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Should I lease with buy option or sell SubTo
Been watching BP podcasts for a while and learned a whole lot. Joined the community a few months ago and today signed up for one of the bootcamps and got the Pro membership - whoohoo! :)
I have a situation that I hope I can get some advice on. I have a 2b/2b condo I purchased in Feb 0f 2022 in NE Philly for $218K. I'm in the process to sign a a lease with a new tenant and was asked about lease with option to buy. While thinking through that I thought why not do a hybrid of subto and owner finance (my equity is about $70K). I liked the idea of selling as I'm not crazy having to deal with HOA. I initially went for a condo as a safer bet, being this was my first investment, but I realized that comes with strings attached so to say.
I'm about half way through Pace Morby's book Wealth without Cash and really like the creative finance approach, but still totally lost about how to approach it as I haven't done any of that.
Thanks in advance for any help!
Dmitry
Hi Dmitry,
It is all based on what your exit strategy is on this deal. If doing a lease option, keep in mind you need to charge a premium at the beginning of the term AND the monthly payment needs to be a little higher than the average. The lease option is a maybe disposition strategy vs doing a hybrid ( which IS a disposition strategy unless buyer defaults on payments) because you don't know if the tenant will force the option and he/she is not obligated to do so. I think is better to do the lease option rather than the hybrid route because the benefit in the hybrid scenario is more to the buyer than to you. If the tenant decides to do the buy option lets say in year 2 or 3, that is time that you will have paid down the mortgage and your delta is higher.
Hope this helps and congrats on joining!
John.
Quote from @John Garcia:Hi John, thank you very much for your input. Yes, I understand that the buy option will have extra payment at the beginning and a higher monthly payments and also being an option, not guaranteed a sale. It seemed that the tenants might have an issue with extra payments at the beginning, which is why I thought if I do a subto, I can forgo cash payment and just structure with mortgage payments and additional monthly payments for my equity.
Hi Dmitry,
It is all based on what your exit strategy is on this deal. If doing a lease option, keep in mind you need to charge a premium at the beginning of the term AND the monthly payment needs to be a little higher than the average. The lease option is a maybe disposition strategy vs doing a hybrid ( which IS a disposition strategy unless buyer defaults on payments) because you don't know if the tenant will force the option and he/she is not obligated to do so. I think is better to do the lease option rather than the hybrid route because the benefit in the hybrid scenario is more to the buyer than to you. If the tenant decides to do the buy option lets say in year 2 or 3, that is time that you will have paid down the mortgage and your delta is higher.
Hope this helps and congrats on joining!
John.
If I decide on one or the other, are there any leases w/buy option here I can use? Who would I need to structure my subto, would it be a lawyer or escrow/title company?
#4 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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- Austin, TX
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#4 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- Austin, TX
Subject to is typically not the best option for sellers, unless they can not keep up with their payments. If your loan is desirable, this is a good option for a buyer.
What is the plus side for you other than the potential of not paying 6% to a buyer/seller agent when you sell?
To me it makes sense if you feel like the market is going to be going down (Im not sure where you are in NE Philly but id bet that isnt the case). You are also betting that inflation isnt going to continue which will again erode away your sell price now vs X years from now.
@Dmitry Zbarsky. If you own a property and you want to sell it, then the 3 options are to sell outright, sell with owner financing (or land contract) or sell with lease option. It depends on the state you're selling the property in. So for example, if you're selling a property in a long foreclosure state, it might be better to do a lease option and if you're selling your property in a deed of trust state, with a fast foreclosure process then I would sell with owner financing. With the seller financing you no longer have to pay the taxes, insurance HOA, ETC however, you do not have any tax write offs like you do with the lease option. Also your relinquishing title, so you have less control when selling with owner finance, so make sure you get a good size down payment.
Quote from @Eric Greenberg:
What is the plus side for you other than the potential of not paying 6% to a buyer/seller agent when you sell?
To me it makes sense if you feel like the market is going to be going down (Im not sure where you are in NE Philly but id bet that isnt the case). You are also betting that inflation isnt going to continue which will again erode away your sell price now vs X years from now.
Hi Eric, you asking why sell w/seller finance vs conventional sale via RE?
The only reason to sell this condo was to re-invest the money in a different type of property. No, I don't think the market will do down, at least not much and not for long and I don't see inflation recovering very soon either.
Quote from @Randy Rodenhouse:
@Dmitry Zbarsky. If you own a property and you want to sell it, then the 3 options are to sell outright, sell with owner financing (or land contract) or sell with lease option. It depends on the state you're selling the property in. So for example, if you're selling a property in a long foreclosure state, it might be better to do a lease option and if you're selling your property in a deed of trust state, with a fast foreclosure process then I would sell with owner financing. With the seller financing you no longer have to pay the taxes, insurance HOA, ETC however, you do not have any tax write offs like you do with the lease option. Also your relinquishing title, so you have less control when selling with owner finance, so make sure you get a good size down payment.
Hi Randy, thanks for your reply. To be honest I'm still rereading your reply to understand :) I'm a fairly new in the RE investing. I'll send you a DM if you don't mind to clarify a few things. Thanks!
Quote from @Dmitry Zbarsky:
Hi Eric, you asking why sell w/seller finance vs conventional sale via RE?
The only reason to sell this condo was to re-invest the money in a different type of property. No, I don't think the market will do down, at least not much and not for long and I don't see inflation recovering very soon either.
Yes, why not just sell on the open market?
I only owned it for a bit longer than a year so not much equity built up. Thinking this whole thing through, makes me re-thing this situation and probably just rent it out.
Thank you all for your inputs!
Quote from @Eric Greenberg:
Quote from @Dmitry Zbarsky:
Hi Eric, you asking why sell w/seller finance vs conventional sale via RE?
The only reason to sell this condo was to re-invest the money in a different type of property. No, I don't think the market will do down, at least not much and not for long and I don't see inflation recovering very soon either.Yes, why not just sell on the open market?
I agree i think you will get the most on the open market. NE philly market is very hot right now and a good condo sells fast. Im not crazy about condos either, but Im sure you locked in a great rate, maybe selling is not the best option
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Thanks again to everyone for your inputs!
