Lease Option Wholesaling - Sellers Asking Price is High

16 Replies

I have a potential lease option wholesale deal in the works. This would be my first deal. I have a question about the sales price that the seller is asking for. The seller wants $100K for the property, but the comps don't show that the home is worth that much. 

Does that mean that I can't do this deal? Or do I just give him what he wants and fill in the sellers asking price on the contract and market it so that he walks away with $100K? The seller is asking for this much because that is what he owes on the home, he just wants to break even. It seems to me that if the home is overpriced that it may present a problem for the tenant/buyer when they are ready to exercise their option to purchase. Can anyone explain to me how this works?

Please advise...

Thanks!

@Traci Pickett

It would be helpful to know what the comps are

Do you have really strong accurate comps?

You can go slightly over comps but not too much maybe 5% more

Seller financing or lease options don't have value to property.

It is wise to price the property at comps and charge market rent to be a legal lease option.

worst case scenario you can call a Realtor and get comps that are close

Please listen to what I said before, you can't charge more than 5% to 7% more than comps for a price on lease option

You need to find out from the sewer with existing financing is, the balance for pay off, the monthly payment, whether it is a fixed or a ARM

And whether or not it's government-backed like FHA or VA

Get that information by asking the seller:

"My boss really would like to ask you some personal questions I know it's difficult to answer but in order for me to really help you and get the best price I need to know some personal information, can you tell me when did you buy the house, how much did you put down originally, if you had to pay half the mortgage how much would that be, and what is your monthly payment that you pay the bank"

If the property is worth close to what he owes, buying sub2 may be a valid strategy as well. Better to own with their existing financing (if favorable) in place than to just have the option to buy it. But be sure of your FMV @Traci Pickett keeps stressing, and rightfully so, you gotta have strong comps.  A high octane realtor that knows this market well is probably your best bet.  Good luck!

Thanks Steve Vaughan .... I think as Brian Gibbons stated my best bet is to have a realtor pull the comps for me. I don't think I'm ready to do a sub2 just yet, but I am highly interested in doing sub2's. Great advice, I am going to do more research on sub2.

Tracy the other thing is you need to know what questions to ask the seller, sprinkle these questions as you have a good conversation with the seller:

MOTIVATED SELLER - QUESTIONNAIRE CHECKLIST

The following is a list of sample questions you should ask a seller. When talking to a seller, try to ask the questions through the course of a conversation and try not to sound like you are reading from a list.

(Note: You will not ask all of these questions depending on the answers the seller gives and your investing objectives.)

Asking About The Seller And Their Property:

• Can you tell me a little bit about your home? (# of bedrooms, baths, size etc.)

• What do you like most about the home?

• What do you like the least?

• Are there any repairs needed?

• What is your sales price and how did you arrive at it?

• What do you think your house would appraise for in excellent condition?

• What do you think your property could rent for?

• Is your property listed with a real estate agent?

• If you don’t mind me asking, why are you selling?

Asking About The Existing Financing:

• Do you own the house free and clear?

• Do you know if your mortgage loan assumable?

• Would you sell the house for what you owe?

• If not, how much are you looking to get above what you owe? (Subtract that from sales price to get loan balance.)

• How much are the monthly payment on the mortgage?

• Are the payments current?

What Kind Of Deal Can You Get:

• If I paid you all cash and closed quickly, what is the least you could take?

(Follow-up by asking if that is truly the least they would take.)

• Will you consider leasing the property to me with an option to buy if I guarantee the mortgage payments and maintenance?

• Do you have a problem with someone living in the property until I get it sold?

• Would you consider optioning the property to me, if there is absolutely no risk or cost to you?

Thanks @BrianGibbons for this questionnaire list, this is great! I keep hearing that this potential deal that I have would be a good Sub2 deal. What are the steps to doing a sub2 deal? Or could you point me in the right direction to find out more information?

Traci, the seller wants a 100K, your comps are just over half of that, either he is asking way too much or you have the wrong comps. My bet, if he owes that much, you have the wrong comps.

Then, when you get comps, what are you doing with the numbers, how are you adjusting the prices of sold comps to be like the subject property? 

This tells you if you even have a potential deal, if it's not, move on, if there is, then dig deeper if you can, but you may not need to dig very deep depending on how good of a deal there is. 

