Structuring a Lease Option to Wholesale

16 Replies

I am working on structuring 2 lease option agreements to wholesale. I have the title company in place that is willing to conduct the transactions for me and the escrow officer has done numerous lease option transactions, and the sellers are informed on the basics of the lease option agreement. 

My question is as follows: 

Property 1, The ARV is 115k, I have a possible purchase price at 95k with a 15 year note/ 7 year call (balloon)/ 10% down/4.99% rate. Currently the tenant is paying 700 monthly. I would like to ensure the owner either maintains or increase their cash flow. How do I calculate the monthly payment amount and add closing fees into the transaction.

Property 2, ARV is 550k, I have a possible purchase price for 525k, with a 20 year note/10 year call (balloon)/25k down/4.99% rate. Currently the tenant is paying 2200 monthly but will not be able to close on their prior seller finance agreement. I would like to ensure the owner is still able to get the 2200 monthly income if not more. How do I calculate the monthly payment amount and add closing fees into the transaction?

Thank you for your response in advance. If additional information is needed please do not hesitate to ask. This will be my company's first seller finance deal, I have tons of leads that will not work with traditional wholesale methods and I have been exploring wholesaling lease options as a way to increase conversion rate.

Not enough information on the strategy used and your wholesale angle. A sandwich lease or are you stepping out of the way?

Numbers are easy, rent is the necessary loan amount or amount due the seller.

Sounds like this is residential, financing an option is a consumer financing agreement. Better check with your attorney.

Any portion to the sale price needs to be paid on the option, not the lease, you need separate agreements.

You need to make rent close to the fair market rent for the property, the rest or overage can go toward the option.

To level the deal, if needed, give credits to the buyer of up to 3% of the sale price in the closing costs normally paid by the buyer.

Interest rates are irrelevant on the seller's side the buyer is not assuming the loan.

Don't attempt to wrap the mortgage as a subject-to deal as this is a lease and an option, you can look at principal reductions and apply that to the option, but again, you will then be accepting payments on the option and that is seller financing.

Why don't you buy subject to, sell your interest and step out of the way having the seller sell to the buyer, much cleaner. :)   

@Ben Leybovich   thanks for the shout.

@Marcus Maloney    first thing I would do is not be a Dodd Frank RMLO and find a AZ RMLO.  He - she knows all about notes and figuring compliance issues.

See

https://www.google.com/search?q=RMLO+arizona&ie=ut...

Going through an RMLO will protect you in case the buyer of the owner occupant property sues you on the basis of the Ability to Repay Rule not being adhered to.

@Bill Gulley  

Thank you for the feedback guys, I intend to wholesale the lease option and step out of the way. Both are residential units and both units are owned free and clear so it is strictly a seller financed deal, no sub2 or wrapping. 

Brian a RMLO is a great recommendation to help structure the deal, as you can see I have not considered this. I have been trying to find a way to convert some of the thin leads I have and wholesaling lease options looks like a way to increase my conversion rate instead of just through leads out.

Originally posted by @Marcus Maloney:

@Bill Gulley  

Thank you for the feedback guys, I intend to wholesale the lease option and step out of the way. Both are residential units and both units are owned free and clear so it is strictly a seller financed deal, no sub2 or wrapping. 

Brian a RMLO is a great recommendation to help structure the deal, as you can see I have not considered this. I have been trying to find a way to convert some of the thin leads I have and wholesaling lease options looks like a way to increase my conversion rate instead of just through leads out.

 Marcus, I do marketing to get all leads.

Something like:

We buy houses and lease houses.  And we solve problems with property, like probate, bankruptcy and divorce.

No equity?  We can help.

Here’s your quick and easy solution:

* FAST Closing

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Call 1-888-555-1212 x12

toll-free 24hr. rec. msg.

@Marcus Maloney      @Brian Gibbons   is not as attractive as me but he's forgotten more than I know....

You talk about wholesaling a LO...but then you come in with the owner's financial data....

I think you need to get a clear understanding of what you are wanting to do...

Are you wanting to tie these up then ASSIGN a contract?  Or are you wanting to STAY IN THE DEAL?

I ask because I've never asked a seller what their interest rate is on a LO Assignment...I don't give a crud...

@John Jackson  

is a master at talking to home sellers, you should listen to his youtube videos, just dont look at him too closely! lol

Some creative no bank no credit ideas...

Low equity deals are:

  • sub2
  • lease option assignments
  • wraps

Mid equity deals are possibly

  • sub2 and a note (pro buyer note)
  • lease purchase and equity split (some of the profit from the back end goes to the seller)

Light rehabs

  • JV with the home seller, dont buy it, bring in private money, supervise the rehab, get a JV fee, seller makes more than the the traditional "we buy houses 65% or ARV less costs"

What is "my conversion rate" Marcus? Are you speaking of turning your inventory of leads into transactions?

A lead is nothing more than a hint that some sort of business might be possible, it isn't even a prospect where the targeted party has expressed an interest in a particular business transaction and a prospect  is not a customer or client until they agree to transact some business with you.

Messing with leads is what I did when I had nothing else to do, that was a long time ago. Every lead is not something you can turn into business, the quality of your leads has much to do with that but you need to recognize what fits your skill level and abilities to manage or work the leads. If you don't recognize a strategy toss it out and move on. Trying to make a silk purse out of a sow's ear is difficult, time consuming, has unknown results and just doesn't merit attention.

