CA Option Money

[Adam King (MI) 1]

Sold,

 

The option money does come out of the seller's pocket, though, doesn't it? Not physically, but, he does have to honor that $$$ amount as part of the purchase price of the home later on. If you keep $5000.00 option money as your fee, then a $100K house is REALLY selling for $95K to the TB. The owner/seller never sees that $5K you took.

 

No. The option money comes off the price like you said, but I haven't done a deal to this day where I didn't sell the house for (At least the option money) above the original sales price. I.e. Seller wanted $95K, I sold it for $100K and kept $5K (Option) bringing the sale price back down to $95K. This is a hypothetical answer not including rent credits etc. But the house is ALWAYS sold at more with a LO than any other way.

Hope that helps,

Adam

PS We should make an "ultimate rebuttal" post.

[grannyguru 0]

The money you are paid by the T/B DOES NOT come out of the seller's pocket because it is NOT money the seller would have had. Instead, the seller is getting money ADDED TO HIS POCKET because you set up the deal.

 

Think of it this way:

 

If you bought the house from the seller for 95k and then sold it to your buyer for 100k, would your profit be coming out of the seller's pocket? Of course not.

 

It's the same thing here.

 

If you start thinking your profits are coming out of the seller's pocket you may feel you owe him. Or he may decide to think that, and you go along with it!

 

The seller is selling the house for as much- or probably more- than he would have sold it for without you in the deal. He is not losing money; he's gaining money.

 

You are SAVING people money by selling the deal instead of buying and then reselling the house. If you had to buy it and then resell it, you would have to buy it for less and sell it for more, because of the added closing costs of two sales.

 

The option money does work as part of the down payment. It is YOUR MONEY. From what YOU were going to sell the house for to YOUR BUYER (T/:P.

 

When you assign the deal back to the seller in a CA, you are assigning him the part of the deal that is left... with your option payment having been already removed from the deal (paid to you!).

 

The fact that the option payment acts as a partial downpayment only means the seller is getting a done deal where that part has already been paid out to someone (you). He gets what is left, which is more than he would have otherwise gotten.

 

It does not cost him to deal with you; it pays him to deal with you.

 

The money that goes into your pocket is money that would NEVER have gone into his pocket. After all: remember, he's the guy who couldn't sell it to anyone else for what he was asking...that's WHY he's turning to you!

 

 

Alice

[Sold ! 0]

OK, I think I am seeing it now, thanks.

 

Is it fair to assume that we can offer the seller what he's asking for the house in most cases, then?

 

But, what if the seller has an over-inflated idea of what he can get for the house? In other words, if his 4BR/2BA comps out at $150K and he is asking $175K because, "that's what he's got into it,"....then is it up to us to educate this man on the facts of the matter?

 

Has anybody found that it is logical to the seller that discounting you the 6% that he'd NORMALLY pay to his realtor is a smart move?

 

Do you ALWAYS work from the Comparables numbers when making your offer to the seller? Or are there instances where you might just go with his asking price despite the fact that it's inflated?

 

I am sorry these questions seem all over the place, but my head is swimming with them right now.

 

Is there a basic formula for determining your offer to a seller? Obviously, it can't be set in stone, but arte there any guidelines anyone uses in making an offer? I know it's very much different from making a traditional offer to buy the property, but does anybody have some sort of system for making the offer?

[MichaelC 160]

Hi, Rich. Don't apologize for asking questions! That's what we're here for.

In some cases, you will find that a homeowner's estimate of his property's value is, indeed, over the top. Can you still work with this individual, and try to complete a quick deal? Sure, you can try, but my experience has been that you'll waste your time and advertising dollars. More important, perhaps, is that the homeowner is now going to see you as the reason for not being able to do as expected and find a taker for his property.

Instead of being the motivated buyer, and taking on the homeowner's misjudgement, your first order of business is to make him realize the accurate value of his property. Back this up with facts, in writing. Show him your report of recent sales. Now, it's up to him to face reality. If he insists on overpricing his home, let him. Give him your card and suggest he call you if he's still fighting the market next month. Chances are he will be. Then, when he calls, fight the temptation to gloat and, instead, be sympathetic. Now, the homeowner realizes he is the incompetent one, not you. You'll get the deal, and at the right price. Do your thing, find the tenant/buyer, and in a week or two he'll consider you the greatest thing since canned beer.......and that's pretty damn great!

[CC Rider - MI 0]

Sold -

 

I struggled with the "comps" question for a while too, but the reason you still need to check comps instead of going with what the seller asks is your eventual sell price has to be grounded in reality such that the T/B can actually get a loan. If the home doesn't appraise for the inflated amount, the deal could fall apart. (In addition to what Michael just wrote.)

 

Anyone else agree or disagree?

[Sold ! 0]

So, then, perhaps our line of questioning up front should include questions like:

 

What would your property be appraised for today?

 

How did you come up with that number?

 

What do you owe on the property?

