"No Charge"?

[randian 0]

A common phrase uttered to sellers by L/O investors. If you're using MC's paperwork or similar the option consideration you get from the buyer of a CA is subtracted from the seller's price. While that's not cash out of pocket for them it isn't "no charge" as most people would see it. It makes you look dishonest, which is death in any business deal. You never get sellers who see the Assignment of Agreements and balk when they see that?

[MichaelC 160]

When doing a CA, you need to present the deal to the homeowner with an emphasis on their net selling price.

For example, I tell the homeowner that when the t/b exercises their option, the homeowner's net price at closing will be $300K. First, they're thrilled because they were planning on receiving around $20K less when their Realtor sold their house for them. Of course, that didn't happen anyway, which is why they are talking to you right now.

Second, I arrived at that $300K net selling price after doing my due diligence and knowing that I could put this property on the market for around $319K. That $19K cushion allows for $6K or $7K option consideration to be paid to me, along with approximately $11K in rent credits, (for this example I am using $1,800/mo rent with a 50% rent credit).

You asked if the seller ever balks when they see us making that $7K. Sure, on occasion, there is the homeowner who wants it all and expects us to work for free. But that is the exception and not the norm, randian. Again, my emphasis from the get-go is the homeowner's net selling price and how much more it will be versus the straight sale they were hoping the Realtor could bring them, (but didn't!). So in this approach I see nothing dishonest or deceiving at all.

[Dan (SoCAl) 0]

While that's not cash out of pocket for them it isn't "no charge" as most people would see it.

 

It's important to understand how the transaction works. You and the seller enter into an agreement which nails down the net purchase price for his property. Now you are free to open escrow and buy that property for the agreed-upon net to him, OR you can sell your interest in the property (with an assignment) at whatever price you can get and pocket the difference. The new buyers will purchase the property and pay the seller his net price, as per the original agreement.

 

Where's the deception?

 

You never get sellers who see the Assignment of Agreements and balk when they see that?

 

Not yet, but again, I am clear with them from the start. To begin with, I never slip into "agent speak." If they view me as an agent, it's up to me to correct that misconception immediately. When they refer to my compensation as a "commission," I correct them. It's not a commission, and it would be illegal for me to collect a commission. They are paying me not one thin dime for my services -- ever -- and sometimes it's important to remind them of that. They have already agreed that my assignment fee becomes "option consideration." If they perceive any part of my option fee to be theirs, again, I correct them.

 

Keep the seller on his side of the fence, the parameters of which are clearly defined in his purchase agreement. You are then going to go find a buyer who's sniffing around in somebody else's yard and bring them to that seller. Whatever the buyer pays you to bring them to the seller is of interest, certainly, but ultimately none of his concern.

 

Dan

Freedom Creek LLC

[Doug Pretorius (ON) 9]

is of interest, certainly, but ultimately none of his concern.

That's how I feel about SLOs. Whether you live there yourself or sublet it is of no consequence to the seller. But how to make them understand that?

[MichaelC 160]

is of interest, certainly, but ultimately none of his concern.

That's how I feel about SLOs. Whether you live there yourself or sublet it is of no consequence to the seller. But how to make them understand that?

That's a different scenario, Douglas. The homeowner's objection to a sandwich lies in the lack of control they sense. They want to know who is living in their house. With a CA, they feel as if they are in control because they have a say in who ultimately resides there. So I can understand that.

But I do get irked when Joe Homeowner raises a fuss because they suddenly realize I'm putting $6K or so in my pocket when I complete the CA. That's just greed kicking in.

[phil43 0]

is of interest, certainly, but ultimately none of his concern.

That's how I feel about SLOs. Whether you live there yourself or sublet it is of no consequence to the seller. But how to make them understand that?

That's a different scenario, Douglas. The homeowner's objection to a sandwich lies in the lack of control they sense. They want to know who is living in their house. With a CA, they feel as if they are in control because they have a say in who ultimately resides there. So I can understand that.

