How to determine future purchase price of a home when doing a lease option sandwich

[Charlie Gonzalez]

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

[Mike Hern]

Quote from @Charlie Gonzalez:

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

You can get an idea of how I do it

I favor finding properties "Off Market" doing “Subject To” and selling on “Lease Option” for great cash flow and nice profits. Such as:

Buy using Subject To and sell on Lease Option which I explain at https://www.biggerpockets.com/forums/311/topics/1141313-subject-to-why-you-need-money-to-buy-using-subject-to-subto-safely-legally

And here are more specifics

https://www.biggerpockets.com/forums/61/topics/1142457-quest...

[Charlie Gonzalez]

Thanks so much Mike! Great info. In your opinion, what is the best way of determining the future purchase price in a lease option sandwich scenario? How would I know if I am offering too low or too high of a price?

[Adam Zach]

Quote from @Charlie Gonzalez:

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

 Could be based on a future appraisal price, get an appraisal. The big companies like Home Partners of America do a 9% increase year 1 followed by 5% increases each year after that (note they are in top 40 metro markets). 

[Charlie Gonzalez]

Quote from @Adam Zach:

Quote from @Charlie Gonzalez:

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

 Could be based on a future appraisal price, get an appraisal. The big companies like Home Partners of America do a 9% increase year 1 followed by 5% increases each year after that (note they are in top 40 metro markets). 

 Thanks Adam! Much appreciated. What websites, aside from BP, do you like to reference when finding the hottest metro markets in the U.S?

[Adam Zach]

Quote from @Charlie Gonzalez:

Quote from @Adam Zach:

Quote from @Charlie Gonzalez:

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

 Could be based on a future appraisal price, get an appraisal. The big companies like Home Partners of America do a 9% increase year 1 followed by 5% increases each year after that (note they are in top 40 metro markets). 

 Thanks Adam! Much appreciated. What websites, aside from BP, do you like to reference when finding the hottest metro markets in the U.S?

 "hottest" I am not sure but HPOA is pretty big and seem to be buying in these spots. https://www.homepartners.com/how-it-works/communities

[Steve A.]

How can anyone determine the market price in the future.  You can't.  When setting up your sandwich the price is set at today's value.

[Randy Rodenhouse]

If you're talking about a true sandwich lease option than you're buying on lease option and then selling with lease option and you make the spread in the middle wrt the rents and the price. Obviously you want to buy it at a lower price and sell it at a higher price.  When I buying on lease option typically I'm looking to buy at 90% or less of the current market value.  Then when I sell the property on lease option I'm typically getting 5 to 10% higher than the current market value since I'm offering future ownership to someone that wants to buy a house but does not have the ability to do so now due to credit challenges and the like.  It's all about finding the right person to buy from and right person to sell to.

[Mike Hern]

Quote from @Steve A.:

How can anyone determine the market price in the future.  You can't.  When setting up your sandwich the price is set at today's value.

What exactly is "todays' value"?

Is it set by Redfin?
Is it set by Zillow?
Is it set by a judge?
Is it set by underwriting?
Is it set by the lender?
Is it set by BPO?
Is it set by a real estate agent?
Is it set by appraisal?
Is it set by what a willing seller wil sell for and willing buyer will buy for? 

Just curious.

[Steve A.]

Yes to all those; and the true value is what someone is willing to pay.

[Mike Hern]

Quote from @Steve A.:

Yes to all those; and the true value is what someone is willing to pay.

So, if an appraisal comes in at $240,000 and the buyer is willing to do an Option based on an 10% increase to $264,000 does your comment "When setting up your sandwich the price is set at today's value" apply?

[Steve A.]

Quote from @Mike Hern:

Quote from @Steve A.:

Yes to all those; and the true value is what someone is willing to pay.

So, if an appraisal comes in at $240,000 and the buyer is willing to do an Option based on an 10% increase to $264,000 does your comment "When setting up your sandwich the price is set at today's value" apply?

Yes, I set the purchase price in the "option" at the top of today's market value. An appraisal is a lender requirement and isn't completed until the option is exercised, typically.  If the appraisal is lower, the Buyer can still purchase at the higher price.

[Mike Hern]

Quote from @Steve A.:

Quote from @Mike Hern:

Quote from @Steve A.:

Yes to all those; and the true value is what someone is willing to pay.

So, if an appraisal comes in at $240,000 and the buyer is willing to do an Option based on an 10% increase to $264,000 does your comment "When setting up your sandwich the price is set at today's value" apply?

Yes, I set the purchase price in the "option" at the top of today's market value. An appraisal is a lender requirement and isn't completed until the option is exercised, typically.  If the appraisal is lower, the Buyer can still purchase at the higher price.

