Possible first deal

[TM_Properties 0]

After marketing for over a month, I finally have a seller who's interested in a lease option. I've talked to him on the phone and he likes it. I told him that I needed to look at the numbers and then I'd get back to him. The house is very nice (from pictures) and in a very nice neighborhood. From talking to the seller, he's more interested in a SLO where he wouldn't have to worry about anything. Here's the numbers:

 

The house is a 4BR 2.5BA 1800sf with a 2 car garage and finished basement (additional 400sf). The seller says he'd like to get $250k for it (that's what he's got in it) but he realizes that comps run around $220-$230k (using recent solds from the MLS). He's been trying to rent it for $1600/month after having it at $1700. It's been on the market for over a month with no takers. He says that he can go down to $1500/month.

 

Looking at these numbers, I can't do a SLO. There's no profit there for me. I'm thinking that I could still do a CA though. Is this what you would suggest? With this being my first deal, I don't want to screw it up. I was thinking something like this:

 

Purchase price: $240k

Monthly payment: $1800

Rent credits: $600/month for 12 months

Lease term: 1 year

Lease Option: $8400 (3.5%)

 

With this, he doesn't get his price but he's getting more cash flow than just renting. He's also getting more money on the sale than he would selling it through a realtor.

 

Please help a newbie do his first deal and let me know what you think.

[Doug Pretorius (ON) 9]

The maximum I could rent to own a house for in that price range in my market would be $1500. How sure are you that you can get $1800?

[TM_Properties 0]

The maximum I could rent to own a house for in that price range in my market would be $1500. How sure are you that you can get $1800?

 

I'm not sure. I used Rentometer to check the rents in that area for a 4BR and $1800 came back as reasonable for the area with $1600 being the median. I also checked on rentals.com to see what other houses in the area were renting for and it looks like $1600 is the norm. Is there anywhere else that I can check online? Being new to this I don't know the market rents.

[MichaelC 160]

TM, first, congrats on getting out there and doing it! You can't gain experience by reading about it. Good going. Now, you've got to see how to make this deal work so you can get paid for your efforts.

Sandwich lease? Forget about it. Won't work with these numbers. And being this is your first deal, a CA is less risk and less hassle.

When doing a CA, you have to walk a fine line between being able to satisfy the homeowner, (assuming they are reasonable and realistic), and being able to market the house with terms that are acceptable to the marketplace. The last thing you want is a property you can't move. What's the point?

You wrote that the seller wants $250K, but the comps are around $220K. That being so, the homeowner isn't getting what he wants. You need to politely but firmly point out to him that his true net, emphasis on net, if he were selling with a Realtor, would probably be around $200K, (and that after a six month wait in all likelihood).

For you to get him a net of, say, $210K, means you would be marketing the property at around $224K. That $14K spread comes from your $5K in option money and $9K in rent credits, ($1,500/mo with a 50% rent credit). Keep in mind I am using round figures here. Ultimately, you will determine what numbers work with this deal. But what you are striving for is a net price that is fair and acceptable to the homeowner, and terms that are acceptable to the t/b. That spread is the difference that allows you to put the deal together and get paid for your smarts. Don't make the mistake of promising the homeowner what he wants to hear, only to find you can't move the property. If any homeowner is unrealistic, let them fight the market for two months while you move on. Eventually, they'll come around to your way of thinking.

As for determining rents, check the newspapers and Craig's List for what landlords or agencies are asking for similar properties. That should give you a ballpark. Ultimately, the market will let you know where you stand.

[TM_Properties 0]

Thanks Michael. I've already told the homeowner that $250k is too much and comps are around $220k - $230k. He's also been told the same thing by a couple of friends that are realtors and he's realistic. I don't know what he currently owes on the mortgage. I'll have to find out what his bottom dollar price is. He owns another house that he lives in and definitely wants to unload this one so there is motivation. It might come down to him being able to lose less money by doing the lease option.

 

I'm simply trying to come up with some numbers that are going to be acceptable to him and allow us to get a tenant/buyer in ASAP. I think that $230k will work as the purchase price for the tenant/buyer. I'll just have to see if it'll work for the seller based on the other numbers I come up with.

 

-Tim

[TM_Properties 0]

I checked Craig's List and there are similar properties in the same area renting for $1600 - $1800. I think that a lease purchase at $1800/month is doable. There aren't a lot of rentals in this area so it's a little difficult to determine.

[<Steve> 82]

Did you find out the mortgage balance and his monthly payment?

You need to get the seller as low as you can, closer to MC's $1,500. I think.

 

 

www.Zilpy.com

Is another rent check that maybe helpful.

[TM_Properties 0]

Did you find out the mortgage balance and his monthly payment?

You need to get the seller as low as you can, closer to MC's $1,500. I think.

 

 

www.Zilpy.com

Is another rent check that maybe helpful.

 

No, not yet. I'll call him tomorrow. $1500/month is low for a very nice 4 BR in that area. I think the seller would do $1500 but not with 50% rent credits and a $220k purchase price. I'll have to go over some different scenarios with him.

 

Thanks for the link to Zilpy. I'll check them out.

 

Zilpy says $2000/month for rent with a range of $1750 - $2300.

 

-Tim

[speedingpenguin 19]

I'm a few steps ahead of you but in a similar situation. Homeowner was motivated, house was on the market for a while but didn't move, numbers didn't work for a SLO, so I'm doing the deal as a C/A

 

My advice would be go for it, even if the numbers seem tight, you'll have pretty much 2 possible outcomes:

 

1- You're able to put the deal together and find a T/B who will give you some option money, even if it's not much

 

2- You'll be unable to find a T/B by the end of your cancellation period, but you got experience dealing with people calling about the property, showing the property, screening T/B's, filling out the paperwork, and you'll know what sort of "mark up" your market WON'T take

 

I'm 3 weeks in to mine and have talked to a ton of people on the phone, showed the house to a bunch of people, I feel more confident about filling out the contracts with the homeowner, etc.

 

Let the homeowner know exactly what you're doing and what your goals are, as well as what's in it for him (you cover the marketing, dealing with phone calls and emails, showing the house, etc.), and give it your best!

 

And who knows, you just might make some money at it too!

[MichaelC 160]

Chris, you're starting to sound like an old, crotchety veteran.

[Doug Pretorius (ON) 9]

Chris, you're starting to sound like an old, crotchety veteran.

Hey I resemble that remark!

[MichaelC 160]

I think we're in a parallel universe!

[TM_Properties 0]

I'm a few steps ahead of you but in a similar situation. Homeowner was motivated, house was on the market for a while but didn't move, numbers didn't work for a SLO, so I'm doing the deal as a C/A

 

My advice would be go for it, even if the numbers seem tight, you'll have pretty much 2 possible outcomes:

 

1- You're able to put the deal together and find a T/B who will give you some option money, even if it's not much

 

2- You'll be unable to find a T/B by the end of your cancellation period, but you got experience dealing with people calling about the property, showing the property, screening T/B's, filling out the paperwork, and you'll know what sort of "mark up" your market WON'T take

 

I'm 3 weeks in to mine and have talked to a ton of people on the phone, showed the house to a bunch of people, I feel more confident about filling out the contracts with the homeowner, etc.

 

Let the homeowner know exactly what you're doing and what your goals are, as well as what's in it for him (you cover the marketing, dealing with phone calls and emails, showing the house, etc.), and give it your best!

 

And who knows, you just might make some money at it too!

 

Yea, I agree. No matter what, it's good experience.