Possible first L/O deal

[tgaspard 0]

I drove through an area and sent out 10 postcards to FSBO and FRBO properties. From these 10 post cards I got 1 call and it turns out he is very motivated. (And yes I was pretty nervous making that first call but is was not to bad once we got talking)

 

He started the house at $150000 3 months ago and he is now at $129900. The comps look very good. The cheapest house in that area over the last 12 months was for $122000 for a 1400sq ft house. This house has close to 2300sq ft. He tells me that he is building another house and needs to get out under this one ASAP. His new house will be ready in less than 2 months. He went to my fly by night web site from my post card and was sold to the idea of lease/purchase before we even talked - I thought that was pretty good, not having to sell the lease/purchase idea to him myself!

 

(Check out my web site at www.option2own.4t.com It is rough and my wife tells me it is full of grammar problems - we'll get that fixed soon. Let me know what you think. It is not close to being done yet)

 

Anyway here is the problem. He says that his relatives are contractors and helped him build an addition to his house. The tax base on the house is still the old 1700sq ft house (it is now with the new addition 2300sq ft). So I'm wondering if this is a problem that needs to get fixed? If I demanded that he get that fixed would he possibly have to pay back taxes? If I bought from him like it is, would I be liable for the back taxes? The addition was done about 7 years ago.

 

Here is a picture of the house

http://www.buyowner.com/property.asp?code=HOU2635

 

So if this was your possible deal, what would be your next move. Since this is a discounted price and he is already sold on lease/purchase I told him I'd like to see it. I'll be taking a look at the property on wednesday.

 

Todd

[Guest Guest]

Todd,

Yes, if you bought the house and he didn't pay the taxes they could be transferred to you or whoever you sell it to. I would check for liens too based on the past help his family and friends gave to him.

I had to read your post twice because the first time I saw no motivation and no deal based on experience from similar deals. (Bridge loans etc that MUST be cashed out) But then I read it again and you said he was interested in LO terms. I also read on his site about the house that "pets are allowed". That tells me he's ready for renting, or something got miss communicated between him and the people trying to move his house for him.

If that's true read on.

 

My next move would be to prove me wrong about what I saw on his true motivations at first and ask him if he is really willing to do terms and hold out for his cash. If he is and the house is looking like it's worth close to what he's asking, this would be a classic lease option assignment deal.

 

About the site. Yes, there are spillin prblmes. Looks nice, but I would cater to one party at a time.. Keep up the good work though.

 

Regards,

Adam

PS I don't look at properties until the seller and I KNOW that we are meeting to sign contracts. Very rarly will I look at it without that being disclosed up front.

[MichaelC 160]

Todd, the deal is very much alive. It sounds as if it is up to you.

First, as Mark has already said, there is no need to look at this property first. Make your offer based on your homework and comps. When and if you can agree to all terms, then it's worth your time to view the property. If you can't agree on terms, who cares if his carpeting is pretty and fruit trees are in bloom?

As for the issues with the addition, taxes, proper building permits, etc. Before this deal becomes finalized all of that needs to be cleared up and verified. Your agreement, of course, will allow you an out in the event everything isn't aligned properly. So, there is no risk to you, but the potential for a sweet deal.

Get the offer out!

[tgaspard 0]

Thanks Mike and Adam

 

I did as you guys suggested - I did not go over but rather talked on the phone and made an offer. (pretty scary for me - I'd admit)

 

First off the problem turned out to be no problem after I talked to the tax people. They told me if the addition was done over 5 years ago then there would be no additional tax for either the buyer or seller. They said the seller would simply get away with it if is was beyond 5 years. Seller tells me addition was done 7 years ago.

 

I called and made a sandwich offer $10,000 lower than he was asking. The reasoning I told him was that he has a unique house (two living rooms and all) and thus I had to go lower. He closes on is new house on Feb 20 and time is ticking on him. Anyway he said he would have to think about that some more. I also offered to do a CA but funny enough he liked that even less (even though I'd give him his price). He really does not want to be a landlord.

 

Anyway here are numbers:

He wanted $150000 ------ went down to $129000 ------ I offered $119000

 

Rent $975 and I could get $1200

 

We did not talk lenght of term

 

He is 100% committed to a sandwich deal but not a CA deal.

