I was hoping someone would help clarify for me how the monthly payments are set up when wholesaling a lease option. Are the tenant buyers just paying a random amount that the seller asks for or are they paying the mortgage amount only? If so how do you ensure that the payments actually go towards the mortgage and the seller doesn't just pocket it?
There's a lot in this question. First off, you dont really wholesale a L/O, you can set it up as a sandwich (you L/O from a seller and then sell on a L/O for more). Kinda risky there, like you said, you've got to verify the pays every time, plus are responsible for the payments if things go bad and you wouldn't wan to do much to improve the house since you dont own it. There are no rules to the payment amount, sometimes the seller will do it for less than the mortgage just to stop the bleeding. Sometimes they'll want a little spread, just depends on them and their situation.
The latest thing is to help the seller sell on a L/O. Get control of the property for an amount the seller is comfy with, then sell on a L/O to and end buyer and you keep the option fee, which I guess could be called wholesaling a L/O. Not a bad strategy for low equity or upside down houses. You are out of the deal once the papers are signed with no cash outlay. I've never done one this way, but I bet Brian Gibbons has details on that one in his stuff.
I used to do a lot of Sub2 to L/O. Got hit pretty hard when the market tanked because I got so many of them back, but its a pretty viable strategy in an appreciating market with mortgages as tight as they are. I'd prefer that over a sandwich L/O all day long, you have way more control.
@Darrell Shepherd When you say sub2 to LO, you're meaning you buy it subject 2 and you sell it as a LO? Interesting way to mix the two. What exactly are some of the benefits of doing it that way? To me, that means you now own the house, right? Versus a Lease Option just means you have the option to buy the house... if you don't you are out your option fee (if any). If I'm wrong here please teach me!
With LO to LO, who is responsible for taxes/insurance? Or are they built into the rent payments? And presuming if something major goes wrong like roof, A/C, Electric, etc ... the end tenant buyer is responsible for those?
What concerns me with Sub 2 to L/O is if the DOS is called you better have a way to buy the house or you need to be 100% open to both the seller and the end buyer that a DOS is possible and what will be done if this happens. I would not want to be in the position of selling a house on a L/O then having the note called due with no way to buy the house leaving the end buyer pissed off and probably getting sued.
I have to do more research on this myself, but my understanding is that if you require the end buyer to be responsible for repairs then that may give them more claim to the house and cause legal issues. You could buy a home warranty for not a huge sum of money and tack that only the option price.
I dont like sandwich L/O's- lease optioning from the owner and lease optioning it out, too much can go wrong.
Like you said, if you dont exercise your option, you lose your option fee. There's nothing saying that you do the same L/O buying as you do renting, though. You could do a 10 year option to buy for $1,000 and then sell it on a 2 year option for $10,000 if you can find the people willing to do that. If they fail to exercise their option, just do it again with someone else. Its CREATIVE real estate, you've got a lot of flexibility on how to structure things.
On a sub2 you take ownership of the property "subject to" the existing mortgage. You can then L/O it out if you want to. That was my cookie cutter when I got started, mainly because that was what I was trained to do. I've probably done 100+ of those, but man it came back and bit me in the *** in 2007, I got a LOT of houses back I thought I had sold when the crash hit, and in a market where you couldn't get anyone to look at houses, much less sell them. Plus, I'd sold them fully rehabbed and got them back fairly abused so had to spend money getting them back to retail. Lost more money than most people will ever see in that mess. Anyway, the advantage of Sub2 is that you own the property and are in WAY more control. Another advantage is that you can acquire a lot of property that you actually own without ever talking to a bank.
There's a lot of stuff the gurus dont tell you about, though. Getting insurance you can show the lender is a pain, your POA gets stale and then banks are hard to deal with, etc. Plus nowadays the states are starting to frown on Sub2 because too many people took the house, rented it out, then didn't make the pays but kept the rent, totally screwing the sellers and renters along the way.
I'd still do a sub2 rehab to retail any day of the week, its a good way to keep money costs down, but I wouldn't suggest using sub2 as a long term (more than a year or so) way to own rentals these days. There's more talk about DOS clause now than before, but I've still never heard of anyone calling a loan due except one person on here said they knew it happened to someone they knew. I can promise you, no banker is going in asking for title reports on all the up to date loans they have. There is a lot more selling of bulk notes these days, though and I could see a buyer checking a sample of a bulk purchase (no way are they doing all of them) and catching one here and there. Still pretty rare, AND, if you dont have the means to cover the debt, you shouldn't be assuming it IMO. Its not like they call the loan due and raid your house anyway. They make a demand with a time period to pay in full, if you fail they can file a foreclosure. Depending on your state you've got a few months to figure out a solution, anyway.
To answer your question, whoever owns the house is responsible for taxes unless specifically said otherwise in a lease (rare). They are usually escrowed into the mortgage, so generally whoever is paying the actual mortgage is paying the taxes and insurance.
My lease was written that the tenant was responsible for all repairs up to $500, I was responsible for anything over. That's all going to be in the lease, however you want to do it. I personally dont want the calls for the little stuff, but didnt want tenants making major repairs to my house.
Brian Gibbons has some good stuff on the pretty house business. I havent checked his materials out, but I know he knows his stuff. You can look him up on here.
The best play on that stuff is Ron Legrand's ACTS method I think (just the one I looked into, Brian has a version of it he teaches too). You basically find someone with low equity like 90-95%% who more or less cant sell without writing a check after realtor fees and closing costs. You then talk them into a long term L/O to a buyer "that they approve". You then market the property at 100%ish of value, then put the two of them together and keep the option fee for your efforts, which should be several thousand bucks, with very little out of pocket and very little risk. Both parties tend to be very happy in that transaction (at least when it starts), seller gets more for the house and the problem is gone, buyer gets home ownership at a good rate without qualifying for a bank loan. Its a little harder to that in a hot market like we have now, but it definitely made a lot of sense 2-3 years ago when it was so hard to sell and so many people with money couldn't qualify for loans.
Thanks @Darrell Shepherd for the kind words.
For payment from TBer to bank, I use a collection account service
I charge the TBer market rent, no rent credits, underwrite thru a rmlo, and fix credit thru www.upgrademycredit.com
I discourage people doing sandwich lease options unless they have 3 to 5 months and reserves in case the tenant buyer doesn't pay
You must be a BiggerPockets member to post on the forums
Join the world's largest, most open Real Estate Investing Community online, 100% free forever!