Spreading option money out in payments

[speedingpenguin 19]

Hi everyone

 

3 weeks ago I got my first C/A under contract and have talked to a LOT of people who were interested, showed it to a lot of people (finally realizing how to pre-screen before setting up appointments, haha), had a t/b deal fall apart (and lost out on another t/b as a result), but have found a qualified family who wants to sign the lease ASAP. They've got good income and decent credit but this will be their first house they'll be buying and want 2 years to be sure it's the right house/ get their financing lined up.

 

I was looking for 5k down but asked for 6k+ 1st months rent. This is their offer:

 

$3,700 down up front (2k option money + first months rent)

$1,700/mo (rent) + $500/mo for 8 months to cover the remaining option money

$1,700/mo (rent) after that for the remainder of the 24 months

 

I feel much better about these people than the previous T/B's that shook my deal up a little and backed out, they are going to have a driveway put in right away (currently grass/gravel parking area) as well as some minor cosmetic work inside.

 

My question is how do I get the option money payments down on paper to make this work?

 

Thanks!

-Chris

[MichaelC 160]

Chris, my own personal bias comes into play here. Ultimately, you'll make the decision that is best for you.

Over the years I have done a number of deals where the t/b pays some portion of the option consideration upfront, with a promissory note to pay off the balance as agreed to. The problem is they rarely meet their obligations, at least in my experience. When that happens, you are basically SOL. You can't evict them. You aren't the homeowner. Besides, even if you could, do you think the homeowner would go along, assuming the rent is current?

So that promissory note may look promising, but it isn't going to put money in your pocket if the t/b's won't or can't adhere to it.

Use your judgement, weigh the pros and cons, and make your decision.

[speedingpenguin 19]

Yeah I had read a few threads here that all seemed to say the same thing...

 

In this case both myself and the homeowner are getting anxious to get someone in there. The "Buy" price isn't killer, it's probably a bit higher than market value, and this family seems like they'll take care of the place and treat it well.

 

I asked for more option money than I even had factored into the deal going in to it, and from everyone who I've talked to about the house, only 1 other person had counted on putting down that much so I'm gonna take my chances and at least get some money to hold me through my next deal. I've been running on empty for a few months now so I'm not gonna get greedy.

 

 

I guess my question was more how would I do this out on paper?

On the Assignment Agreement where I put the T/B's option payment, would I put the full 6k? 2k+ payments?

What would the promissory note need to include? (to increase the chances of me actually getting anything...)

 

Thanks!

[<Steve> 82]

Real quick before you close this deal.

 

Can you take part of the option consideration now to hold the house for say 30 days. Do all the paper work with the tenant/buyer and take the property off the market. Then after 30 days or so when the tenant/buyer is ready to move in, get the rest of the option consideration (or a least another chunk of it), the seller gets his first months rent and signs the final paper work and the t/b gets the keys. Typically it take a few weeks before the t/b moves-in anyway and you might be able to get more upfront.

 

just-a-thought

[MichaelC 160]

I guess my question was more how would I do this out on paper?

On the Assignment Agreement where I put the T/B's option payment, would I put the full 6k? 2k+ payments?

What would the promissory note need to include? (to increase the chances of me actually getting anything...)

On the Assignment Agreement, it can be done in several ways. I would put in the total amount of option consideration agreed to, then show a breakdown of the payment schedule.

For example, $2,000 received upon the signing of this Agreement, and $500 per month, due and payable on the first day of each month, beginning September 1, 2010, and ending April 1, 2011. Or something similar. . .

[speedingpenguin 19]

Awesome guys, thanks!

 

In response to her email this morning I let her know that her offer sounded alright, but was it possible to get a little more up front?

 

Her reply was that they want to re-do the driveway, install a fence, and get a swing set for their kids, and while she does have $$$ saved up and income to back it up, she doesn't want to go "house poor" by depleting their savings... but she's willing to figure something out if we can compromise.

 

I'm gonna see if she'll put 3k down up front (rather than 2), I'll take 1k off the deposit amount (6k as of now) and they can either do $400/mo for 5 months or even if they did 250/mo for 8 months, I plan on having several deals under my belt by that point and if 3 months down the road they for some reason stop paying, I'll be fine with it. Plus I figure if they're gonna re-do the driveway and put a fence around the yard, they're adding value to the property and I can understand why that's a priority for them (the biggest selling point for them was the yard for the kids to play in)

If I don't squeeze every cent out of this deal I'm fine with it. This is the first of MANY, and I've learned enough from this experience that if I had the money, I'd say what I learned is WORTH 3k

 

I'll report back, hopefully with a picture of a check to post up!

[MichaelC 160]

If I don't squeeze every cent out of this deal I'm fine with it. This is the first of MANY, and I've learned enough from this experience that if I had the money, I'd say what I learned is WORTH 3k

That's the right attitude, Chris. This is a volume business, not a get rich quick scheme. This will be but one deal of many. $2K here, $4K later, $5K next deal, etc. It adds up and you're doing fine. So put this one together, make your money, and move on.

[speedingpenguin 19]

Well everything went well yesterday, assigned the lease/option to the seller and got a check for 3k and I'll be getting 500/mo for 4 months to make up the 2k (we agreed that rather than 6k with 2k down, we'd do 5k with 3k down, they were happy)

Thanks guys for helping me out with this deal, and thanks Michael especially for writing the Naked Investor manual which showed me how to do this deal in the first place! I think it's been right around a month or so since I read the manual and I've already made 3k from it (more than I've made in the last 9 months hunting for a wholesale opportunity!)

On to the next one! :-D

[MichaelC 160]

Now it's official. Congrats, Chris! $3K on your first deal that you stumbled through. Imagine how you'll succeed when you know what you're doing!

By the way, buried in small print legalese in the manual, it mentions that the proceeds from your first deal are mine. I assume the check is in the mail?

[Doug Pretorius (ON) 9]

Awesome work, Chris!

[<Steve> 82]

It's a beautiful thing. Nice going Chris!

[speedingpenguin 19]

Thanks guys! 3k plus as many 500 dollar payments as I can collect up to 2k, so I'm hoping to get 5k total out of this one.

 

Of course things couldn't go COMPLETELY smoothly, got a voicemail yesterday from the tenant/buyer asking me to call her back to confirm that I had cashed the check, because there was a withdrawal from her account that didn't match what the check was for (less). I wasn't able to get ahold of her by phone today, but I sent her an email and got a response a little while later saying that she spoke with the bank manager and it was that there's a hold on the funds she deposited (she's a broker and had 2 closings the day before, I'm guessing they were decent sized checks) so the $ won't be available 'till Thursday.

 

Gah!

 

I might try calling the bank before then to see if there's a way to confirm if the $ is available, I'm anxious to completely finish this deal!

[Doug Pretorius (ON) 9]

A broker? As in...you RTOed to a realtor? LOL!

[speedingpenguin 19]

yep I did, haha. She didn't seem to phased by anything as far as me assigning the lease/option, I wasn't really sure what to expect, haha

[Doug Pretorius (ON) 9]

Love it! Sweet irony