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bartendjoe

Potential First Deal

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I think I may have my first deal. I have been emailing with the seller, pitched a CA and have a phone called scheduled for this evening.

 

Details:

 

Purchase Price: $203,900

Rent: $1800 -$2000

Rent Credits based up to $200 based on the monthly rent

 

 

They only want to sign someone up for a 12 month L/O period. Anyone see any problems with this?

 

I have read the recent posts about doing a CA and have already printed out the CA Residential Lease Agreement, Option to Purchase Agreement and CA Assignment of Agreement. Am I missing anything?

 

I'm going to try for a $7.5k option fee. Should there be a split of this with the homeowner? I would think they would expect a deposit from the tenant. How do I collect the option fee if the CA Lease Agreement lists the purchase price of $203,900? Should I add the $7.5k before I sign with the homeowner? What if I'm unable to find a tenant to pay this amount?

 

They have the house listed on the MLS and some "for sale by owner" websites. I was going to offer to let them continue to list and look for a conventional buyer but with a contract break fee if they sell conventionally. Would this be possible? Where would I put this clause?

 

Thanks.

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Joe,

What is their balance on the property?

 

They only want to sign someone up for a 12 month L/O period. Anyone see any problems with this?

 

No. If they ask for it, that's what you try to give them.

 

I only split what I cannot negotiate with the owner, or if they are in desperate need of some cash.

Regards,

Adam

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Joe,

What is their balance on the property?

 

I'm not sure yet what their balance is. Would this be important to know for a CA? They were asking $209,000 and recently lowered their price to $203,900. The asking price is comparable to similar homes currently for sale in their neighborhood and I got some sold information from this free website. The asking price for the home is good.

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Could you put that link in again, I use wells fargo (basis100) web page but it isn't avail any more. I did find that in my area if a house comp'd at 125k a realtors comps would be 5k or more higher.

 

Thanks

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Could you put that link in again, I use wells fargo (basis100) web page but it isn't avail any more.  I did find that in my area if a house comp'd at 125k a realtors comps would be 5k or more higher.

 

Thanks

 

Here it is again.... Link

 

Hopefully this link works. :angry:

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Joe,

It's always important to know as much as you can. Not only does it give you more leverage to ask for more, but it also allows you to know their situation if you shouldn't.

I don't want to say it's a good CA if you could turn it into a bigger money maker for yourself. Yes, CAs are great ways to make money but there's bigger fish out there.

Just my two cents,

Adam

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Joe, let's reel this one in. And let's start by simplyifing the process.

They only want to sign someone up for a 12 month L/O period. Anyone see any problems with this?
First, since you're doing a Cooperative Assignment, twelve months is the norm. So that issue isn't an issue. :P
I have read the recent posts about doing a CA and have already printed out the CA Residential Lease Agreement, Option to Purchase Agreement and CA Assignment of Agreement. Am I missing anything?
No. Those are the three documents you'll be using. But just be certain you are using the CA Residential Lease Agreement, and the CA Assignment of Agreement.
I'm going to try for a $7.5k option fee. Should there be a split of this with the homeowner? I would think they would expect a deposit from the tenant.
I'm not sure what part of the country you're located, Joe, but that amounts to close to four percent of the purchase price. Sounds a bit steep to me. But, if you can get it, more power to you. Just be open minded to a t/b with four or five grand if all else looks good. And for God's sake, do not offer to split your option money! If you must to make the deal fly, so be it. Sometimes it happens. But, offering to split your option money is a habit worse than smoking! Don't offer!

As for the purchase price, here's where it can get dicey if you're not careful. Let the homeowner tell you what they want. That's well and fine. But let the market tell you what they're going to get. Run your comps, and determine what they realistically and likely would receive if they sold their house with their Realtor.

Factor in the discount off the asking price. Factor in the Realtor's commission and the closing costs. Now you have their true net selling price.

From here, figure out the terms you can expect to receive from the market when offering a rent to own, keeping in mind that "terms get price". Meaning, if I'm offering low down payment, no financing needed for a year, a locked in price, and a generous rent credit, I expect top purchase price in return. (Oh, and by the way, speaking of rent credits, $200 on a $2,000 rental ain't no thing. Offer 50%, build it into the price, and watch your phone ring off the hook.)

If all goes according to norm, the rent to own net price to the seller will be around $15K to $20K higher. Take a look at this thread, and in particular my reply in post #4. I think it may help clarify the numbers involved.

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I'm going to try for a $7.5k option fee. Should there be a split of this with the homeowner? I would think they would expect a deposit from the tenant.

 

And they SHOULD get a deposit. Most rentals (leases) do ask for a security deposit and this should be no different.

 

I know I am going against the grain here a little bit, but think of the worst case scenario possible and look 12 months down the road. If the TB has to bail or can't get financed or you have to evict him, he can try to scream that he has equitable interest in the property. You DO have a separate lease and a separate option agreement, BUT, with a purchase there is no "security deposit." If you can show the judge that you have received a security deposit from this "tenant," the tendency for the judge would be to look at this thing more as a rental....and uphold the eviction or whatever is causing this trouble in the first place.

 

I say always ask for a "security deposit" on the lease portion of your deals.

 

What say you?

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Rich, while I understand the reasoning and logic behind the security/damage deposit argument, (a la Bill Bronchick), I must say I disagree.

One, I'm confident that the language in my contracts and Agreements is quite clear and evidence enough about all the specifics of the deal.

And two, I also believe that given a local court with a bias against the fat cat landlord and pity for the downtrodden tenant, no damage deposit will change the mind of that particular judge.

