Rent to own, or owner finance? I need some help

2 Replies

I'm currently working a lead and need some help coming up with the right close. When it comes to sales, I like giving people an option. So instead of a "what do you think?" They get a "which would you rather do, a. b. or c.?" But I'm having trouble defining those options. So here's the deal:

Single family residence in a C neighborhood with a D- neighborhood across a major road.

Seller bought the house for $45k, in cash, last summer and is selling it because he has a new job out of state and doesn't want to deal with a drawn out sales process. He said that he's done some updates, but knows that he won't get the full $45k on a cash sale, he even threw $35k out there as a number he'd be willing to take.

I believe a conservative ARV to be $50k and don't expect more than paint and carpet is needed. My cash offer would be about $32k. However, I'd like to flex my creative financing muscle and save a good chunk of my own cash if possible. So I'm thinking of a lease option or owner financing if the seller will go for it.

My problem is that, between the two creative methods, I don't see much of a difference number-wise that would benefit the seller. If I did a lease option, I'd want to offer a 5-year option to buy at $45k, put $1000 down, and then make $250/month payments that went towards the balance. A seller financed deal wouldn't look much different. I'd want to put no more than $3,000 down, would offer $45k purchase price and would ask to pay the house off in 10 years ($350/month). My problem is that these don't seem like great deals for the seller to me and I don't see how I could make them much better.

Conservative rent on this house is $750/month.

Do these options seem reasonable to you?

What might you do differently?

First, you're doing the Lease Option wrong...and if I were the seller, I would never give you a 5 year agreement...especially where the Purchase Price didn't go up each year during that period.  The max should be 3 years.

Second, you don't make payments on the purchase when doing a Lease Option.  You make rent payments, of which none of it goes towards the purchase.  If the seller paid cash, and has no mortgage, just have the seller (still the owner during the option period) responsible for all the monthly expenses (i.e...taxes, insurance, repairs, etc...) but you will pay them "rent".  

Example:  Assuming the expenses are around $300/month, if you paid the landlord $550 per month in rent, the landlord would cash flow $250/month...all would be profit to the seller since none of it goes towards the purchase.  This $9,000 (3 years at $3k/yr) would be added to the cost of the home.

Buy the home for the $32k you wanted to offer, and the seller would actually be making $41k if you took advantage of all 3 years...which you would, since that would be 3 years worth of cash flow to you as well, from the tenant you actually put in the house that pays you the $750/month.  Your only expense would be the $550 you paid the landlord, so you would be making $2400/year just from the spread on the rents.

If your purchase price was $32k, and you sold it to your tenant/buyer for the $50k you say it's worth, that's income to you of around $18k from the spread on the purchase.

If you pay 5% option consideration to the seller, on the $32k buy, the Option would cost you $1600.  Now, you sell an option to the end Tenant/buyer also for 5%...of their purchase price from you of $50k, and you would get $2500 from them...for a third profit of $900 on that spread.

Now, if you look through all of this, and follow all the money, how much did this entire process/system "cost" you to "control"?

Aside from what Joe said (which I generally agree with), this probably isn't the right deal for a lease-option or seller finance. After all, your seller is willing to take a $10k loss to just sell the property, so I don't think he wants to put himself into the position of being a bank that services debt for several years/decades or a landlord that will rent out for possibly 5 years.

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