In other words, who cares what type on loan the seller has, is it a fixed or adjustable rate as that means the payments may change, but how much he owes is irrelevant if it's a great deal. Can an end buyer get it appraised to pay it off without having to put 20% down, can they get in at 97% loan to value? That goes to marketability. 

Selling to an owner occupant, you can sell your option, you can assign your lease, you cannot assign your sub-to without the owner's consent. If repairs are needed you need title as Steve suggested. 

The reason you're lost is that you haven't learned real estate, you're just trying to learn how shuffle papers to make money from real estate......not a good way to learn the business. :)

@Bill Gulley You may be right about me learning real estate. But I can assure you that I am not just trying to shuffle papers around to make money from real estate.

I want to make money, but most importantly I want to make sure that I fully understand what I am doing when dealing with sellers so that I can remain ethical.

The reason for my question is solely because It seems to me that the seller is asking to much for the property and I do not want to do this deal just to make the money and it damages me or someone else in the long run.

Like I stated previously, I am going to get help from a realtor to see if I can dig a little deeper to get strong comps for this property.

I understand that I can not assign a sub2 without the sellers permission. I am just asking questions to get a better understanding of the process so that I am a little more knowledgeable.

I'm new to this...

Originally posted by @Traci Pickett :

@Bill Gulley You may be right about me learning real estate. But I can assure you that I am not just trying to shuffle papers around to make money from real estate.

I want to make money, but most importantly I want to make sure that I fully understand what I am doing when dealing with sellers so that I can remain ethical.

The reason for my question is solely because It seems to me that the seller is asking to much for the property and I do not want to do this deal just to make the money and it damages me or someone else in the long run.

Like I stated previously, I am going to get help from a realtor to see if I can dig a little deeper to get strong comps for this property.

I understand that I can not assign a sub2 without the sellers permission. I am just asking questions to get a better understanding of the process so that I am a little more knowledgeable.

I'm new to this...

Nothing I said was aimed at your ethical dealing or you fairness, it has to do with understand comps and valuations more than anything, not the flow of an option or lease assignment, that's pretty straight forward, get them and assign them. 

Great, get assistance from your Realtor! Good news. 

Most newbies don't know they can't assign a sub to without consent, so good for you, you've been reading more than guru stuff.

And, if you're not taking title, yes, it is simply passing paperwork around which is the basis of what you make, it's good to hear you want to put more effort into it too.

Good luck and learn valuations, that's where you begin. :)  

@Traci P.

You will have to be easy on Uncle Bill, he has forgotton more about RE regulations and RE finance than most mere mortals.

This should help you...

BASIC VALUATION DEFINITIONS

Value Designations
There are many different designations or definitions of value. They may be divided into the following two main classifications:

Utility Value, which is value directed toward a particular use. This frequently is termed subjective value and includes valuation of amenities which attach to a property or a determination of value for a specified purpose or for a specific person.

Market value, which represents the amount in money (cash or the equivalent) for which a property can be sold or exchanged in prevailing market conditions at a given time or place as a result of market balancing. It may be based on a "willing buyer" and "willing seller" concept. This is frequently termed the objective value, since it is not subject to restrictions of a given project.

Appraisers carefully define the value being sought. Types of values include Liquidation Value, Market Value, Investment Value and, of course, Assessed Value (for taxation).

The real estate market sometimes places great importance on real estate financing terms. Market Value might be estimated for specific financing arrangements: seller carry-back, balloon payments, renegotiable mortgages or other "creative" financing techniques.

Market Value Defined

In appraisal practice, the term Market Value is defined by agencies that regulate federal financial institutions in the U.S. That definition is given as:
"The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:


1. buyer and seller are typically motivated;
2. buyer and seller are well informed or well advised and acting in what they consider their own best interest;
3. a reasonable time is allowed for exposure in the open market;
4. payment is made in terms of cash in United States dollars or terms of financial arrangements comparable thereto; and
5. the price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

(Source: Uniform Standards of Professional Appraisal Practice, Appraisal Foundation, 2010-2011 Edition, page A-105.)

