I've got a great deal tee'd up and this will be my first seller financed/lease option deal.
The homeowner owns the property outright and it is currently vacant (not in rent ready shape as the last tenant did some damage before leaving). My initial thought was to try and do a sandwhich lease option where my 'down payment' is going to be the $5k or so to get this place cleaned up and rent ready. Get the L/O signed with a contingency that payments don't start until I've found the end-tenant-buyer, and then enter into L/O with them with better terms and hopefully an option consideration of at least $5k to get my money out immediately.
My question is am I using the right strategy here? The seller is motivated, no mortgage/liens, and I would be getting into the property at about 80% all-in ARV and >2% rule.
Any and all input will be greatly appreciated.
A few tweaks to lessen your exposure. You can market it as a "handyman special" and not do anything to it. This is often my favorite type of deal because you don't have to do any work. Typically the buyer that this attracts is very handy and does not mind doing work.
Is $5,000 the least that they will take for a down payment if you are able to pay them their price? I would find that out.
Love your thinking of making it contingent on finding a buyer. We set out to do that on every deal but not all sellers agree to this.
Any follow up questions shoot me a private message and I'll be happy to point you in the right direction! Hope that helps.
Nick, what's the FMV of the house in as-is condition? What will the after repair value be?
@Chris Prefontaine that's an awesome idea and will definitely be stealing that. For this particular property my concern is it won't sell right off the bat as a handyman special due to its current condition (not livable as-is). My second thought was telling the owner that I will match her repair budget up to $5k, and I will be the one dealing with the contractors, etc. Simply because I don't want to invest $10k let's say on a property that I don't actually own. Let me know your thoughts on that but I probably will be PM'ing you anyway!
@Michael Carbonare as-is FMV sits around $35-40k. ARV of around 55-60k conservatively.
My thought is come in at a purchase price of $35k with my 'down payment' being a repair budget matching whatever she puts in up to $5k. It will rent for $1100-$1200 and cash flow around $600 before paying the owner her cut. If she doesn't want to put any money towards the repairs then I may just try and wholesale the deal.
Nick, the likelihood of you receiving $5K option money on a lease option in the $50K range is slim to none. Likewise, you should not consider, not for a minute, of putting up $5K of your own money for a property worth $50K, and a property you don't even own. The risk-reward ratio on this deal isn't favorable.
@Michael Carbonare I pop my head in to see what's new here and what do I find? The man, the myth, the legend. Mr. Carbonare in the flesh (digitally speaking)!
...I had no idea biggerpockets had fallen to such a low! :O
@Doug Pretorius ?! Wow! This is like a celebrity sighting! Can one of the Kardashian bimbos be far behind? Good to see the Yukon Territory now has working internet service.
@Michael Carbonare Yes indeed! Finally upgraded from moose calls to the same device Matthew Broderick used in War Games. I can access the interwebz at a blazing 5 characters per minute with this baby!
Seriously though, great to see you again Michael!
@Nick Brown Sorry for hijacking your thread. As the others have said, putting any money (or repairs) into a property you don't own is not what you should be doing as an investor.
One way you could do this is to buy the property for say $35k with the seller holding the note for the entire balance at say 10% interest-only for 1 year. Then lease option it to a contractor with sweat equity for the down payment--on the condition that he/she do the rehab prior to taking possession. Once that's done and you get a new appraisal for the $55-$60k you can refinance and pay the seller out.
Doing it that way you end up with a fully rehabbed property that didn't cost you a penny. If the contractor closes on the option you collected the difference between their rent and your payments, plus the difference between their price and yours. If they don't you have a nice little rental to add to your portfolio.
Obviously every deal is different but we have even done the strategy I outlined in my earlier post to a home that was not livable. I can give you the numbers on that deal if you're curious. Your idea seems like a lot of work! If you haven't got the answer that you are looking for let me know and I'd be happy to share.
Hope that helps,