But I do get irked when Joe Homeowner raises a fuss because they suddenly realize I'm putting $6K or so in my pocket when I complete the CA. That's just greed kicking in.

 

Funny too Mike, because they seem to have no problem with the 6% realtor commission

 

Phil

[Doug Pretorius (ON) 9]

The homeowner's objection to a sandwich lies in the lack of control they sense.

Sorry to hijack the thread, but would it be a good idea to let the seller approve of your sub-T/B? So they feel like they have some say?

[MichaelC 160]

The problem with that is what if they are so unrealistic and fussy that no one you present meets their expectations? No, if I'm doing a sandwich lease I want/need complete control. I've got more at risk, I want to be in control.

[Doug Pretorius (ON) 9]

Do I have a trustworthy voice or something? Because all kinds of people are ready to hand their houses over to me to live in myself without any sort of background check, or even meeting me in person! And yet they get all pissy when I want to sublet

[randian 0]

While that's not cash out of pocket for them it isn't "no charge" as most people would see it.

 

It's important to understand how the transaction works. You and the seller enter into an agreement which nails down the net purchase price for his property. Now you are free to open escrow and buy that property for the agreed-upon net to him, OR you can sell your interest in the property (with an assignment) at whatever price you can get and pocket the difference. The new buyers will purchase the property and pay the seller his net price, as per the original agreement.

That's true for a SLO, but that's not how a CA works, at least as MC's paperwork does it. If you read the "CA Assignment of Agreements", it says: "Any assignment fee paid shall be considered option consideration and will be credited in full towards the purchase price of the subject property". In other words, your assignment fee reduces their net proceeds. Most any seller who understands that sentence will perceive you as lying to them when you said the deal would be at "no charge" to them. That's not a problem if you didn't say "no charge" or "no cost", but what else would you say instead? "No cash out of pocket"?

[Doug Pretorius (ON) 9]

randian, I don't say anything anymore. I ran into exactly the same problem, no matter how I explained the fact that I am ADDING my fee onto their bottom line, they still see it as coming out of their equity. The problem is they figure if YOU can sell it for $205k when they were asking $200k, they should raise their price to $205k!

 

So I don't mention that anymore. I find around here that people who are open to doing L/Os will do it for their own reasons, and those who don't want to do it won't be swayed by it being "no cost" to them. So there's no point even bringing it up.

[Dan (SoCAl) 0]

That's true for a SLO, but that's not how a CA works, at least as MC's paperwork does it.

Au contraire, that's exactly how a CA works, MC style. The seller's net purchase price is nailed down on the initial short offer form. Signed and done. The "hope-to-get" price to the T/B is stated in the Option to Purchase Agreement (1c). Full disclosure, with the understanding that the final price to the T/B will probably change depending on how I negotiate the deal.

"Any assignment fee paid shall be considered option consideration and will be credited in full towards the purchase price of the subject property".

Correct, exactly how I stated in my original post.

In other words, your assignment fee reduces their net proceeds.

Do the math again. Once you deduct the option consideration and rent credits, what number are you left with? That's right, exactly the net amount promised to the seller.

 

It takes a moment (or several in my early days of lease purchases) to fully appreciate the beauty of this deal. It is NOT real estate as usual. If you're an agent, and think like an agent, it will take a good long while to grasp the particulars. But when you do, and realize how devastatingly elegant this is, it will set you free!

 

Dan

Freedom Creek LLC

[randian 0]

That's true for a SLO, but that's not how a CA works, at least as MC's paperwork does it.

Au contraire, that's exactly how a CA works, MC style. The seller's net purchase price is nailed down on the initial short offer form. Signed and done. The "hope-to-get" price to the T/B is stated in the Option to Purchase Agreement (1c). Full disclosure, with the understanding that the final price to the T/B will probably change depending on how I negotiate the deal.

