Sandwich lease vs co-op assign

[verbatim 1]

What are the deciding factors on which one you do? Do you try to get the sandwich 1st then go CA as plan b or start off with the CA?

 

Just curious?

[Jonathan RexfordFL 8]

I am always looking at the deal from the stand point who is my buyer. How can I sell and make some money. I operate with the idea that the deal has to pay for itself as an investment or I will not buy or make myself obligated to make payments.

 

I will always operate with the idea of keeping a property. If not then I will move forward with other creative offers. If I have a deal I like, I am prepared to make several type offers. Even the CA if the house can afford it.

[verbatim 1]

Thanks for the quick reply Jon.

 

Possible deal, small #'s:

ARV 50k

they owe 40

note is 440

rents for 595-650

i can probable get 1500 option

 

This is almost a rhetorical question but I thought I'd ask anyway.

[MichaelC 160]

You need to have a plan going into the deal, but be flexible enough to change in midstream if the numbers and/or the homeowner's needs dictate a different approach.

[Doug Pretorius (ON) 9]

I'm not any good at negotiating on the fly. I have to decide what I'm after and then I go out and look for it. I can't do this stuff where you get to know the seller and learn about their needs and situation and create a custom solution that works for them and me.

[<Steve> 82]

I go after a deal as a SLO first as there are more advantages for the seller, then see if the seller is open to doing a CA. For a SLO it has to be a nice house in a good area. The property needs to have the potential to place quality tenant/buyers as my relationship with the tenant/buyer and seller is longer term. The numbers have to be there too. I like median priced houses and I need room to have the flexibility to offer a 100% rent credit should I have to place a second tenant/buyer and still be Ok in the back end of the deal.

[Jonathan RexfordFL 8]

When I mentioned that the property has to pay for itself as an investment. You have to decide how much can you carry a empty home. I have my own formula. I always look at a home with a 50% occupancy and FLUFF rate it keeps me safe. If a property has a payment of 600.00 as income, I only look at $300 as income. I need to make my cashflow off the 300. Not the 600.00. Remember everytime that home is vacant. It cost you money that cannot be recouped. Unless you get a large Option Fee.

 

Which I never count that as income to service debt. That is operation money for business.

 

As with Lease option or any type of income property (SLO) you make your money off the cashflow. IF the property is sold then you can make the back end. I have made more stupid deals by not figuring the debt service on a property. It will eat into your profits more than you think.

 

You need to come up with your own numbers and risk factor. I know some people will take a deal if they can make $100.00 per month. That is good as long as you figure how long you are going to keep it vacant.

 

Too many newbie and oldies think that if a property can pay $800.00 per month and I am paying the seller $600.00 per month that is a great deal. To me that is a horrible deal. In my world I would not take this deal unless I can pay the seller $400.00 per month and rent it out for $800.00 per month.

 

Again this is MY RISK. I don't do too many SLO's as I have been burned and lost money and some I was able to make on cashouts. But others are rough.

 

Look at the idea of doing a SLO and then you get it filled for $1,000.00 per month and you are paying a seller $700.00 per month. You have a $300.00 per month cashflow. But after 10 months they decide to move and you have 2 months vacancy (which is normal) and it cost you $1,400.00 to get it filled. It will take you 5 months to get that money back. Sure you have money from the Option Fee. But remember you have a business to operate and also buying the tuna each month to feed the kids.

 

But if you take the idea of operating off a 50% occupancy idea you only pay the seller $500.00 per month. Sure it is $1,000.00 but it opens you to less risk and you won't make stupid deals.

 

Again this is just my opinion. Debt service is so important.

[Doug Pretorius (ON) 9]

Jonathan, did you follow what you just wrote?

 

1. Iffy backend = no profit there.

2. Cashflow wiped out by vacancies = no profit there.

3. Option fee spent on operating costs = no profit there.

 

So...SLOs = no profit.

 

Kinda makes you long for CAs doesn't it?

[<Steve> 82]

I have to agree with you Jonathan. When SLOs are good they are great and when they are bad they are really bad. Last year I had a vacancy every month with a different property each time. At the end of the year I broke even with my SLOs monthly passive income but made money on the option consideration. I look at my group of SLOs like the owner of a multi-unit apartment building. There are going to be vacancies and expenses that get paid for by the group. At the end of the year I then realize my profit from the group of SLOs as a whole. If I have a stinker property not making it, I get rid of it.

 

This year's vacancies are nil and my SLOs have saved my butt as this past spring was really bad for deals. Typically the monthly income I receive from SLOs can increase my L/O income 25% and that doesn't include front end or back end profit.