 

Hmmmmmmmmmmm............he's asking $195K and he owes $140K.......

 

Would you take what you owe on the property?

 

 

Seems we could flush out the answer as to where he got his figures for the asking price and maybe even see where his mind is and how motivated he is by asking if he'd take what he owes. Some peoiple just need to get out from under the debt and this question could smoke that info out.

 

By asking how he came to the "appraised value" we can perhaps get from what he's asking to what his own perception of reality is.

 

No?

[-Tony- 0]

Would you take what you owe on the property?

or this may sound a little better to the owner

 

if I could cover your Mtg payment taxes insurance and all of the day to day maintenance of the house, would that be something you may be interested in?

 

you forgot....

 

are you behind on payments?

 

what is the condition of the property?

 

it sounds like a very nice house, why are you selling?

 

also sq ft, bd/ba/gar to name a few more

[Sold ! 0]

you forgot....

 

are you behind on payments?

 

what is the condition of the property?

 

it sounds like a very nice house, why are you selling?

 

also sq ft, bd/ba/gar to name a few more

I didn't forget it, I just don't know if I need that information yet. That could come later.

 

If he has just indicated that he's flexible and motivated, I want to find out just HOW flexible and motivated he really is.

 

I can find out about payments and all about the property later on, if I am interested in working with him. Motivation is the key factor right up front.

[-Tony- 0]

if I could cover your Mtg payment taxes insurance and all of the day to day maintenance of the house, would that be something you may be interested in?

 

Then just use this line but I get all the info on the first call (if they called me)

[<Steve> 82]

I am meeting a seller this weekend to talk about doing a CA with their property. I have been in contact with this seller since last June. They tried to do a L/O on their own and failed. So, now the seller has come back and is asking for my services. This thread has been most helpful as this is my first attempt at a CA.

 

Adams reply:

The option money comes off the price like you said, but I haven't done a deal to this day where I didn't sell the house for (At least the option money) above the original sales price. I.e. Seller wanted $95K, I sold it for $100K and kept $5K (Option) bringing the sale price back down to $95K. This is a hypothetical answer not including rent credits etc. But the house is ALWAYS sold at more with a LO than any other way.

 

OK got it so far. So what about the 50% rent credits. How is that explained to the seller? If the rent is $800 per month and the term (1) year for this 95K house, the price drops another $4,800. Or would you add that to the 95K along with the option consideration (t/b fee)? Now selling the house for $104,800.

 

<S>

[Adam King (MI) 1]

Steve,

 

OK got it so far. So what about the 50% rent credits. How is that explained to the seller? If the rent is $800 per month and the term (1) year for this 95K house, the price drops another $4,800. Or would you add that to the 95K along with the option consideration (t/b fee)? Now selling the house for $104,800.

 

The rent credit would be negotiated as further incentive for the tenant/buyer to pay on time and purchase. If I'm doing a CA, I try to work it out so the tenant/buyer is actually getting the bargain the way you have it above in the first scenario. So the purchase price would drop down under the $95K mark to the $91,200.00 mark after a full year. But you can inflate the price to keep it at the $95K mark minus the option and the rent credits. (Your second scenario)

 

Two things usually happen from this second scenario.

 

1. The seller bugs you all the time (If you offer your broker to help to get the tenant/buyer a mortgage like I do) to get the property cashed out. This is because they're losing $400 a month in equity. Also, the Tenant/Buyer tries to go the full term of the lease to get the extra equity. They also have a harder time leaving the property if there's an eviction.

 

2. Tenant/Buyers are getting much more savvy lately. A lot of them are starting to ask for appraisals (Which I like because I know I have a serious buyer) and comps. So if they see I am grossly over inflating the property (Which I DO NOT like to do), then they have issues with that. People are getting smarter about purchasing lease option.

My opinion is that if a seller is motivated enough to do a CA, let the tenant/buyer get some juice out of it too.

Hope that helps,

Adam

[MichaelC 160]

I am meeting a seller this weekend to talk about doing a CA with their property.  I have been in contact with this seller since last June.  They tried to do a L/O on their own and failed.  So, now the seller has come back and is asking for my services.  This thread has been most helpful as this is my first attempt at a CA.

 

OK got it so far.  So what about the 50% rent credits.  How is that explained to the seller?  If the rent is $800 per month and the term (1) year for this 95K house, the price drops another $4,800.  Or would you add that to the 95K along with the option consideration (t/b fee)? Now selling the house for $104,800.

 

<S>

Steve, I find that if you explain the rent credits as being beneficial to the homeowner, they are never a problem.

Let's say our homeowner has just tried the Realtor scenario but the property hasn't sold. The asking price started at $189K three months ago. But, alas, no action. Skittish seller wants to know why and the Realtor decides the price needs to come down, (not at all unusual, by the way). So, the price is reduced to 184K. Again, no buyers, and the listing expires.

