lease options - do they work with someone who wants to do a 1031?

10 Replies

I have a lead off my current YL campaign who is a Realtor. She has a property she no longer lives close to and doesn't want to manage from afar - she'd rather sell it and do a 1031. The comps she gave me I am in agreement with after some computer searching, etc. I don't know the condition inside because it's tenant occupied, and until we talk further I'm not at the point of going to see it. She owns it free and clear, isn't open to carrying back the mortgage again because of wanting to do an exchange.

Any suggestions on how to approach this one when I call her back? I'd like to present her with some possible options. The standard 70% minus repairs offer, and I know very little about lease options (I'm doing my best in my spare time to learn about them here on BP) but I'm wondering if you can even use them if the seller wants to do an exchange? I was thinking that may be a way for her to get her income stream without the hassles of any of the property management details.

A secondary question off of this that maybe can also be addressed by those in the know are - why would a Realtor even reach out to a "we buy houses" type of investor in the first place when they could list their own property and keep 1/2 of the potential commission?

Thanks in advance for any replies.

Hi @Christina R. it looks to me like this seller is testing the water to see just what kind of offer you'll make for the property.

The lease option isn't what I would offer upfront since she is trying to do an exchange. She is up against a couple deadlines with the exchange to reinvest her proceeds from the sale of this property that requires reinvestment right away (I think it's 180 days).

You might suggest it as an alternative, but I think it will only be appealing to her at a "near retail price," which is bad for you. You might say something like, "if you have any difficulty selling, I would be interested if the property were available at $XX,000?" and if it doesn't sell, she might come back to you.

If she moved away, she no longer has a membership in the local realtors' association and can't list the property. She should still have contacts there, but she's human and will save paying the commission if she can make a deal investor to investor. That's probably why she reached out to you.

@Robert Leonard - thanks for replying. I don't know enough about lease options to feel like I can make it an educated egg in my basket at this point so I want to study up on that more here and with local people doing it successfully (like @Tyrus Shivers ) .

I like your verbiage above - will use it in the future. Thanks!

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@Christina R.

I agree with @Robert Leonard the time limits for the exchange would likely stop the seller from taking a lease option. More information is available here http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

Do you think you can sell it to a buy and hold investor? I think the next step is determining the condition of the property and perhaps wholesaling it. Also I would use 65% for here in Maryland. There are several investors in our group looking for rentals in county areas.

@Tyrus Shivers Shivers @Brian Gibbons - thanks for the above info and tips, and knowing that 65% is where our holders are at around here is great to know. (actually,to clarify, Tyrus - is that 65% THEN minus repairs - or 65% total discount for the buy-and-hold group here in our area?).

I had a response here typed up and lost it. Essentially I was saying that I'm not good at teasing out a price from sellers and up to this point have used the opportunity/excuse to put some time into what are probably not motivated sellers as a learning experience in (1) due diligence (2) phone skills (3) follow-up mentality (4) getting out of my comfort zone with the phone.

@Andraise Scott - the property is a 4 bed/2.5 bath/2 car garage TH in Anne Arundel area of Laurel. It's tenant occupied and less than 20 years old. I have not seen the inside. ARV is 300K. It's owned free and clear- she wants to do the 1031 and is not interested in a L/O or carryback of financing. The average rent - according to rentometer.com - $2070.00

Here's a question for the experienced - at what point do you go to the property?


Here's a question for the experienced - at what point do you go to the property?

I love buying on TERMS not cash.

So I look for a great houses - 4B 2B, great schools, great existing financing or free and clear.

Sub2, Wraps, Note and Mortg or DOT, Lease Option and Assign, lease and Rofr, etc.

Once I own it or control it with a lease, then sell it, rent it or rent to own it.

To answer your question, I only look for motivate sellers of pretty 4B houses in good schools.

I and go see them and present my solution(s).

@Christina R.

65% then minus repairs. However when you are dealing with buy and hold it can be a different ball game, as there are many ways they look at the deal. Some will buy, renovate, and keep (if vacant), others prefer turn key. I would go out and see the property asap. At least get an idea of what the inside looks like, get pictures, ask the owner if she can provide rent rolls once a contract is signed, get maintenance costs. Who pays the utilities? Send me a e-mail and I can help you with this one. I know for sure two guys in our group that are looking for rentals in the counties surrounding baltimore.

@Christina R.

A few red flags.

You are dealing with a realtor! Her job is selling, if she wants to get rid of the house why isn't she selling it for market or above market. Is she that bad at what she does? Personally I would take the second opinion that she really isn't that interested about selling the property unless you hit her number!

Rent

As a buy and hold investor who owns property in 3 different state and managed my parents in another. BE VERY VERY careful about buying property based on these calculators. I find they can be 10-30% OFF. If you are going to use the calculators. Make sure you check and see current available rentals/their asking price.