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Doug Pretorius (ON)

Price set to market value at the time of sale

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Thought I'd post about this idea since it applies pretty much across the board whether you're having trouble getting buyers or sellers to commit to a fixed purchase price upfront. Buyers don't want a fixed price when prices are falling, and sellers don't want one when prices are rising... what's a lease purchase technician to do?

 

I've been pondering this problem and how best to make it function in the real world and I think I have a possible solution. While we can't leave the purchase price in our contracts blank, we can set the price to a formula rather than a dollar amount. So our contract could read something like this:

 

Purchase Price: The purchase price shall be the market value at the time of the exercise of this option. Market value shall be determined by taking the average of no less than 3 broker price opinions.

 

Then of course the contract would also specify that the option consideration and rent credits would be credited to the purchase price. Do it this way the price is legitimate (banks often use BPOs to determine value for refi's and foreclosures and whatnot, anytime they don't want to do a full appraisal). If prices fall the buyer benefits. If they rise the seller benefits. And the buyer still gets their credits.

 

What do you guys think?

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We set the price based on current market, but have a clause that sets the price at appraised value at time of purchase, should the appraised price be less than the Option Price.

Sometimes we'll put a stop loss in depending on the situation.

"...should the Appraisal Value be less than the Option price at the time of purchase, then the LAndlord/Optionor agrees to lower the Option Price by up to $3k at the time of purchase...."' or something like that.

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Hi Doug

 

I just have two questions here in the scenario that you described. Since the buyer is getting their option consideration and rent credits factored in wouldn't this have to be a very conservative amount? Also wouldn't you have to make sure that the owner has enough equity in case the price dropped say 10-15% over the term of the option?

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You're right, Gordon. John's idea of a stop loss is an excellent one limiting the decline to some percentage or dollar amount.

 

Using a fixed price plus some formula can work too. Say the price would be $X UNLESS the market value rises or falls by a certain percentage.

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Doug

 

I've been thinking about this too. I have been thinking of an idea that may get around this. My idea doesn't depend on the idea that people will buy the house when they are qualified so much as they would any house. The idea is to get some market deduction based on today's FMV and have the seller sign a longer term lease option of say 3 years with a below market rent. Tell the TB that they will pay the traditional option consideration of say 2-3% but if they can pay the market or above market rent with the difference going to you as option consideration you would give them a no interest down payment to buy any house if at the end of the term if they manage their credit and qualify and keep the lease option contract in good standing. In this scenario of course the option consideration would be minus a small payment to you for your trouble and at the end of the term if they don't qualify you get the rest as well. My idea summed up is this the extra consideration that they pay is like insurance in case the house price falls and either way the TB wins even if the seller won't negotiate with them if the house price falls below the option price. I make this sound more complicated then it is but it would mean a larger sum for option consideration for us in the end. I have not tried this yet but by giving the TB the choice of a lower rent or protection from price drops and a chance to better qualify we can never be the bad guys they made their choice.

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I've always been opposed to leaving the option price open ended. I figure it just leaves too much potential for problems come purchase time. Mainly, agreeing on the price. But I must say that pilot's idea of setting a price today with a clause that allows for an appraisal of some type at the time of exercising the option to be a good one.

I still would prefer to set a price today that all parties agree to, and only make things interesting if need be to get the deal done. Simpler is always better.

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MC you're right simpler is always better. I guess in the end it is always just better that we find deals with more equity so that stop losses can be put into place. If the houses don't appraise for the fmv in the future it could always be negotiated by the TB and the owner.

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We set the price based on current market, but have a clause that sets the price at appraised value at time of purchase, should the appraised price be less than the Option Price.

Sometimes we'll put a stop loss in depending on the situation.

"...should the Appraisal Value be less than the Option price at the time of purchase, then the LAndlord/Optionor agrees to lower the Option Price by up to $3k at the time of purchase...."' or something like that.