Leads need to be qualified as to motivation, type of transaction, financial viability, the market and to fit your skill level. Me saying my cousin wants to move and get rid of their home is not a qualified lead, it's a hint that a qualified lead may be there. Your time should be better spent in obtaining qualified leads, better yet skip the "leads" and just go to known prospects, you can find folks that are already trying to unload a property, like a FSBO that has been in the paper or on CL for 3 months, that owner has a problem to solve.

Sounds to me like you may be trying to put a square peg in a smaller round hole trying to adapt leads to a strategy, that is bass ackwards, you look at the property, the circumstances, the goals of the owner and then select the best strategy to get the owner's problem solved.

Not knowing where these leads came from or how you got them,  we can't say what you should do with them.

Brian's efforts are targeted to invoke interest in particular strategies he uses, when he gets those types of leads he can the identify the strategy to use and lead the prospect to the water. 

Let's not make up terms or use local office buzz words that are invented in the minds of investors or marketing operators. Give details and be specific. Saying "wholesale a lease-option" has many roads to go down and there are Ys in the road, and wholesaling is not retailing to an owner occupant.

My skill level is pretty well developed and refined, but even I can't make a good deal out of just any property, no one can. If it's not there, move on. :)  

@John Jackson  @Brian Gibbons  you guys must have a wonderful working relationship funny.

This is where I am at I have 2 sellers that own the properties free and clear, my offer price is not suitable for them to buy it out right, but they are interested in offering seller financing. I do not want to stay in the deal I would like to solidify the terms on the properties and then wholesale my interest to either a tenant buyer or a buy and hold investor. I know I was reviewing a lot of Joe McCall's wholesaling these type of transactions and I wanted to get out there and try one, if I fail that's fine but I want to work my way through to try and learn from it.

Originally posted by @Brian Gibbons :

@John Jackson  

is a master at talking to home sellers, you should listen to his youtube videos, just dont look at him too closely! lol

Some creative no bank no credit ideas...

Low equity deals are:

  • sub2
  • lease option assignments
  • wraps

Mid equity deals are possibly

  • sub2 and a note (pro buyer note)
  • lease purchase and equity split (some of the profit from the back end goes to the seller)

Light rehabs

  • JV with the home seller, dont buy it, bring in private money, supervise the rehab, get a JV fee, seller makes more than the the traditional "we buy houses 65% or ARV less costs"

@Brian Gibbons I will review @john

@Marcus Maloney  

I believe that lease-option assignments (aka. "wholesaling lease options"), are used far more with 'pretty houses' that have low/no equity. That doesn't mean it cannot be done with free-and-clear homes, but the seller probably won't have much desperation and subsequently won't be motivated to sell on those particular terms, as they are only paying the TI of PITI.

Why would they want to deal with a tenant/buyer when they can just take their time find a buyer?  

That said, you do have an opportunity to get creative with offers to the seller.  

@Brian Gibbons   probably can suggest about 86 different things you could do in this situation.

@Bill Gulley  point taken, however I am not trying to make a lead a deal I am trying to present another opportunity to a seller that can not justify selling there property 65% below market value however he/she would like to sell and creative finance is an option that can be presented. I am not trying to learn this strategy just to close these 2 potential deals but to add more tools to my tool box. At some point (now) I have to be able to provide another option to help a seller out. This is the point of this post. I am not trying to convert leads that have no opportunity at this present time I have a great follow up process for that. 

The houses were their primary residence and they had to relocate which turned them into landlords because they did not want to list the property at the time, so they agreed to lease optioning the home with current tenant buyers that are not able to perform. So I received the call. I see the opportunity for me to help the seller and for me to learn this is why I am seeking assist from the community. 

If I am missing something please feel free to share positively!!!

Free and clear houses - installment sales.

Use a RMLO to construct a note and have a CPA knowledgable with 

http://www.irs.gov/taxtopics/tc705.html

and 

http://www.irs.gov/publications/p537/index.html

and

Imputed Interest

http://search.irs.gov/search?q=imputed+installment...

I like the idea of assisting free and clear house owners get a cash flow vs lump sum.  If you structure the note for a win win between you and the seller, you could pay 105% of today's value but on your terms.  Like for instance a "temporary moratorium" on payments.

Study up on annuities, as home sellers are essentially taking their equity in installments.  See annuity education here:

http://www.investopedia.com/search/default.aspx?q=...

http://www.marketwatch.com/story/hate-annuities-7-...

Marcus, good deal, when I post comments they are not all directed at the OP, many are for general consumption. I just didn't understand your term and looked like you were trying to work leads.

What's your position in this, what's your deal with the owner?

A tenant is already in there?

Another aspect investors need to be aware of......anticipating again, is when an owner has a buyer and folks call us to put a deal together, if you're not a Realtor you can be on thin ice as you have no interest directly in the transaction, there are other issues too, the unauthorized practice of law is a favorite for prosecutors. Careful how you get involved. :)   

@Brian Gibbons  always a value add thank you again, I do have a lot more to learn in structuring these deals. Always willing to learn something new

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