 

Anyone see any problems with the numbers?

 

PS: Over 12 months the cheepest house sold in that area was $122000 for a 1400sq ft house. This one has 2300sq ft.

 

Todd

[-Tony- 0]

The only problem I see is you don't have a signed contract....

 

for terms this is what I like to say.

 

the reason for the 48-60 month term, is for your protection. We like to protect you as best we can. When we place t/b we work with them to get them financed in 6-12 month but sometimes things happen where the t/b can't buy. But, when we have the safety net of a little extra time we can get your house sold. During this time if there is a lapse in t/b we continue to make your payments while we get another qualified t/b in the house. As I told you before if we don't get them qualified for a mtg, we don't get paid.

 

Then when filling out the contract just wright in 60 month (I usually say it as I right it) if he has an objection change it to 48.

[Adam King (MI) 1]

Todd,

I commend you 100% on your effort, but if he was truly 100% committed you'd have a signed contract in your hands. But the fact that this is your first deal (Or close to your first), I'm still impressed.

 

I can't comment on the numbers because I don't have all the info, but at face value it looks like a good deal. If your comps were accurate, then the house at $122K with almost 1000 fewer square feet would definitely seem cheaper. But the question is really how much is the property worth?

 

As for the taxes, that is cool if it's true. I didn't know that they would be wiped clean after 5 years. I would still make sure there was clear title though.

What state are you in?

 

The first few deals are always the hardest because our minds run with the nonsense of "what could happen". We seem to almost be more afraid of a "yes" than a no and that can make in difficult to make the proper choices. But you never know until you try and not too many people even get to that point.

Good stuff,

Adam

[MichaelC 160]

Todd, you've received some good advice so far from Tony and Adam.

Was your offer to him verbal, over the phone? Or, was it in writing? Get into the habit of making your offers written. It gives the offer credibility. The homeowner now has something in their hands they can look at and touch. It also has an expiration, usually of 24 hours. If they are serious they are going to get back to you and work out a deal.

Another question: when you get this deal locked up, what then? A sandwich lease? An assignment? What terms do you think you can receive from a tenant/buyer?

The first one always seems overwhelming, Todd. Don't sweat it. You'll be fine. Get this, maybe another one under your belt, and you'll be struttin' your stuff and kicking yourself for not starting years sooner.

[R/E Possibilities 0]

Just a thought on negotiations:

 

Ask the seller: If a real estate agent came in today and said he had a buyer willing to pay you $129,900 would that work? If they say yes, then say:

 

Real estate commissions are usually 6%, that's about $7,800. So you would net $122,100. If they agree then you have talked them down almost to your $119,900.

 

Now you have my two cents worth..might even be worth three cents.

 

Take care,

 

Ed

[Joseph44 0]

Hi everybody,

I read the post and all the replies I don't know if I would make

an offer without seeing the property that would be like stepping on quicksand.

I would get all pertinent info over the phone due as Michael C says your due

dillgence then go with paper work and a mind set what you are willing to offer,

and your terms.See the home and sign paperwork in one visit.Of course if I'm

wrong I'm open to ridicule.(wouldn't be the first time).

[tgaspard 0]

Just look at those last 4 replies

 

This forum is absolutely the best! You guys are great and have given excellent advice. I can't thank you enough.

 

For me I really don't care if I get this deal (he is supposed to call back by Friday). The experience alone is worth it. I've learned so much from sending those 10 post cards, doing comps, getting appraisal district info online, talking to title companies about double closings, talking to my first potential customer, to finally making a working offer (Mike, excellent point about making written offers). I've made many mistakes and the most important point is that I know the mistakes that I made. Anyway this little one week lesson is worth its weight in gold. I know that I can do better and will be better prepared for future transactions.

 

I think that a beginner, as myself, should maybe do assignments first before doing a sandwich deal. It is important to get a feel for the market and how good a deal really is. This guy I'm talking to liked the sandwich idea, but not the assignment which I find is kinda backwards. But that is okay.