 

John,

I like this idea. Old thread, but definitely still applicable to the current real estate market. I would like to hear if others on the forum are implementing anything similar

 

I see Eric is having concerns expressed by T/B in this thread: Appraisal Link

 

I realize that having the appraisal contingency may be one sided (in favor of the buyer), but in today's market I think it is becoming necessary. The bottom line is that unless the seller can get a cash buyer, they are going to have to take what a lender will lend on appraised value, or if they can do an owner financed 2nd mortgage.

 

I have also read posts by MC about having the clause in his contracts about financing not being a condition of the contract. Question:MC in today's market are you getting objections to this from buyers expressing concerns about the property appraising?

 

I am tying to brainstorm something to put in a contract using something similar to John's above. Please let me know your thoughts:

 

"Should the property appraise for less than the Option price at the time the Option is exercised, Optionor and Optionee shall have the right, not obligation, to negotiate an addendum reflecting the appraisal price"

 

 

Look forward to all the input/ideas.

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Question: MC in today's market are you getting objections to this from buyers expressing concerns about the property appraising?
Rarely. If the issue is raised, I leave it to the t/b and the homeowner to work out an agreement.

 

I am tying to brainstorm something to put in a contract using something similar to John's above. Please let me know your thoughts:

 

"Should the property appraise for less than the Option price at the time the Option is exercised, Optionor and Optionee shall have the right, not obligation, to negotiate an addendum reflecting the appraisal price"

That sentence changes nothing should an appraisal come in below option price. Both parties always have the right to attempt to renegotiate. Doesn't mean the other side will cooperate, however.

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I think it goes to buyer beware. If you purchase a car do you not shop for price and look up values as a buyer? If not whose fault is that? Do prices change over time? Yes. The investor has no control of the market and what the lender's appraisal will be. What if the value goes up? Should the tenant/buyer pay more? The True Value in real estate or anything is what someone is willing to pay for it. You can have three appraisals completed and each will have a different number. Banks looking at foreclosures and short sales as comps in an appraisal to obtain a true value is BS.

 

The tenant/buyer should be grateful they had the option and a lease term with time to kick the tires; or they may have been stuck with a house, that if they purchased, would have now been valued less than what they paid for it. That is the advantage of a lease with an option to purchase.

 

Four choices:

-seller drop the price

-tenant/buyer pays the difference to obtain financing

-seller carries a second

-tenant/buyer is not obligated to purchase (lucky for them)

 

"Mr. Buyer, we pull comparable sales of similar houses that have acutely sold in the area. We take the price per square foot and apply it to this house. That is how we came up with the price. You also receive a 50% monthly rent credit which reduces the purchase price below current market values."

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This is such a great thread. Thank you all so much for this. My forte is people, the gift of gab and engagement.

 

The numbers---aim't gonna lie----have me scared. I can just see me when I get someone serious on the phone. I'll say goodbye to them and then RUN to the laptop and scream omgosh, what's the best way to do the numbers. :blush:

 

I din't even know exactly how the price per sq foot figured into the whole pic. Does everyone use this piece in figuring out the price/ I need to go back to "The Manual" and re-read that part. I'd love to hear your perspective on it though.

 

Thanks!

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DeeLight-

For me looking at price per square foot is the most accurate, because you always hear from sellers that the house down the street is for sale at this price, so my house should be priced the same. Well, the house down the street has 3,000 s.f. and the seller’s house is a 2,000. s.f. house. There are many sites now that give a value range and also list houses and what they have actually sold for, and what they are listed at. It is also good should a buyer balk at the price and explaining the per square foot comparable usually satisfies them.

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Thanks so much for that Steve. I need to get a handle on the numbers part of this crei game. I need to get un-intimidated by that part. :P

 

People can hear fear and uncertainty in someone's voice.

 

I'll re-read The Manual; I learn something new everytime ;)

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Appraisals are not a science. Two qualified, professional, licensed appraisers can look at the same property and come up with different valuation. There are always variables that will affect someone's perception of value. If I'm selling, I will use the comps that are going to support a higher price. If I'm buying, quite the opposite. We use the comps in a way that serves our interest in the deal. Like Steve, I'm a big advocate of breaking down the cost per square foot method. Just be sure, Dee, that you can justify your number.

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