Lease Option the only option here - am I thinking right?

Question

Hello everyone!  I could definitely use your help to make sure my thinking is on the right track with this one.  Here are the numbers:

The house is a 3BR, 1.5 BA rancher.  It is 1120 square feet.  The owner has financing of:

1st mortgage - $142K or $1339 per month
2nd mortgage - 14K or $146 per month

Total monthly payment of $1485.

The comps in the area average 140-150K.

He is four months back on his mortgage, but has not been sent to foreclosure yet.  He is definitely a motivated seller!!

The only way I can see this deal working is if I did a lease option at $1500/month, with at least a 7K deposit.  It doesn't look like taking the deed is such a great idea in this case, with the seller need being above the comps, but what do you all think???

How should I structure this deal, if I should touch it at all?
This is my first deal, so any feedback or assistance would be most appreciated!!

:D 
Jamie

Jon Holdman · Answer

Just saw your second post.  With $950/month for rent, I'd want to be all in (i.e., the balance on my permanent loan) somewhere south of $80K.  $70K would be better, unless it looks like there's some long term upside in the area.

Jon Holdman · Answer

I don't see any other option.  You say comps are $140-150K.  I read that as $140K.  As a fix and flip, you need to say at price plus rehab under 70% of ARV.  So, if ARV is $140K, you can only pay $98K, less the work it needs to bring it up to where it will sell for $140K.  That's going to net the rehabber $14-20K when they sell.  Further, that's about the best you can do for hard money loans these days.  If you want an assignment fee, you'll need to subtract that off, too.

A lease option is going to have an option to purchase.  Unless the seller's willing to bring money to the table, the option price would have to be at least enough to pay off the loans and cover closing costs.  Those are minimal without comissions, but you're still looking at an option price of about $160K. That just doesn't make sense if its only worth $140K.

Now if you could turn around a rent it for $2000, and could find someone to sandwich lease option it to for, say $180K, maybe it would be worth while. If you're willing to take the risk of a sandwich leas option, which I for one wouldn't do.

So, I just don't see much alternative to a short.

I don't know what the banks would take.  With $98K (or less) on the table, the first isn't going to want to see the second get anything.  Certainly not more than a few hundred.

Jamie Gaymon · Answer

You asked about rent - $950 - $1100 per month for that house.

Jamie Gaymon · Answer

Jon-

If short sale is my only option, then my entire strategy for the place changes.  Now, my focus would be to wholesale it.  Of that 98K, how much should I offer the 2nd mortgage holder to settle it?

Thank you very much for the information, by the way:)

Jon Holdman · Answer

Short sale.

Are you planning on renting or selling? If renting, what's the rent you can get?  If selling, you need to pay no more than about $98K, less repairs.  Lease option or subject to won't work because there's no equity.