NOT a down payment, option fee for the option to buy, nothing else.  No DOWN PAYMENT.  An option fee consideration for the option to buy.
• Yes they need to save up for the down payment ON TOP of the option fee.
• I would DISCOUNT the sales price by the amount of the option consideration, eg  sales price $564,000.

 Good to see you again, Brian!

I don't like sub2 with arrears  / pre-foreclosure.   House already under scrutiny, title searches, lender anxious.

I don't like Lease Options with work needed unless low consideration (<1%) paid and I assign to qualified contractor TB Optionee. 

Know equity skimming foreclosure rescue laws in your state. In WA you will get hammered, MA may be same.  Buy pre-foreclosure outright with title insurance only if at all, NOT sub2👍