So, after listening to a podcast I decided to stick my nose into the idea of lease options. I called FSBO and got several people who were interested in the idea. Now what do I do??
How do I structure this deal, what I would like to do is lease option this property from the owner and then turn around and either assign the contract to another investor or have a tenant rent to own the property (I think this is correct). Can someone please guide me in the right direction on how to make this deal work.
Post more specifics on the deal. Underlying notes, liens, payments, rehab, back payments, back taxes.
Rob Gillespie does a lot of these.
Ok, the guy purchased the property back in Aug for 87k and did a rehab on it himself, he's a class a contractor. On FSBO he was asking 169K for the property, now that I see the comps in the area he's out of his mind if he thinks he will get that. The property is a 3bed 1bath 900+ property, my guess after looking at the comps is that it's work around 120 - 130k tops. I'm not sure how much he has in the property but I would guess that if he was to rent it he would get 900-1100k a month in rent. Hope this helps.
It doesn't make sense to do anything on this property if it is overpriced. Let that be his problem, not yours.
What if I talk him down then how xculd I make this work.
Lease options are an excellent way to invest but make sure you are ready before you jump into your first deal, it would be better to invest with a partner to get educated than to invest on your own and end up in trouble. I invest using the sandwich lease option which allows me to earn immediate income, a passive monthly income and future income. I don't really do the regular lease option because it is too much like a job because every time I complete a transaction I have to do another one to get paid and I can never stop or the money stops.
Lo's are great, but if you feel the seller is asking WAY too much already...forget it...wish him luck, give him your contact info, and he'll call you back in 4 months when the house is empty...still...
Here is my rule of thumb on lease options:
DO NOT stay in the middle of a lease option (sandwich lease option) UNLESS the seller is willing to sign the deed over to you.
DO NOT stay in the middle, even if the owner is willing to sign the deed over to you, unless:
A) There is at least 30% equity in the property
B) You are making $200 or more per month cash flow
C) Your tenant has put at least 10% or more down to offset the risk of going into foreclosure.
Assume that all lease options will be kicked up to foreclosure court. It depends on what the judges mood is that day! It is a very grey area, so you have to figure $2,000 to $4,000 attorney fees for the foreclosure, plus at least 6 months of mortgage payments unless you can do a cash for keys with the tenant.
Assign, assign, assign!
Even if the property is overpriced, a tenant / buyer may want to buy it!
If he wants $169,000 for the property and a tenant buyer is willing to pay $10,000 for an option and your seller only wants $500 for an option, charge your tenant a $9,500 assignment fee and get out of the middle.
That is exactly what I would do on this deal, since there is no equity and lots of response. See if you can make a quick assignment fee and move on down the road.
I also want to state that I know A LOT of investors do sandwich lease options without having the seller sign over the deed. A lot of "Lease Option Gurus" don't even mention it. And that is because they have NEVER been in a situation where the seller and the buyer BOTH want to sue them! Save yourself thousands of dollars and several months of grief by having property rights before you choose to stay in the middle. This is also known as a "subject to"
You can do lease options with tenants all day long and not sign over property rights, but make sure your a$$ is covered! You can also assign contracts with zero equity and no cash flow because you aren't staying in the middle of it! But do not take the risk of doing a sandwich without title or deed to the property! Walk if the seller refuses the property rights, or assign the contract!!!
Rose is spot on correct.
Just be sure that your contracts have an explicit assignment clause that fully releases you from all liability. The assignee must fully assume all liability.
Rose & Jeff - when you say sign over the property do you mean actually giving you the deed w/o and money? Or, do you mean getting POA for the seller of the property. If I was the owner of the property why in the world would i give the deed of my property to someone who is leasing it.
and Rose does the indemnification clause in the contract protect you from being sued by the seller?
Whenever I assign a contact in a lease option situation, I have the seller sign an authorization to assign and also a full release of liability. In addition, I also have the buyer sign a full release of liability. Assigning contracts is the easiest way to get started, but I suggest getting off the treadmill and doing some long-term deals. Most people I know who just do assignments make money, buy they still are living deal-2-deal. Not my idea of of "freedom". A mixture of both is good. Cash flow and Equity......