 

My biggest surprise is that I did get one person to call me from those 10 cards. A even bigger surprise to me is that he was sold to the lease/purchase sandwich concept from my work in progress web site (it will be a huge site before I'm done with it).

 

A few responces to your questions:

 

Tony

I'd like the idea of 3 year term. It is an advantage to the seller if we can get his house sold in 3 years because if he's been in the house for 2 of the last 5 years then he MAY not have to pay capital gains taxes.

 

And yes I don't have a contract but I will. If not this deal than another will pop up and I will get it. What I got from this little transaction is a lot of education.

 

Adam

Thanks so much for the encourging words! You bring up a good point. I should at least double verify what people are telling me. Also to answer your question I'm in Houston, Texas - would you believe a NASA engineer. Yes, and in a way a big space chicken for waiting so long to give this a try.

 

Mike

I'm more interested in doing an assignment but he liked the sandwich deal he learned about from my web site. Like I said earlier I was sorta surprised by that. And good point on the making offers in writing - I like that.

 

Mike, I probably read every responce you've written in this forum. Man, you are simply awesome! I'm sure you spend hours and hours on end answering everyone. I'm not sure how you keep up the energy. Thanks so much for everything that this forum provides. Maybe at some point I could get you to come to Houston to speak at our real estate club.

 

ED

Thanks for your 3 cents Ed. I did hear that once before and I think it is a great idea. I'm sure I will use that line at some point in the future.

[tgaspard 0]

Result was no deal - but that is okay, I learned plenty!!!

 

Thanks everyone...

 

Todd

[MichaelC 160]

Todd, I'm so glad to hear you say what you did! It is so true that each near deal, especially when starting out, is a great learning experience. Use it as such, learn from it, and you are wiser as a result. Remember: to get that first deal, to get your next deals, you must be making offers. And the only way you'll get to that point is to speak with sellers. Call and market, and call and market some more!

[tgaspard 0]

Just when I thought that this deal was dead, the guy called me back!!!

 

This would be my first deal - so all input is welcomed?

 

His motivation has been going up since he closes on the home he is building at the end of next month.

 

My Terms:

He started at $150,000 and went down to $129,999. I offered $119,000 and tonight he accepted. We further agreed to 3 years at $1000 a month (this covers his PITI)

 

House:

4 bedrooms, 3 full bathrooms with two living areas. Additions were added on the house so it went from 1700sq ft to 2300sq ft. It also has an above ground pool. He says house is in excellent condition. (Note - you can see pictures of home on a earlier post on this thread)

 

 

Comps:

Here are some comps I got from homeradar.com (.25 miles away for 12 months)

 

1 6011 BEAR TRACK LN

1421 sq. ft. PASADENA , TX $122,360 11 Dec 03

2 3718 COUNTRY RD

1698 sq. ft. PASADENA , TX $159,467 08 Dec 03

3 3412 MEADOW LOOP

1644 sq. ft. PASADENA , TX $126,223 21 Oct 03

4 5938 BUTTERFLY CIR

2084 sq. ft. PASADENA , TX $133,000 17 Oct 03

5 3735 CLOVER MEADOWS ST

2205 sq. ft. PASADENA , TX $122,360 31 Jul 03

6 3635 SWEETBRIAR DR

1385 sq. ft. PASADENA , TX $110,716 25 Apr 03

7 3635 SWEETBRIAR DR

1385 sq. ft. PASADENA , TX $110,716 25 Apr 03

8 3412 MEADOW LOOP

1593 sq. ft. PASADENA , TX $117,040 14 Apr 03

9 3627 COUNTRY RD

1216 sq. ft. PASADENA , TX $123,823 31 Mar 03

10 3730 SWEETBRIAR DR

1502 sq. ft.

 

#2 and #9 are on the same street, infact #2 is not far at all from his house. You see from this list that his house is bigger than all of these!

 

He has given me permission to bring contracts with me on saturday. So now the big question, "Is this a good enough sandwich deal?"

 

T/B side of equation:

I don't think it would be hard to lease at $1250 a month (My current lease house of 1600sq ft is renting for $1140 a month) I'd advertise "Rent-2-Own" for $135000.

 

Is this a looking like a deal?

