Question about lease option

9 Replies

Hey BP,

I am trying to completely understand how the lease option works.  Hypothetical situation :

Seller owes 50k on a house, ARV is 110k. I come in an offer a lease option and they accept. Terms of the deal are 5 years with the option to purchase (here is my question) do you purchase the house for the amount the seller owes? Or do you purchase for another amount? And if you agree on purchasing for 50k, does the seller get the benefit of the debt pay down?

I currently have a situation where the seller owes 69k and the ARV of the house is 100k, what are my options here?

I don't think you can do a lease option greater than 3 years and you would be a tenant those 3 years with a portion of that money going towards the agreed upon purchase price (which would need to be at least the amount the seller owes).  After those 3 years, you would have to get a loan to pay off the remaining balance.  Or I suppose the seller could offer to renew the terms indefinitely until the entire balance is paid off? I'm not sure.  At that point the rental amount could be seen as interest but I doubt the seller would still want to be on the hook for repairs.  In that case they might as well do a sub2 or land contract.  Would probably need to put the house in a trust to avoid triggering the due-on-sale clause and then make you the beneficiary after house is paid off.

@Shawn Connors

You are in PA, if you want to own it, is it buy and hold, or exit w lease 2 own?

Usually an option price is stated in the option contract, not the loan balance.

You could 

1. Lease Purchase and buy at loan balance, not a lease option.

2. Buy sub2 + note, get the deed and offer seller to refinance later sales price w the loan balance.

3. Buy on an installment sales contract.

See a good RE attorney.

@Josh Caldwell is in PA.  Great guy.

Shawn that is what I'm doing, and here is how I approach your similar situation.

1. Negotiate with the Seller. If they'll sell for 69K great but they might want some of their equity as well. Let's say hypothetically you agree to 80K (NO OR VERY LITTLE MONEY DOWN, remember your helping them, that's why they're motivated) and you will take over there monthly loan payments subject to or leas option. In most states you can do this for 5 years before cashing out with an option to extend.

2. First get the house under contract or agreement for the agreed deal with conditions that you don't start making payments until you find a buyer within the next three months. This requires the correct paperwork but it's not too complicated. This eliminates any risk on your part but guarantees that they they won't sell it from under you. Worst case scenario, you don't find a buyer and you move on but this us highly unlikely. Buyers are much easier to find than motivated sellers. If they don't like the fact that you won't make payments immediately, remind them that they are not going to have to pay closing costs which would be an amount equal or greater than two monthly payments, (closing costs come from the buyers down payment).

3. Find the buyer from your buyers list who is willing to pay the highest down payment and monthly payments. It's best to let them name the price and you can let them know if it is acceptable. Once you have negotiated an agreement with the buyer then your attorney gets the lease purchase agreements to both your seller and buyer. You get to keep the buyers down payment minus any closing costs and attorneys fees which should leave you with a large junk (I wouldn't settle for less than 10K) and what ever the positive difference is on your monthly payments (Buyers rent minus Sellers mortgage payment) is your cashflow.

4. Once the buyer is ready to cashout (in a few years) with in the agreed upon time, you pay your seller owner and transfer the title to the buyer. Then you are out with a nice profit on the remaining sale difference on the back end. 

No risk, none of your money is ever used but you get to profit from creativity.

Are you working with a mentor on this deal?

@nathanweaver I am working with someone on this, not a mentor, just someone who may want to take the property subject to.  Ideally I want to just collect a fee for bringing the seller and buyer together, whatever the going rate is, and just sink the profit back into my marketing.  I don't know how feasible that is though?

@ShawnConnors That is definitely an option Shawn. That would be called an ACTS ( Assignment of Contract To Seller) 

In that scenario you would only be settling for a much lower quick profit in the form of the initial buyers down payment. You would be cutting yourself out of the deal without receiving any monthly cashflow or additional profit in the back end when the house is transfered to the buyer.

You have a great opportunity to make this worthwhile for yourself by staying in the deal and it's at virtually no risk to you.

If you get out of the deal, you may end up leaving the seller with a bad situation if your buyer defaults. But if your still in the middle of the deal, not only can you help the seller find a new buyer if this happens but you could also stand to make even more on the deal buy collecting an additional down payment from a new buyer.

The reality is that most sellers in this situation just want either their loan payments to go away or as I mentioned before maybe some equity as well. You are doing them a huge service be relieving them of this burden. They ususlly don't want to deal with anyone else because you've built rapport. If you lay an unknown buyer on them and wipe your hands clean it can be a bigger headache for them but if you stay in and see the deal through there is a huge benifit to both you and the seller. Not to mention the buyer is very pleased to be a homeowner when most banks wouldn't give them a chance. This is a win-win-win scenario.

Nathan, yes you are right. It is easier to find buyers than motivated sellers. Seems like most sellers will not entertain doing a lease purchase.  So how did you find and approach sellers that would do a lease purchase? 

Also, I know that in sandwich lease you would be on the hook for rent payments, if the T/B stop paying or damaged the property, but what about if the owner stop making mortgage payments or refused to sell or had some judgements or liens occur on the property, wouldn't this cause a big problem since you are in the middle on a sandwich lease? 

Originally posted by @Shawn Connors :

@nathanweaver I am working with someone on this, not a mentor, just someone who may want to take the property subject to.  Ideally I want to just collect a fee for bringing the seller and buyer together, whatever the going rate is, and just sink the profit back into my marketing.  I don't know how feasible that is though?

 Shawn if you're in Pennsylvania 

I would look up @Josh Caldwell

What works well for Pennsylvania's property code is to enter into a lease and option with the seller, 

record the option, 

charge an option release fee to the tenant buyer, and 

have the option release fee on the HUD 1

Josh is awesome