 

But you have to treat it like a business and hold your tenant/buyers tight to the lease agreement. At times as a landlord it seems like you have to have nerves of steel. My issue has always been the holding expense during a vacancy. Having to continue to pay the rent to the seller when the property is vacant is the worst. What is needed is an exit strategy. What I do is use the paragraph in the Naked agreement that allows me to cancel at anytime during the lease term , and I only have to pay one month's rent. So I explain this to the seller "up front", that I only pay (1) month's rent if the property goes vacant. Typically the property is cleaned and ready and a second tenant/buyer is placed in a few weeks. Worst case the seller misses 1 month's rent and they never want to take back their property. And if they want the property back, so be it. I give them that option too.

[randian 0]

But if you take the idea of operating off a 50% occupancy idea you only pay the seller $500.00 per month. Sure it is $1,000.00 but it opens you to less risk and you won't make stupid deals.

How are you selling that to the owner? Their net income from a conventional lease is indeed $500 on a triple net basis, but they have another $500 in hand to pay taxes, insurance, and maintenance. In your deal, the owner is still stuck paying taxes, insurance, and maintenance (if the T/B skips) but is light $500 a month.

I go after a deal as a SLO first as there are more advantages for the seller

How so? They net less rent, after your back-end profit net less on the sale, and if the T/B is well chosen they don't have significantly less management effort.

[Jonathan RexfordFL 8]

Jonathan, did you follow what you just wrote?

 

1. Iffy backend = no profit there.

2. Cashflow wiped out by vacancies = no profit there.

3. Option fee spent on operating costs = no profit there.

 

So...SLOs = no profit.

 

Kinda makes you long for CAs doesn't it?

 

Doug,

I never bet on the BACK END. If it doesn't make sense on the front end for CASHFLOW then why do the deal. Vacancies will kill any profit. Sure the CA's look good. A few of you all have shown that too me watching the kind of deals you put together.

[Jonathan RexfordFL 8]

But if you take the idea of operating off a 50% occupancy idea you only pay the seller $500.00 per month. Sure it is $1,000.00 but it opens you to less risk and you won't make stupid deals.

How are you selling that to the owner? Their net income from a conventional lease is indeed $500 on a triple net basis, but they have another $500 in hand to pay taxes, insurance, and maintenance. In your deal, the owner is still stuck paying taxes, insurance, and maintenance (if the T/B skips) but is light $500 a month.

I go after a deal as a SLO first as there are more advantages for the seller

How so? They net less rent, after your back-end profit net less on the sale, and if the T/B is well chosen they don't have significantly less management effort.

 

Randian,

It is not my JOB to sell the homeowner. It is what HIS HOME can afford to pay. When showing the homeowner the math, they will agree or not agree. As long as I don't violate my business principals then I am ok. I am not one of these guys that does 5 deals per month. It is those guys we are reading about in the NOD section of the paper.

[<Steve> 82]

QUOTE (<Steve>)

I go after a deal as a SLO first as there are more advantages for the seller

 

How so? They net less rent, after your back-end profit net less on the sale, and if the T/B is well chosen they don't have significantly less management effort.

radian-

The advantages for the seller with a SLO are that I handle all aspects of managing and maintaining the property and I am responsible for paying the rent directly to the seller each month. Basically the property goes on auto-pilot for the seller and all the seller needs to do is take their check to the bank. No land lording responsibilities. True with a good tenant/buyer a CA is not much different, but some sellers would rather not manage their property during the lease term.

[dionwisn 0]

Jonathan, did you follow what you just wrote?

 

1. Iffy backend = no profit there.

2. Cashflow wiped out by vacancies = no profit there.

3. Option fee spent on operating costs = no profit there.

 

So...SLOs = no profit.

 

Kinda makes you long for CAs doesn't it?

I agree there are a lot of IF'S. Investing through SLO's has advantages. When CA's are slow they can be handy as what Steve stated. Im more in agreement with Johnathan. There must be enough profit upfront, and you cant rely on the back to save you. That was my mistake. You really cant rely on the Option money either. UNLESS its a nice home in a good area and your cashflow is a 35-40% of the negotiated rent your not investing your wasting your time.

[randian 0]

It is not my JOB to sell the homeowner. It is what HIS HOME can afford to pay. When showing the homeowner the math, they will agree or not agree.

What math are you showing them? Let me give an example. You point out to the homeowner that after taxes, insurance, maintenance, management, and vacancy, that $1000/month gross lease is actually netting them $500/month. So, you say to them, "how about I pay you that $500/month guaranteed and be done with it?" Just one thing. The lease you offered is not economically equivalent to the gross lease you compared it to. It doesn't cover taxes and insurance while the gross lease does. Perhaps not one homeowner in a hundred would notice that, which is the real source of your positive cash flow.