Lease Option to Lease Option

7 Replies

Hello,

I wanted to know if there is anyone here whho has done a lease option agreement with seller for 6 months and lease option the property to buyer for 3 months? I was running numbers and wanted to know if someone has done this. If so, how successful was it. If not why?

Originally posted by @Raymond Hill :

Hello,

I wanted to know if there is anyone here whho has done a lease option agreement with seller for 6 months and lease option the property to buyer for 3 months? I was running numbers and wanted to know if someone has done this. If so, how successful was it. If not why?

 Sure, lots of people do those, like myself. I never Lease Option for less than 2 or 3 years and when I lease Option out it is always 1 year less than the Option I have. That way I have some breathing room if my optionee can't get financing to exercise his option.

For instance, I get a 3 Year Lease Option and sell on a 2 Year Lease Option.

I think you will run into trouble with 6 months and 3 months. It isn't really enough time to get "seasoning" to show a prospective lender to get financing to buy out the Option.

I agree with @Mike M. We do lease options in Arizona for 3-5 years. We don’t allow our optionees to lease out the property to others though. We look for end buyers for our properties to do lease options with.

Do any of the BP calculators apply to analyzing a lease option property? If not, is there a way to adjust them to do so?

@shiloh 

@Shiloh Lundahl , are you still doing lease options?   Do you do them in CA?  When I collect a deposit from the tenant buyer,are there any limitations on that per Dodd Frank?  In other words, can a property listed at $400,000, get a 5% option fee for $20,000?  That is way higher than the $5000, some people suggest. What are you doing?

@Joe Yobaccio If the 20k is looked at as a deposit then you may have some issues with Dodd Frank. We call the money they put down an option fee.  It is similar to buying options in the stock market.  If you buy an option, you are not actually buying the stock.  You are just buying the right to buy the stock at a certain price.  If the stock goes up considerably and you have a call option on it then your option goes up because you have the right to buy the stock at a price below the market value.  You could then exercise the option and realize the gain or you could sell the option.  The same thing applies here.  Let's say the tenant buyer pays 4k to buy an option to purchase the property for a specific amount in 4 years, lets say 185k.  The value of the property today is 170k.  If the property goes up to 195k because of inflation during the 4 years then the tenant buyer still has the right to buy the property at 185k.  If the property value goes down to 160k, then the tenant buyer will probably not exercise their option but will walk away from the property and they will save all of the money they would have lost by trying to sell the property at a loss.  

We don't apply the option fee to the purchase price and we don't apply any rents towards the purchase price either.  This keeps it from looking like a mortgage in disguise.  

As far as charging 20k for an option fee, I think that is reasonable for the price point.  Especially because California prices go up so much.  We usually increase the price by 5-10% and charge a $3900 option fee.  Recently I had a tenant buyer say that he wanted to buy the property in a year so instead of increasing the property 5-10%, we did it on a scale of 3% per year for a 4 year period of time.  So if he exercises the option in year 1 or 2 then he buys if for less, if he exercises it in year 3 or 4 he will end up paying more then the original option amount offered.  So there is some incentive there for him to exercise the option early.

Anyway, I hope this helps. Good luck.

Thank you @Shiloh Lundahl .  $3900 for an option fees seems reasonable and doable.  As I don't already own a propety, I would have to acquire one and getting one by lease option first and then subleasing, seems like a great strategy. That seller will likely want option money and that makes sense. I can put it up initially or get it from my tennant buyer.  But, I would also like to make a little spread.  The price points here are higher, but someone who is renting with hopes of buying in 2-5 years isn't necessarily going to have a chunk to use as a non refundable option fee.  So, I'm trying to explore this and see if what I'm trying to do has been done.  If rent here is $2000 a month, then a renter would put up 1st and security of $4,000. I'm assuming, I would instead take an option fee vs. 1st and last and to make a spread, make sure I get more than I offered the seller.   Have you done any of these in Ca or just Az?  

@Joe Yobaccio I have not done any sandwich lease options which sounds like what you are discribing. We sell properties on lease options that we already own ourselves. So you may want to search for sandwich lease options in the search bar.

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