I always bump the price up 10%. It's value is time and convenience for the Optionee.

[Brad S.]

First you decide on what you want out of the deal (i.e. specific return %, profit, etc). Then you create your LO with that in mind. It may read something like "contract price to be determined at time purchase option is exercised, by an appraisal performed by an independent licensed certified appraiser with local market competence. Contract price not to be below current agreed value of $$$$. In the event the appraised values is below the minimum value of $$$$, Seller has the right to cancel the purchase contract or Buyer and Seller may choose to negotiate a different contract price."  etc, etc, etc...

Basically, you decide how you want it to look at the time of the potential purchase and you form your contract based on that. And you may want to have an attorney assist with that. I am not an attorney and don't play one on TV and don't rely on what I say.

Ok, so after re-reading your post, here's a little more to the point.

*  In my experience, a typical lease option is done by negotiating a CURRENT purchase price with the seller, based on today's value (not to be confused with AT today's value). So, you may negotiate a $90k purchase price for a $100k property. And you should learn how to determine your own current values. That's where the skill in RE investing comes in. You can get a current appraisal if you want, but that costs money and may not be as accurate as you want. And if you determine it based on a future value, you defeat the purpose of finding a deal today and may find it challenging dealing with a seller whose circumstances have changed, especially when their property may have doubled in value as market conditions have changed (like the past few years). 

The short version scenario is generally this: You find a motivated seller who wants cash flow or have their monthly obligations covered, you negotiate an option to purchase the house for $90k (current value is $100k), to be exercised within 2 years, and also negotiate leasing the house for $1k/mth until then. Then you find a tenant/buyer (t/b) to agree to lease the house for $1,300/mth taking care of all the maintenance, etc. and you do a separate option for them to purchase the house at an agreed price (see 1st paragraph above). Then the house appreciates to $120k and you qualify your T/B to purchase the house, and exercise the option to purchase the house at $90k based on closing the sale to the t/b at $120k. That gives you a $300/mth spread until you get a $30k gross profit at the time of sale.

If this doesn't sound familiar to you, you need more education on L/O's

[Daniel Beck]

I just started learning about lease-to-own recently, but what I've seen so far is that the future value of a property should be determined by an appraisal.

[Mike Hern]

Quote from @Daniel Beck:

I just started learning about lease-to-own recently, but what I've seen so far is that the future value of a property should be determined by an appraisal.

Why?

[Daniel Beck]

My guess is because an appraisal is an objective measure of the property value as it is done by a third party expert (instead of the value being determined by the seller or renter, which has obvious conflicts of interest).

[Mike Hern]

Quote from @Daniel Beck:

My guess is because an appraisal is an objective measure of the property value as it is done by a third party expert (instead of the value being determined by the seller or renter, which has obvious conflicts of interest).

I'm still not sure how that answers the question of "future value".

[Brad S.]

Quote from @Daniel Beck:

My guess is because an appraisal is an objective measure of the property value as it is done by a third party expert (instead of the value being determined by the seller or renter, which has obvious conflicts of interest).

************************************

@Daniel Beck  There's no conflict of interest between a seller and a tenant/buyer. Both of their interests are inline with their own obligations/responsibilities - both are focusing on negotiating a deal advantageous to themselves.  An example of a conflict of interest would be with a Realtor negotiating to buy a property directly from their client, since the Realtor has a fiduciary responsibility to their client, so their interest in getting a good "deal" on the property would conflict with the fiduciary duty of putting their client's interests ahead of their own.

I get what you are trying to say, but I think you are getting tripped up a little. As a seller, you would want to negotiate a "future property value" which fits you profit objectives for that specific deal. You wouldn't want to contractually commit to selling it based on what an appraiser tells you it is worth, at a future date, or you could setting yourself up for a loss - literally, having to PAY the tenant/buyer to buy the house!  Example: What if I picked up a lease/option deal in 2006 for $400k (my purchase or agreed upon purchase price to the seller) and watched it fall to a value around $200k, around 4 years later (2010). If I had it as a lease option, in which, I contractually agreed to sell it to my tenant/buyer 4 years later for the appraised value then (in 2010), I would literally, be obligated to sell it to them for $200k and possibly be liable for damages ($200k) if I didn't! That doesn't sound like a risk I would want to take!

You, as the seller, are in control of what you want out of the deal. So, you decide how you want it to go. Now, you can say "the tenant/buyer agrees to purchase the house within the next 4 years at the appraised value, at that future time, NOT TO BE BELOW $450K, etc, blah, blah, blah. But, I would never agree to anything unknown without a safety net. Read my previous post for additional info.

If your L/O training isn't pointing things like that out, then search for better training.