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AngelMG

1st L/O Deal!

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Main Question: When do we get the option money? We showed the house to the family on Mon. night, they paid $50 for the appl. fee and $500 as an earnest money/binder deposit to hold the property. We are ready to do the paperwork with them tonight and they will be moving in Dec. 1. The option amount is $2000. Should they be paying this tonight or on Dec. 1!

 

And here is our profit in our first L/O deal!

 

$15,000 on spread between our purchase price and their's

 

They have a term of 4 1/2 years, we have 5.

 

We have a monthly cash flow of $150, with $80 going toward their purchase.

 

And they have $2500 for upfront money.

 

Thanks for your help with this deal Michael and Troy.

 

Angela

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Hi, Angel. Congratulations! I always collect the option money when the paperwork is signed. If you sign the papers and allow the property to be tied up until December 1 for only $500, I think it's a risky proposition for you if they back out. Backing out after putting down $2,500 nonrefundable option money is less likely. And, if they do, less painful for you.

A question on the terms.......you received five years from the seller? And you gave your tenant/buyers four and a half? Is this correct? Why such a long term for them? In doing so, you're potentially losing a lot of money in this deal.

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Congratulations on your first deal.

Please provide the blow by blows of how it came together and how long have you been going at it. I need to give my wife some hope that I am not nuts!

It seems like a long time for you to wait to get your profit out?

 

Best Wishes,

Bill Vargas

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Michael,

 

A question on the terms.......you received five years from the seller? And you gave your tenant/buyers four and a half? Is this correct? Why such a long term for them? In doing so, you're potentially losing a lot of money in this deal.

 

Yes, we did receive 5 yrs form the seller and we gave the tenants 4 1/2 yrs. They know they can get financing within 3 yrs, but when we negotiated the terms to get up to $800 per month rent we let them have a longer term.

 

Another issue we are questioning is if we should have a rent increase each year of 10%? And should we give a rent discount if they pay their rent early?

 

Also, do we need to have a rental security deposit which is separate from the option deposit money?

 

Thanks for responding so fast, Michael!

 

Angela

 

And, Bill, I'll be happy to do that for you. I'll write more about my overall experience tonight after our appointment with the T/B's.

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Five years from the seller is great. But, in my opinion, giving your tenant/buyers almost all of that time was not the best way to do the deal.

Generally, we try and get the longest term possible from the homeowner, and offer the shortest term possible to the tenant/buyer. Usually, that is one year for our t/b. On occasion I'll go longer with them if it is in my best interest to do so. I don't know all the details, Angel, so I may very well be wrong here. But, you could have done something along the lines of, say, a one year agreement with an option to extend for a second year. If they opted to extend, an additional option money payment would be required and the rent and/or purchase price would be increased according to the marketplace.

I think something along those lines would have earned you more money, and given your tenant/buyer more incentive to exercise sooner, rather than later.

The key is to have the control in these deals. By giving your t/b's so much time, you gave that control to them.

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You are so right, Michael. We should have given them the option to extend the option B)

 

What do you say to these questions:

 

Another issue we are questioning is if we should have a rent increase each year of 10%? And should we give a rent discount if they pay their rent early?

 

Also, do we need to have a rental security deposit which is separate from the option deposit money?

 

AngelMG

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You are so right, Michael. We should have given them the option to extend the option
True. But, if this is the worst mistake you ever make, you're well ahead of the game. Learn from your experiences. Next time, Angel, give your t/b's a one year term, and proceed from there.
Another issue we are questioning is if we should have a rent increase each year of 10%? And should we give a rent discount if they pay their rent early?
Have the terms all been discussed already? If so, what has been agreed to? If not, you can try for a rent increase. Better still, why not cease all rent credits after a certain time period? Let's say one year. This should give them the incentive to exercise their option sooner rather than later. As for a rent discount, I say no. My agreement requires that the rent be paid on time. There is no grace period. If they are even one day late they lose the rent credit for that month.
Also, do we need to have a rental security deposit which is separate from the option deposit money?
You don't need to collect a security deposit. It isn't something I do. But, I know some say that in so doing you strengthen your position that these folks are only tenants, thus having no claim to equitable interest in the property. The argument being that tenants pay security deposits. Owners don't. Never having run into this problem I have not found it necessary to collect a security deposit. It's your call on this one, Angel.

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This is how we got our first L/O deal. We put out 170 we buy houses signs around the city. We got tons of calls. Signs definitely work. We are going to end up getting 11 to 12 deals from those signs. So, the seller of this first house called from our sign. The owners were a couple that was living miles apart. The wife had already moved back to Illinois where they were from and where her daughter lived with her father, her ex-husband. The husband was still here working his job. They needed someone to take over their mortgage payments so they could afford a new house payment in Illinois. The wife was currently living with her parents. Once the husband gets to Illinois the wifes daughter will be able to come live with them. They were very motivated to get their house sold! We negotiated the deal with them the first night we looked at it, to take over the balance of their mortgage and their exact payment. They had one prospective buyer that they wanted to check with before they signed the paperwork. We let them do that and they called us a few days later. We signed the paperwork and got keys to the house.

 

We had two group showings for the house. We found our buyers in the second showing, which was 10 days after we did the paperwork with the sellers.

 

We celebrated when we got the house and celebrated when we got the buyers and we will continue to celebrate as we get more and more!

 

Angela

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Angela, a sweeter story I have never heard :) . Congratulations to you!

This is how we got our first L/O deal. We put out 170 we buy houses signs around the city. We got tons of calls. Signs definitely work. We are going to end up getting 11 to 12 deals from those signs.
Marketing. It always comes back to marketing.

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