Found potential deal. Need help analyzing possibilities.

5 Replies

I am trying to figure out if a property is worth buying. I found a home sitting on an acre lot outside los angeles. The land has several structures on it that I think need to be razed. There is a barn that I think should be converted to a rental. The home is a nice 3 family. The initial asking price was 1.4 million, and the owners are now asking 900K. They have said they are willing to do a lease option for $2500/month because they don't want to take capital gains, and they would potentially like to get a fixed income from it.

I think I might be able them down to $800k. I'm pretty sure I could get $2000-$2500/month for the home and a converted barn might fetch another $1500. First - can you rent out a property that you have gotten a lease option on?

I think renting both buildings might be one option. The other idea is to split the lot into 2. Sell the lot with the house. Raze the barn and build a new home in its place. Then sell the new home. Are there problems that come with something like this?

Without spliting the lot, I think If I improve the property with $50k, I'm sure I would be able to get over $1million, but I wonder how best to finance it. Do I go with the lease option, do the repairs, purchase the property early, then assign it to a new buyer? OR Should I just find some private lender, buy it, fix, then flip?

I'd like to hear any of your ideas on how to make something like this work. Thank you.

I have no perspective on pricing in CA, but from everything else in your post, this is sounding like a good deal to go after. One of the biggest hurdles is getting a seller to understand and consider creative financing. You also mentioned a very key item - which was their wishes to defer capital gains. This will give you some leverage.

First, I want to answer your question about renting it out. YES, you can rent out a place that you have a lease/option on, just make sure that your lease/option agreement with the sellers doesn't forbid subletting. When you sign a lease/option agreement, you gain the rights to occupy and enjoy a property. You will then transfer those rights to someone else by having them sign a lease with you.

I wouldn't suggest that you go this way unless it is the only thing that the sellers will do. The reason is that you are put into a weak position in the deal and you will not be able to do anything to the property without their permission. Don't get me wrong, you can make it work, but if it is possible, you should go for a land contract (or whatever "payment for deed" is called in California). This type of deal is probably a win-win for you and sellers as well.

For you, you get all rights of ownership on the property. That gives you much more control and should give you the right to sell the property if you find a buyer and you want to flip it (unless that is not allowed in CA or if is not allowed in the contract that you sign with the sellers).

For the sellers it softens the capital gains blow. They lock in the sale price now (instead of the future) but they only pay capital gains taxes on the recovered principal amount during that tax year. Since you are making relatively small payments to them that include only a small amount of principal and mostly interest, they will not have to pay very much in taxes on an annual basis. If you structure the land contract for a period of time that is longer than their life expectancy, then the remaining capital gains will be wiped out upon their death and the contract transfers to the heirs.

That's where having a good real estate financing education and a penchant for sales comes in. Selling homeowners on creative financing requires that you have creative ideas and an extremly broad understanding of financing options. That's where you need to start.

Yes, I have one very specific technique that works very well and Josh hit it exactly. I took the time to learn about the different creative techniques and when I am talking to a seller I educate them on how I can purchase their home using these techniques. If the situation is right for one of these techniques, I simply tell the seller that I can purchase their home and tell them how I can do it.

I truly feel that you do not have to "sell" these techniques to the homeowners, you just need to educate. If you find that you are having to "sell" the ideas, then it probably isn't going to work. If you have a truly motivated seller, then after you educate them on how it will work, they come to the conclusion that it is exactly what they are looking for.

TIP: you aren't going to be able to do these techniques very well if you are only looking at properties that are listed with an agent. The agent will usually want to know where their commission is coming from in all of this and that usually screws up the numbers. If they have a very difficult property, it is possible to work out something that involves the agent as well, but they are going to have to be agreeable from the beginning. In order to successfully do creative deals on a regular basis you are going to have to get sellers to call you directly from your marketing.

Creative means seem to work best when the seller has a problem, in this case avoiding capital gains taxes. They are faced with them if they sell outright, the method above helps them get by that hurdle. What's there to sell in this case, if the deal is presented so all parties understand the details fully they should jump on this option. It always seems to me that the biggest penchant in creative financing is always a problem that the financing solves.

As was said above buying retail through an agent will always cause hassles. Also, in a market that is hot with cash buyers lined up around the block to buy it on the spot with no funky terms it just won't work and why should it since it may be more work for the seller?

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