How to Structure and Propose Lease Option to Seller

11 Replies

Hello BP,

I found a seller who wants to sell her home because she's having a difficult time maintaining the property by herself and making the mortgage payment. She's owned the house for 10+ years and has equity. When I first met with the seller, my only strategy was to purchase her property under value and wholesale it. Well she didn't like my offer because she felt like she was losing too much equity and told me she'd rather list with an agent.

Weeks have passed since I've talked to her and I noticed she still hasn't listed her house. I've been thinking about different ways I can help her and started to read about lease option assignments. I think this might be a great solution for her. She can get a higher sales price for her property, pay no RE commissions, and have a tenant pay her mortgage.

The house is worth $200k and rent in the area is about $1200.

If I understand L/O assignments correctly, I make a lease option agreement with the seller to lease the property with the option to purchase for X at a later date. For example, we agree to $1200 in rent per month with an option to purchase the property for $200k in two years. Then I market for a tenant/buyer who will pay $1300 in rent with an option to purchase for $210k in two years. Once I find a buyer, I assign the L/O to the tenant/buyer for a $10k option fee. If the tenant/buyer pays their rent on time, they can get a $100 rent credit towards the purchase price or down payment.

The seller is happy because her mortgage is paid for two years and hopefully will sell by then. The tenant/buyer is happy because they get to live in a house, build equity, and have the option to purchase it within two years. And I'm happy because I made my assignment fee.

Am I on the right track or is there a better solution for the seller? 

I'd like to see what the pros have to say about it too, as I have a homeowner who would probably benefit more through a lease option agreement like this. I admire that even after you figured you couldn't wholesale it straight away, you still want to help the homeowner by learning another route in RE investing.

Kudos to you. Best wishes for your business. :)

Justin ... what you proposed makes sense. In my Lease Option deals I stay in the deal and make more money. If the owner is motivated enough he would be just as happy getting his $1200. If you do end up assigning it, make sure that it's clear whether or not that the Options Fee is also a credit. Again, in my deals the Option Fee is always credited ... but it should be clear from all 3 parties.

@Justin Howe

Good for you! Thinking outside the box!

Buying on terms with equity more than 40%

-Sub2 and a note purchase

-Wrap around mortgage purchase

-Lease option assignment

Watch your terms

Building equity and rent credits create real PROBLEMS 

Dodd Frank and Safe Act has put a stop to the guru pitches of lease options

When I sell on rent to own,

I use a RMLO (reg Mortg loan originator)

I don't use rent credits, I use seller concessions

I don't say "build equity"

Pm me for a good plan on how to sell to home seller with equity

Thanks for all of the responses so far. @Jim Pellerin it sounds like you are talking about doing a sandwich lease option. I don't really want to do that right now, I'd rather assign it until I get more familiar with l/o and creative financing.

@Brian Gibbons

 I sent you a PM!

@Justin Howe

Sounds like a good plan that is very ambitious - A couple things I noticed:

The margin is pretty slim for you.  10k over 2 years on 200k is GREAT if you're not putting any of your own cash in - but if you're putting any money into it you may be able to do better elsewhere.  

You run a pretty good risk for that renter to not exercise the option, so run your numbers based on that happening just so you have a contingency plan.  This isn't always a bad thing, but just run the scenario so you have an idea what could happen.

Remember you're going to have a L/O, which is basically a renter and if that renter does a number on the house and then doesn't exercise, you'll be the one left holding the bag on repairs - or exercising the original option. I would be super picky on the tenant for this reason.

I'd try to whittle down your 200k price, and try to get a lower monthly payment.

Lastly I would check the laws in your state on assigning / LO / Subleasing.  There may be some regulation that you need to follow.

Best of luck - let us know how it goes!

Blair Poelman, Broker in Utah (#9299425)

This post has been removed.

@Blair Poelman

Since I'm assigning the lease option to the new tenant/buyer, don't I collect the option fee once the assignment is complete? I'm not interested in a sandwich lease option. I simply want to put a deal together and assign my interest in the deal to a new tenant/buyer.

I agree, if I wanted to do a sandwich lease option, I'd want to have a bigger spread on the back end (when the lease expires and sale is supposed to happen) and have a larger spread month to month to cover the amount of risk exposure.

@Justin Howe

 The deal can be put together however you want - so you can collect option fee wherever and whenever you want as long as it's legal.  

However, looks like you're missing the part where the homeowner (seller) gets a piece of that option fee, and what you're talking about is a variation from a traditional lease option, so you'll need to do things a little bit different to account for those variations.

Look at it this way - if I'm going to offer you (tenant / Leasee) a 2 yr lease option at 200k:
Leasee is going to make a down payment of $20k  (this can be whatever you negotiate).
Principal is now $180k
Monthly rent payments of $1,300 for 2 years.  If you pay rent on time I credit you $300/month toward the principal (this can also be whatever you negotiate).
Say you pay on time ever month for 24 months. That's $7,200 credit

Principal is now $172,800.
At 2 years you exercise your option and pay the 200k contract price, less your credits and that's what you pay the seller (leasor).

Here's where it gets a little bassackwards -you are taking that 200k and increasing it to 210k, you will need to pay that 20k down, write a new option, and collect your 20k from a new leasee to replace your position.  You may be able to pass that 20k through directly from your leasee and not come out of pocket any cash.

Another option would be to take your downpayment at the front - so give your leasee your option at 200k, but charge them 30k down, and write into your agreement with the leasee that only 20k is credited to the purchase.  This way you get paid and you're out of the deal with your 10k.

Lots of ways to slice and dice this one - but again, just make sure what you do is legal otherwise you could get stuck in a pretty nasty spot.  

Blair Poelman, Broker in Utah (#9299425)

@Justin Howe

The best way to structure a lease option assignment is not to assign a deal because you're acting as a broker when you assign a deal

There is legislation in Florida and Ohio about assigning lease options without a license

If you record your option and charge an option release fee to the buyer, that's your best strategy versus assigning a lease option

@Brian Gibbons

 OK so I'd record the option (with a title company?) for $200k and charge a fee (let's say $10k) to the new tenant/buyer. Correct?

How does the new lease option spell out the assignment fee with the new tenant/buyer? Does it show that they will purchase the house for $210k or does it say they are paying me a $10k fee as an option release fee?

I would create a deal that makes sense for fair market value and fair market rent and a 3% option fee

The tenant buyer would pay an option release fee plus the 3% +1st and last months rent

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