 

Now for the bad news, he says that another investor is also interested and will be looking at his place on Friday. The other investor wants him to carry back a 0% owner finance note. He insures me that we can meet saturday, which tells me he won't be signing anything with the other investor (at least that is what I hope).

 

Todd

[MichaelC 160]

It's like I always say: time is a great motivator. I'm not surprised you heard back from the homeowner. It happens more often than you'd think.

OK. Let's look at the numbers........

Your deal with homeowner:

36 month lease with option to purchase, at $1K per month. Purchase price of $119K. (Nothing down, I assume? And, beginning when? Being it is the third week in January I would prefer that the agreement begins April 1.)

 

Your possible terms with tenant/buyer:

12 month lease with option to purchase, at $1,250 per month. $250 monthly positive cash flow. So far, so good.

Assuming option consideration in an amount equivalent to three to six months rent, let's be conservative and say you receive $4K.

Your t/b's agreed to purchase price is $135K, giving you a gross back end profit of $16K. Deduct the $4K option money you have already received, plus another $7,500 in rent credits, (assuming 50% for 12 months), and your true back end profit is $4,500.

Overall, I'd say the numbers work fine. This is a fairly typical sandwich lease deal. The numbers could change due to any number of factors. For example, the t/b's could end up not exercising their option. In which case you can pad those figures considerably as you do the deal again.

So, yeah, I'd say based on the numbers you are giving us the deal is worth doing. A few points worth remembering: the agreements you have provide you with a number of safety nets in the event you need an out. So, no need to stress over what might go wrong. If something does we probably already have it covered.

As for the "other" investor. He may or may not exist. I have had any number of sellers tell me they had another interested party looking at their property. Let's give your guy the benefit of the doubt and say it's true. You don't want to be the motivated buyer and you don't want to get into a bidding war. You have done your due diligence and you know what this property is worth to you and the type of deal you can offer. Stick to it. If the seller seems to be leaning towards the other offer, I would point out the advantages of what you are offering.

Things like the seller's name remains on the title, so he retains all the benefits of homeownership. The other offer is for a 0% owner finance deal. Ask the seller what's in that deal for him? Tell him the dangers of seller financing include needing to foreclose on the borrower if the borrower defaults. A costly and time consuming process that could screw his credit history in the interim. I don't think you've got too much to be concerned with here.

Let us know if you have any more questions and how it plays out. I'm pullin' for you, Todd!

[tgaspard 0]

Thanks for the reply Michael! And yes I am (was) shooting for a no down deal. And yes, I also asked and got an April 1 start date.

 

This is how my first Landlord/Seller encounter went down

 

The outside of the home is real nice - excellent shape. The inside could use some paint and carpet. The addition to the house seems well done but this house is definitely unique. The house has 2 living areas that can isolate the family from the older parents. Of course this means it might be hard to move this home. It sorta concerns me now.

 

We talked for two hours and I sure they felt very comfortable with me. They asked many questions and I had all the answers. They mentioned needing some money up front. I had previously planned my strategy if that was to happen. 1 -I'd offer to prepay some rent up front or, 2 - give a security deposit, and 3 - as a last resort I offer up some option money. I had already decided I would not offer #3. Option money I could never get back, but at least I could get back a security deposit if I had to get out of the deal.

 

We decided on 3 months rent up front. Since rent will be $1000 a month, I will give $3000 up front (only after I have a Tenant/Buyer) and pay them $500 a month for 6 months to recoup. I would then go back to $1000 a month. Thus I recoup my up front profit in 6 months.

 

Unfortunetly I don't have a signed contract. They have someone coming to look over the house on Monday. They asked if I would be available to possibly sign papers on Tuesday. That other investor guy had to reschedule and will be looking at the property tomorrow. I got them to understand that if things ever went wrong with me they could evict, but with the other guy, they would have to foreclose (and thats another animal entirely)

 

So come Tuesday we will see if this deal closes or not!

 

Mistake #1 - I should of asked on the phone if it was possible we could sign papers today.

Mistake #2 - I'm starting to think I should of asked for a lower price due to the bad carpets and the need for inside paint.

 

Thanks for all the support Mike - your simply amazing man!

 

Todd