Having said this, don't necessarily take my methods verbatim. If your comfort level is such that a damage deposit makes you feel better about the deal, I say go for it. It certainly can't hurt....unless the amount of money required for the t/b to get into the deal becomes prohibitive and the deal dies.

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You DO have a separate lease and a separate option agreement, BUT, with a purchase there is no "security deposit." If you can show the judge that you have received a security deposit from this "tenant," the tendency for the judge would be to look at this thing more as a rental....

Rich,

 

Not all apartment complexes require security deposits around here. No Security Deposit, free rent till the first of the month, $150 total move-in, etc. are all ploys to encourage renters to move into that complex. Some local landlords renting houses use the exact same ploys! Security Deposits are refundable, Option Consideration is not. Also, in Oklahoma a security deposit is required by law to be in an escrowed account (separate from your personal and/or business funds). Those are my reasons for no Security Deposit.

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I'm going to try for a $7.5k option fee. Should there be a split of this with the homeowner? I would think they would expect a deposit from the tenant.

I'm not sure what part of the country you're located, Joe, but that amounts to close to four percent of the purchase price.  Sounds a bit steep to me.  But, if you can get it, more power to you.  Just be open minded to a t/b with four or five grand if all else looks good.  And for God's sake, do not offer to split your option money!  If you must to make the deal fly, so be it.  Sometimes it happens.  But, offering to split your option money is a habit worse than smoking!  Don't offer!
I spoke to the seller and they used to rent the property. They asked how much of a deposit I collect and I told them "one months rent". :P

 

As for the purchase price, here's where it can get dicey if you're not careful.  Let the homeowner tell you what they want.  That's well and fine.  But let the market tell you what they're going to get.  Run your comps, and determine what they realistically and likely would receive if they sold their house with their Realtor.

Factor in the discount off the asking price.  Factor in the Realtor's commission and the closing costs.  Now you have their true net selling price.

They are not using a realtor so their current sales price is pretty close to their net price.
From here, figure out the terms you can expect to receive from the market when offering a rent to own, keeping in mind that "terms get price".  Meaning, if I'm offering low down payment, no financing needed for a year, a locked in price, and a generous rent credit, I expect top purchase price in return.  (Oh, and by the way, speaking of rent credits, $200 on a $2,000 rental ain't no thing.  Offer 50%, build it into the price, and watch your phone ring off the hook.)

If all goes according to norm, the rent to own net price to the seller will be around $15K to $20K higher.  Take a look at this thread, and in particular my reply in post #4.  I think it may help clarify the numbers involved.

Ok, so I should probably look at a monthly rent of $2k, L/O price of $217k with $12k in rent credits and a $5k option fee. The homeowner would get $2k of the option fee for the rent deposit and I would make $3k. The homeowner would net $200k which is the same as their current asking price of $203,900 minus closing costs they would incur selling by owner.

 

$217k is a bit high for the area though since comps only support a max of $210k. Would this present a problem when the t/b attempts to purchase? Appraisal may not equal purchase price?

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If comps are at $210K and appreciation is ONLY 3.3%, you have your $217K option price.

 

Do you know what your appreciation rate is there in your part of the world? In Florida, we are screaming along at over 20% a year and in some parts 30%+ !!!!!!!!!!

 

Take your $210K comps, add appreciation and that's the "spread" you just created for yourself (the money you have to work with.)

 

Let's assume, for argument's sake, that your appreciation rate is only 10%. That brings your strike price to $231K !! You have $21K to work with, which gives you great rent credit possibilities to fill the house fast and a fat cushion for a nice option consideration fee (pay day!)

 

Next year when they purchase the house, it will comp out at $231K and everyone is happy, especially you becauSe you have gone on and done 15-20 more deals in the meantime. And when the seller calls you and says the TB is moving out, can you help again, you smile and say, SURE, I'll be right over with the paperwork!

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How do you find out the appreciation rate in your area. I have been all over the net looking for it. I don't know if it is because I am in Canada (Ontario) but I can't find any statistics. I sold my own house I live in a few months ago and the appreciation was only 5%/year on average. I have been using this figure to look at deals, but I don't want to shortchange myself or make it so a t/b can't cash out at the end. Any thoughts?

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If comps are at $210K and appreciation is ONLY 3.3%, you have your $217K option price.

 

Do you know what your appreciation rate is there in your part of the world?  In Florida, we are screaming along at over 20% a year and in some parts 30%+ !!!!!!!!!!

 

Take your $210K comps, add appreciation and that's the "spread" you just created for yourself (the money you have to work with.)

 

Let's assume, for argument's sake, that your appreciation rate is only 10%.  That brings your strike price to $231K !!  You have $21K to work with, which gives you great rent credit possibilities to fill the house fast and a fat cushion for a nice option consideration fee (pay day!)

 

Next year when they purchase the house, it will comp out at $231K and everyone is happy, especially you becauSe you have gone on and done 15-20 more deals in the meantime.  And when the seller calls you and says the TB is moving out, can you help again, you smile and say, SURE, I'll be right over with the paperwork!

Unfortunately, the appreciation rates in the DFW, Texas area are nowhere near 20%. They are probably between 2-4% in the suburb where this home is located.

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How do you find out the appreciation rate in your area.

Krusty,

 

Some ideas...

Is there a Realtor Association in Canada like there is here? You can probably get the median sales figures off their website and do the calculations.

 

Once a month in the business pages of the newspaper here, there is a story on what real estate is doing. Many times this includes appreciation.

 

Call a Realtor and ask.

 

A while back someone posted a site with the appreciation rate by state. While that gives you a general idea, appreciation may vary widely from one area to another even within a single state.

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