The phone rings. I'm at the beach, enjoying vaca frita con platanos y arroz, con una cerveza o dos. Thinking it's my buddy Tom, wanting to extend the party and decadence, imagine my surprise when it's our friendly homeowner who saved my letter I mailed him three months ago when his property first listed.

"Tell me more", he says.

"I'd love to, amigo", I reply, "but I'm on another call. May I call you back later this afternoon?"

When the food and spirits dissipate, and I return to my cabana to have the Cuban cabana girl wash the sand out of my Speedos, I call Joe Homeowner back and begin to explain The Lease Purchase Advantage. Among the details, I make a point of emphasizing the bottom line to the seller because, well, that's the bottom line for most of 'em.

"Mr. Homeowner, you were last listed with your Realtor at $184K and had no takers. Well, let's say you did have a buyer at $180K. Of course, this means a net price to you of around $166K when you factor in the commissions and closing costs."

"What if, using a lease purchase, I could net you $178K? That's $11K more than you might have received using your Realtor, and that's if you relisted for another three months. And of course, there is no guarantee he would sell your house this second go round, either. He might have even suggested you drop your price to $179K. Heck, I see this happen all the time. That's the way the game is played, unfortunately, Joe."

I then go into my explanation of how it all works, including why the 50% rent credit I am proposing is vital to making the deal work and necessary for him to offer it. Joe now thinks I'm a crafty and wise individual, in addition to sensing how tanned and well fed I appear.

Your numbers, of course, will vary. But, they will always be favorable to you. Do your due diligence, determine what the top of the fair market value is, (keeping in mind that offering terms such as a lease purchase will get you top price), plug in the numbers and make your comparison to the homeowner. Presented this way, with the emphasis on the net price to the seller, makes all the difference with most homeowners, and will get you more deals than not.

[Sold ! 0]

So, to quote myself and talk myself through this process:

 

Is there a basic formula for determining your offer to a seller? Obviously, it can't be set in stone, but are there any guidelines anyone uses in making an offer? I know it's very much different from making a traditional offer to buy the property, but does anybody have some sort of system for making the offer?

 

.....how about we start with a $200K house and we find the comparables are the same $200K.

 

Perhaps we even negotiate with the seller to pay the next 4 payments on his mortgage while we find him a TB, and the payments are $1500.00 A MONTH ($6000.00 TOTAL FOR 4 MONTHS). BUT, Why would he agree to this?

 

Because we are going to show him something that most sellers don't consider: the cost of selling their house. Most people simply subtract the asking price from the balance of their mortgage and they come up with their PROFIT. But, they are wrong.

 

We are going to point out that if he doesn't do business with us that it is safe to say he's going to list it with a realtor and they are going to charge him 6% of the sales price ($12,000.00 assuming the house sells for full asking price). Let's say this is going to take (the national average) 6 months to sell the home this way and they are going to be paying another $9000.00 in mortgage payments. Wouldn't that suck if they had already moved and it was a second payment every month !?

 

Now, add to that 2-3% closing costs that the seller USUALLY ends up paying (I'll use 3% here for the example) and that's another $6000.00.

 

So, Mr. Seller.........let's add that all up:

 

Real estate commission: 6% x $200K = $12,000.00

 

Closing costs: 3% x $200K = $6000.00

 

Six mortgage payments: = $9,000.00

 

TOTAL TO SELL YOUR HOME WITH A REALTOR = $27,000.00.

 

If there's a really good RE agent involved and it can be done in 90 days, the total cost would be $22,500.00......a $4500.00 difference.

 

Of course the process could be much longer, and you need to point this out to the seller.

 

Now, if you hit him with your original offer of doing an LO or a CA with you for a MAXIMUM $6000.00 (4 mortgage payments) he makes out $16,500.00 BETTER !!

 

That is a formula for success.

 

Am I getting warmer?

[MichaelC 160]

Am I getting warmer?   

Yes. But why would you ever offer to make the homeowner's next four mortgage payments? You're not in this business to make payments on vacant properties, or to have the homeowner's problems become your problems.

[<Steve> 82]

 

The phone rings. I'm at the beach, enjoying vaca frita con platanos y arroz, con una cerveza o dos. Thinking it's my buddy Tom, wanting to extend the party and decadence, imagine my surprise when it's our friendly homeowner who saved my letter I mailed him three months ago when his property first listed.

 

You're a Hoot! MichaelC

 

I'd love to, amigo", I reply, "but I'm on another call. May I call you back later this afternoon?"

 

I'm going to use this line!

 

When the food and spirits dissipate, and I return to my cabana to have the Cuban cabana girl wash the sand out of my Speedos, I call Joe Homeowner back and begin to explain The Lease Purchase Advantage

 

AHHHHH Now I know what the "Advantage" means in the Lease Purchase Advantage!

 

OK, It is clear on the Rent Credits, thanks Adam, MichaelC & Sold. I think I could also give the Seller a price range on selling their house instead of a specific number. This would leave things flexible until the tenant/buyer comes on board.

 

Alright back to the cabana.

<S>