Would you rehab a house on a Lease Option??

Question

Let's say you purchased a home that needed to be rehabbed. ARV 100k, Repairs needed 20k and you was able to get the option for 40k with monthly payments of $500 with 100% going towards the purchase price.

I'm just thinking out loud on this one.

J Scott · Answer

Sounds like a reasonable deal, assuming the following:

- The option period is long enough that you're *very* confident you can get it sold or financed;

- You have a plan in place to get it financed (so you can buy it), should you not be able to sell it;

- You are 100% sure of your numbers (there's a little room for error, but if this is your first flip, you don't want to be off by much);

- You are sure you can come up with the money to finish the repairs -- you'd hate to get 75% complete, not be able to finish, and then not be able to sell.

All that said, given the terms your throwing out, why don't you get the seller to offer seller financing under similar terms -- this way you have the deed in your name and don't have to worry about the seller trying to kick you out of the deal after the repairs are made.

Gilbert Dominguez · Answer

First off Mike you have not stated what is the sales price you are locking in with a lease option because $40K for the option plus $20K for the repairs plus your $500.00/mo adds up to more than $60K. You are obviously putting in more than twice as much as the contractor but you propose a 50/50 split and we do not know 50% of what yet. You have also not made it clear if the present owner really owns the house outright or if there are any mortgages on the house.

The owner is not going to get paid anyway until you fully exercise your option so why not simply do a joint venture between the 3 of you?

The owner puts up the house, you put up money and the contractor puts up money plus the labor and you all 3 get on the deed. You include to exercise an exit strategy of selling the house at or during a set date. You can think that between you and the contractor can simply buy the house from the current owner so that ownership of the house is vested in a partnership of only you and the contractor.

Something just is not making sense with the manner in which you are presenting your case. If you are putting in $40K from the get go then I would definitely want the deed in my name if not the title. I also would propose something more equitable if you are putting in more than twice as much as the contractor more like 66/34 in your favor.

Todd Toback · Answer

Mike,

You can certainly rehab on a lease option! There is a  major catch though.  The lease option should be so well protected it is really a disguised “subject to” deal.

Many sellers would be completely freaked out about doing a “subject to”.  Their brother-in-law, lawyer, dog, or undeducated CPA told them it was illegal.  Let’s be real for a moment, I love getting the deed to a property when I make money, but the seller can often be putting their equity and credit on the line.  So if the seller won’t do a “subject to”.  What to do?

A lease option on steroids.  I would do the following:

First, build rapor with the seller.  Get him talking about all the pain on the property and get him/her/they all angry about this “real estate problem”.  Build rapor and trust here.

Then start talking about all the ways that they win and are protected. i.e- they get to keep the deed, you are fronting the rehab money, your are such a honorable guy, yada, yada, yada.

Then let them know that you need to be protected and for you to solve there problem and invest five figures, the following needs to happen.:

1. Record a memorandum of option
2.  Have them sign a second mortgage/trust deed in the amount of the purchase price of the home with you as the beneficiary
3.  Have the seller sign all the necessary documents, including the deed, needed to close the deal.

If I had all three of those,  and the deal was good enough, I would do the deal.  Have penalties drawn up in your option agreement if you seller won’t close when it is time.

Memorandums are great, but when you are dealing with 5-figure investments, it’s time to up your game. GAME ON! I can’t wait to hear about your check.

-Todd

Brian Gibbons · Answer

It costs 10 percent to sell a house, commissions, closing costs, wiggle room, etc.

I agree w @Steve Vaughan

A Joint venture w the seller on a rehab should be

1. give the seller a note and mortgage in exchange for a deed

2. use private money for rehab

3. use a joint venture agreement with the seller

4. NEVER do a lease option w repairs on a property you do not have title to.

5. Pay off the note and mortgage to the seller and the private lender when the houses sells.

6. Set the sales price before you do the deal, based on ARV comps.  I set the list sale price at 95% of comps to get it sold.

7. You should also make a fixed profit of at least 5% of ARV or $10K which ever is greater.  You are basically solving a problem for the seller and making a profit.

Steve Vaughan · Answer

$565k invested into a $600k ARV?  Sales commissions alone will kill any chance of profit.  Doesn't matter how much they owe if there's nothing to profit from, right @Joe Yobaccio?

Mike Nelson · Answer

Thank for all of you guys input, these aren't the actual numbers for the deal but I'm just trying to get an idea on how to go about this the right way. I'm working with a contractor that will do all the repairs at no cost to me (how would you structure this JV?).

Account Closed · Answer

In addition to the Memorandum of Option, I would negotiate to attach a lien against the property for the value of the rendered repairs. Some judges don't understand option contracts, but most of them understand liens. Escrow a release for the lien and for the memorandum with a neutral 3rd party who will record the releases upon conclusion of the option contract.

Also consider getting from a title company a "title insurance policy with option endorsement" to protect your right to exercise the option.

A $40K option price that is paid $500 per month as additional option consideration is 0% seller financing. Your "all in" is $60K=$40K+$20K, which is well within the 65% ARV rule of thumb. In this situation, you probably would not even need the "lease agreement" portion. Just include full possessory rights and repair rights in the option contract (and the lien for the repair costs).

Benjamin Cowles · Answer

I'm lost here. How do you figure seller nets $200 after $540 sales price minus 1st TD of $200k?  Wouldn't he net $340k?

Joe Yobaccio · Answer

I'm hoping Todd or others who commented here a few years ago may clarify some of the previous comment.  It was hard for me to follow and maybe you can use this example to clarity.   House-$600,000 ARV.  Seller asking $540,000.   Investor to bring in rehab of $25,000. a 1st TD is $200,000 remainingl   If seller sells as is, his net is $225,000.  If I want to bring in the $25,000 and rehab and profit, do I write up a lease option that makes me responsible for payments and if seller signs a second TD, as the above example by Todd says, then that doesn't make sense to me.   I do want title and I want him to make his net, but how is him signing a 2nd TD applied?

Would you rehab a house on a Lease Option??

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