Fair Market Value Defined

Courts and accounting practice sometimes require "fair market value" opinions. The legal definition of Fair Market Value under California law is found in the Code of Civil Procedure, Section 1263.320, as follows:

"The fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available. The fair market value of property taken for which there is no relevant, comparable market is its value on the date of valuation as determined by any method of valuation that is just and equitable."

Cost and Price in Relation to Value

Appraisers carefully distinguish between their defined value, cost and price in refining their appraisal opinions.
Cost is defined in USPAP as follows: "The amount required to create, produce, or obtain a property." USPAP notes that cost is either a fact or an estimate of fact.
Price is defined in USPAP as follows: "The amount asked, offered, or paid for a property." USPAP notes that "Once stated, price is a fact, whether publicly disclosed or retained in private. Because of the financial capabilities, motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have any relation to the value that might be ascribed to that property by others."

Value is defined in USPAP as follows: "The monetary relationship between properties and those who buy, sell, or use those properties." USPAP notes that "Value expresses an economic concept. As such, it is never a fact, but always an opinion of the worth of a property at a given time in accordance with a specific opinion of value. In appraisal practice, value must always be qualified - for example, market value, liquidation value, or investment value."
Generally speaking, a broker or salesperson will focus on price. Examples include list price, offer price, contract price, and broker's price opinion (BPO). Those providing a service or product normally speak in terms of cost. Appraisers will consider prices and costs in the valuation process when developing a value opinion

Purposes and Characteristics of Value

The purpose of a valuation or an appraisal is usually indicated in the value concept employed, for example: market value, assessed value, condemnation value, liquidation value, cash value, mortgage loan value, fire insurance value, etc. The purpose of an appraisal frequently dictates the valuation method employed and influences the resulting estimate of value.

Intended use and intended user(s) of the appraisal report. Appraisers are required to identify the intended use and intended user(s) of the appraisal assignment. The intended use and intended user(s) of the report have become distinct from the purpose of the appraisal. This relates to how the process has been separated from the writing of the report (Standard 1 vs. Standard 2 in USPAP). The purpose of the appraisal may be, for instance, to help in settling an estate. The intended use of the report may be to communicate the value findings to heirs only, or may include attorneys and/or taxing authorities. The purpose helps to define how the appraisal process will be laid out. The identification of the intended use and intended user(s) will help to determine which report type is most appropriate for communicating the results of the process.

Appraisal Client.
USPAP defines the client as follows:
"The party or parties who engage an appraiser (by employment or contract) in a specific assignment." USPAP further comments on the client: "The client identified by the appraiser in appraisal, appraisal review, or appraisal consulting assignment (or in the assignment workfile) is the party or parties with who the appraiser has an appraiser-client relationship in the related assignment, and may be an individual, group, or entity.

Confidentiality. The Confidentiality Section of the Ethics Rule in USPAP states that the appraiser must protect the confidential nature of the appraiser-client relationship. This is significant because the appraiser must not disclose confidential information in the report or the assignment results to anyone other than the client or persons authorized by the client. Note that the state appraiser regulatory agencies and third parties duly authorized by law are also authorized to obtain the confidential information found in an appraisal report. This prohibits the appraiser from discussing assignment results or providing copies of the appraisal reports to agents or borrowers unless they are the client identified in the appraisal report.

Four elements of value.
There are four elements of value, all of which are essential.
These are utility, scarcity, demand (together with financial ability to purchase), and transferability.

None alone will create value, but all must be present to achieve value for a property. For example, a thing may be scarce but, if it has no utility, there is no demand for it. Other things, like air, may have utility and may be in great demand, but are so abundant as to have no commercial value. Utility is the capacity of a commodity to satisfy a need or desire. To have utility value, real estate should have the ability to provide shelter, income, amenities or whatever use is being sought. Functional utility is an important test for determining value. Likewise, the commodity must be transferable as to use or title to be marketable.

Generally speaking, a commodity will have commercial or marketable value in proportion to its utility and relative scarcity. Scarcity is the present or anticipated supply of a product in relation to the demand for it. Utility creates demand, but demand, to be effective, must be implemented by purchasing power. Otherwise, a person desiring a product cannot acquire it.

Real estate cycles cause fluctuations in the four elements of value.
For example, when interest rates increase, fewer buyers are able to qualify for loans. This in turn reduces demand for real estate. This may lead to an over-supply of properties for sale (or a lack of scarcity).