Please explain this, then. The original Option between you and the seller has you paying the seller $0 for it (or maybe $100). Get in light, right? If you expect to get a $5k assignment fee from your assignee, and put down $5k in the option agreement, you have agreed to pay them $5k for the option. That's what the agreement says, does it not? It is after all an agreement between you and the seller, not your yet to be found assignee and the seller. So are you writing down $5k or $0 when you sign the option?

 

What I don't get here is that the paperwork does not reflect the underlying economic reality of the transaction. Either the paperwork says I'm paying them $5k (to get down the the desired net) while I'm verbally telling them I'm really going to pay $0, or the paperwork says I'm paying $0 (setting appropriate expectations) while the assignment agreement says their net went down by the amount of the assignment fee I received.

 

A true net deal with the seller means that your assignee's option consideration doesn't reduce the price. The only reduction is the rent credit. Whether you get $3k or $7k for your assignment fee is immaterial. It seems like an easier negotiation than explaining why their net depends on the size of your fee. That leaves you with the problem of explaining (if they ask) to the T/B why their option consideration didn't reduce the price. That may not be a problem if you have a rational T/B.

 

I'm probably too anal about this, but I believe that the paperwork should document what is planned to happen. Somebody who reads only the paperwork should understand the true flow of funds. As you describe it the reader won't.

It takes a moment (or several in my early days of lease purchases) to fully appreciate the beauty of this deal. It is NOT real estate as usual. If you're an agent, and think like an agent, it will take a good long while to grasp the particulars.

How am I thinking like an agent? As soon as I start talking about "commissions" and "illegal brokerage" feel free to (virtually) shoot me. I think I have an excellent grasp of the particulars, now that I have figured out that the deal as written doesn't match the deal as applied.

[Dan (SoCAl) 0]

If you expect to get a $5k assignment fee from your assignee, and put down $5k in the option agreement, you have agreed to pay them $5k for the option. That's what the agreement says, does it not?

If you cross out your original (say) $1 option fee and replace it with $5000, you create a problem resulting in six paragraphs of misunderstanding (see your post). So don't touch that number. The assignment fee is properly handled in the Assignment of Agreement, as follows:

 

"Any assignment fee paid shall be nonrefundable and considered option consideration and will be credited in full towards the purchase price of the subject property as specified in the attached Option to Purchase Agreement."

 

It seems like an easier negotiation than explaining why their net depends on the size of your fee.

Your fee, whether $3000 or $30,000, does not alter the seller's originally agreed upon net at all. Once you've nailed down the net price with the seller, that part of the deal is finished.

 

That leaves you with the problem of explaining (if they ask) to the T/B why their option consideration didn't reduce the price.

But it does reduce their price, dollar for dollar. Here's where I think you're missing a key ingredient. Others here may handle this a bit differently than I do, but... I enter the price to the T/B in the Option to Purchase Agreement (item 1c) up front, meaning the seller is fully aware of this (higher) number when he is signing the agreements. I think this is why I've never had a back-end blow-up with the seller. He already knows I'm selling the house for more than his net, the difference being the option fee and the rent credits.

 

I do not wait for him to ask me about it, either. I point it out and say "This number may be complete fantasy, but I want room to negotiate and I want the T/B to see it in writing. It will probably change. The numbers that won't change are your net, your monthly rent and the term. It's still okay if they pay you early, right?"

 

Once you understand how it goes together -- and how to explain it to all parties -- you'll slap yourself. It is a real A-HA! moment. There is no deception, no manipulation, no back pedaling, no agreement mismatch, no guilt.... The deal IS applied exactly as written.

 

Dan

Freedom Creek LLC

[randian 0]

Let's say you have a house where you promise to pay $188k net. The contract terms add up to $192,999 net ($205k gross, $1 consideration, $500/month credit, 24 month term). You tell the seller up front you want room to negotiate with the buyer for an up to $4,999 assignment fee for yourself? You couldn't accept a (for example) $10k fee, because that would be $182,999 net, less than what was promised? If your assignment fee is less than $4,999 the seller's net goes up since you can't retroactively reduce the agreed upon gross sales price? Am I getting close?