Newbie Lease Option Questions

Jordan Capps · 2018-11-21T17:05:28-08:00

So I've really been wanting to do a few lease Option deals but I still have lots of questions. I was cold calling for some properties I found while driving for $ and came across a landlord. He has 20 properties but only wants to sell one. Said its just been remodeled and he wants 119k. I told him I could pay that but would need to do a lease option and briefly explained what it was but didn't explain it as well as I could have. Basically said it would be like I was renting it but then I would sub lease it out to another tenant/buyer. He said he has never heard of it but still sounded interested. I told him I would drive by and look at it and then follow up. Before I follow up though I want to have my numbers down.. so would I myself give him a down payment? Or would I give him a down payment From the down payment I get from my tenant/buyer? What all payments do I need from my tenant/buyer? What's a good down payment for a 119k house? Also lets say I'm paying him 900/month and that's the average rent in that area, would a tenant be willing to pay me $1200 since they are Renting to own? Also should I start looking for my tenant/buyer directly after I sign papers with the seller? Should I take paperwork to title company before I find a buyer or after? Really if somebody could give me an example of a lease Option with the numbers on a property from a FSBO that you have done yourself that would probably answer all of my questions... any info is greatly appreciated!

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

7y

@Jordan Capps if you don't understand the process well enough to explain it clearly then you probably don't understand it well enough to execute. I think you're headed towards disaster by attempting something you don't comprehend.

Lease option explained

What you're describing sounds more like a Master Lease, wherein you lease the property and then sub-lease it to another tenant.

Master lease explained

You could do a combination of the two wherein you lease the property, sub-lease it to someone else, and then eventually purchase it. However, what would happen if your tenant trashes the property, stops paying rent, or causes other problems?

I recommend some more education before attempting to juggle something this complex.

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Jordan Capps

OP

Member since 2018 · 9 posts · 0 votes

7y

Well I believe trial and error is the best way to learn, from what I've heard from others it's pretty simple after you've done it a few times. I would market it as a rent to own and collect 10k-20k as a nonrefundable down payment from the tenant/buyer and keep that in escrow in case of damages or vacancy. I would put in the contract that they are responsible for any repairs over $500. They would be more likely to take better care of the property if they plan on owning it though. I do get the concept I just didnt quite know what exact payments would be on my end or my tenant/buyers end. I did watch some good videos on YouTube though after I posted this that gave me a better understanding.

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Patti RobertsonBusiness Member

Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes

7y

@Jordan Capps - The numbers you shared are really tight. Have you considered that the seller will have to continue to pay the taxes and insurance and you will have to reimburse him? Do you have enough cash to pay your rent payment to the seller while you search for a tenant, then continue to pay it if your tenant does not pay? If the roof or HVAC fails, so you have enough cash reserves to be able to make the repairs? IMO you need a much bigger spread to be able to make these numbers work.

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Jordan Capps

OP

Member since 2018 · 9 posts · 0 votes

7y

@Patti Robertson I've heard of several different ways to approach lease options. One source I've found has said that Its best to only target nice homes with little to no repairs needed. Note in the contract that I'll cover all repairs, pay taxes, and insurance. Try not to pay anything upfront to the seller and if they do require something pay first months rent. Then when I do find a tenant/buyer I would have them put down 10k-15k EMD and have them cover any repairs over $500. Then rather than keeping the EMD for myself I would save it for repairs or possible vacancy and also use that to pay taxes/insurance..

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Jordan Capps

OP

Member since 2018 · 9 posts · 0 votes

7y

@Patti Robertson have you done any lease options that way possibly?

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Steven Chandler

Investor · Mcdonough, GA · Member since 2017 · 8 posts · 4 votes

7y

You ask if a renter would pay $1200 per month vs the $900 area average because they are renting to own. I would argue probably not. The renter would be entering a lease to own contract with you and would be handing over part of a down payment. That partial down payment number would be what you demand for the lease or negotiated, but normally a few thousand (if they can pay 10k-15k on a 119k house they would probably be doing a loan and buying outright vs rent to own). They would also be on the hook for repairs over $500, so what's to entice them to pay more per month for rent exactly? I don't think you could realistically plan for tenants to pay that higher number, and that puts your strategy here in jeopardy.

There's a few other things in your strategy I would urge caution on. It looks to me to be a mix of using a lease option and wholesaling. I think you could be on the hook if things were to go south with a lease to own tenant. I'm all for jumping in, but be careful.

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Jordan Capps

OP

Member since 2018 · 9 posts · 0 votes

7y

@Steven Chandler well I was thinking that if the tenants were actually planning to buy the house they might be willing to pay more per month. I've also heard to market the houses to people with bad credit, because bad credit doesn't always mean they don't get paid well. So while they are renting it that can give them time to build their credit and eventually get a loan to buy the house at the end of the term.

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Patti RobertsonBusiness Member

Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes

7y

@Jordan Capps - I sell with lease options, but don’t buy. Having the possibility of the seller get a lien or judgment attached to the house, not to mention entering foreclosure, would be way to risky for me.

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Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

7y

@Jordan Capps some people call what you are trying to do a sandwich lease option where you are leasing out the property with an option to buy and then you lease out the property for more with an option for them to buy the property from you. I have done about 20 lease options in the past year and a half and none of them have been sandwich lease options. A few words of caution:

1. Your documents need to be done correctly and if they are not done correctly you run the risk of violating the Dodd Frank act which may result in very large fines due to creating a mortgage without a license.

2. The down payment should not be a down payment but it should be an option fee that does not go towards the end price of the property. Again, if it does then you are looking at fees from Dodd Frank violations.

3. The option fee that we would charge for a house at that price point would probably be around $3900.

4. You could probably charge about $100 over market rents for someone who really wants to live in the home but who can’t get a loan at the moment.

5. If you put that the tenant will fix anything over $500, what happens when they say that the AC or heater goes out and that you are legally required to fix it by the tenant land lord laws. Or what if there is a leak in the roof and they don’t have the money to fix it, will you wait until they have the money to fix it and allow for more water damage to ruin more things and cost more money? We have the tenant pay for the small things and we mostly take care of the major things with the house. This makes the phone calls a lot less.

So considering the points above, I agree with what was said by previos posters that it may be too risky for too little reward. Unless you have a mentor holding your hand along the way, helping you with your processes, I wouldn’t encourage you to go this route for the return that it looks like you stand to make.

Importantly, have you run the numbers? Do you know how much profit you stand to make? How long of a lease term would you make the lease for? How do you plan to market the property? How do you plan to screen the tenant buyer? Here are just a few questions that you should have the answers to before doing the lease option.

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