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Straight Option or Land Contract Flip???

Straight Option Land Contract

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#1 JvM

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Posted 19 August 2013 - 03:48 PM

Ok, so we have a seller who wants to sell on a land contract & my thoughts were we could sign it up like we do with a lease option but instead the terms would be the land contract terms & then pad our fee to the sale price (like with a lease option flip) & then assign our position to our buyer for our fee.

 

Or we could get a straight option for the land contract terms & find the buyer, then release our interest with the seller for a fee from him (the seller).

 

My question(s) are..

 

1) Which way is the simplest/cleanest to do.

2) I've never done a straight option assignment to a seller, so I'm not sure if it works the same way where we pad our fee into the sale price term (above the sellers price) which creates the money spread the seller would pay us for the release.

3) If we do a straight option, do we just get the option with the sellers terms, & market for buyers with the higher sale price amount (I’m trying to figure out where we add our fee in so it make sense to the buyer in the paperwork).

 

I know Adam King had a place in his lease option paperwork where you could just select a land contract instead of a lease option & simply fill in those terms. Then you would just pad the sale price by your fee amount like with a regular lease option assignment deal.

 

I’ve heard about straight options a lot, but I’m not sure exactly if it’s the right instrument to use for this kind of deal (or what it is best for).

 

Thanks for any help!

 

 

UPDATE - FORGOT...

 

I figured I'd put in the numbers to possibly make it easier. We can get the option to purchase for 380k with 30k down to the seller (the seller owes 300k, so he wants 30k upfront & will get his other 50k on the back end).

 

We are going to market it for 400k with 50k down (30 will go to seller & 20 to us). This is also why we are talking land contract over lease option because of the large size of the money down from the buyer.

 

The seller wants his monthly PITI payment of 2500 month covered, so we'll need to figure out what % that works out to over the term before the balloon is due (probably 3 yrs).

 

Anyway, I'm leaning towards doing it like a lease option flip where I get a contract with the seller for his desired terms, then add in my fee above his sale price & assign our position to the buyer. I just wanted to check if there's something possibly easier like with a straight option.

 

I'd rather just have an option & then release for a quick payday than have to fill out an entire contract for deed contract to assign over to a buyer (never did a contract for deed before).

Thanks.


Edited by JvM, 19 August 2013 - 06:15 PM.

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#2 MichaelC

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Posted 19 August 2013 - 05:48 PM

Jay, a Pure Option can be used when the homeowner is willing to deal with you but has no interest in any type of lease arrangement.  You simply have an option to purchase for an agreed to price for an agreed to time frame. 

The simplest way to do this is to negotiate the lowest price you can for the longest period of time.  I understand that some folks preach about assigning it back to the seller.  I don't, and for the life of me I can't understand why anyone would.  Let's look at an example of a Pure Option deal:

You negotiate with the homeowner an option price of $200K, for 60 days.  You're out a buck or five for that privilege.  You agreed to that price because your homework has you convinced the fair market value is around $235K.  That's $35K in potential equity.  The question now becomes how much will someone be willing to pay you for that equity?  Perhaps an investor comes along and decides your deal is worth $5K and agrees to pay you that as an assignment fee.  You collect your fee, he replaces you in the deal, goes on to close with the homeowner, and in the meantime you are long gone and out of the loop.  That's one example, and the most straightforward approach.



#3 JvM

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Posted 19 August 2013 - 06:27 PM

Jay, a Pure Option can be used when the homeowner is willing to deal with you but has no interest in any type of lease arrangement.  You simply have an option to purchase for an agreed to price for an agreed to time frame. 

The simplest way to do this is to negotiate the lowest price you can for the longest period of time.  I understand that some folks preach about assigning it back to the seller.  I don't, and for the life of me I can't understand why anyone would.  Let's look at an example of a Pure Option deal:

You negotiate with the homeowner an option price of $200K, for 60 days.  You're out a buck or five for that privilege.  You agreed to that price because your homework has you convinced the fair market value is around $235K.  That's $35K in potential equity.  The question now becomes how much will someone be willing to pay you for that equity?  Perhaps an investor comes along and decides your deal is worth $5K and agrees to pay you that as an assignment fee.  You collect your fee, he replaces you in the deal, goes on to close with the homeowner, and in the meantime you are long gone and out of the loop.  That's one example, and the most straightforward approach.

 

 

Thanks Michael. With this one we will be marketing for the actual buyer who wants to live there. As I added in the updated numbers part above, we will be marketing it as an owner finance (contract for deed) deal for 400kk & 50k down for the buyer. We'll keep 20k of that & the other 30k goes to the owner. 

I'm just trying to figure out if there's a way to assign it without having to fill out an entire contract for deed contract first (like when I have to fill out the entire lease & option contracts with the seller to assign to the buyer when I do lease option flips).

 

Maybe the contract for deed forms aren't that hard to get or figure out. I just wanted to see if there was a faster way (like stating just the contract for deed terms on the option so after the assignment the owner & buyer would then fill out the contract for deed between them, etc).

 

Thanks again.


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#4 <Steve>

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Posted 19 August 2013 - 09:56 PM

If marketing for a retail buyer, I think I would set it up as a Contract for Deed with the right to assign; then market it like an Option to Purchase with Owner Financing & 10% down as your assignment fee.  Assign to the buyer, then share part of your fee with the seller.  Spend a couple late nights cramming to put together the CD agreements the $20K is worth it.


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#5 JvM

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Posted 20 August 2013 - 03:17 PM

If marketing for a retail buyer, I think I would set it up as a Contract for Deed with the right to assign; then market it like an Option to Purchase with Owner Financing & 10% down as your assignment fee.  Assign to the buyer, then share part of your fee with the seller.  Spend a couple late nights cramming to put together the CD agreements the $20K is worth it.

 

Thanks Steve. Yeah, I was thinking along those lines. I was just thinking it would be best if I could do a simple owner finance flip without all the amortization stuff (the seller just wants his 2600 PITI payment covered till the balloon is due at the end).

 

The whole amortization thing & what % applies over time is what confuses me on these kind of deals. That's why straight lease options are super easy in comparison.

 

The other thing I found is some people who do contract for deed deals were posting that they always use a mortgage broker to originate the contracts because of the new S.A.F.E. act rules.

 

Any thoughts on that?

 

Thanks.


Singer/Songwriter/Guitarist & real estate investor. My song Forever scored in the John Lennon Songwriting Contest. Checkout Mr. Hefner also. I love & rescue animals, sometimes on my motorcycle.  http://www.youtube.com/MohrMusic


#6 MichaelC

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Posted 20 August 2013 - 06:15 PM

Jay, I agree with Steve.  And this is one of those times when it might be the prudent thing to speak with an investor friendly attorney, (one who is a member of a local REIC?), and explain what you're trying to do.  There's a potential for a nice payday and you don't want a paperwork technicality to screw things up. 



#7 <Steve>

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Posted 21 August 2013 - 08:42 PM

Another idea maybe to market a Lease Purchase with bank or owner financing.  The lease/option term is set for one full year, as a kind of test run before committing to a contract for deed.  If the tenant/buyer works out well for that year, then the offering of a longer term more permanent owner finance / Contract for Deed can be entered into with down payment.  The seller & tenant/buyer can consult an attorney to put it together; maybe you can locate and suggest a good attorney. You may not get the 20K, but you can get option consideration.  Or if comfortable, work as a consultant, receive a consultant fee down the road for the set up of the contract for deed.


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#8 JvM

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Posted 21 August 2013 - 09:23 PM

Another idea maybe to market a Lease Purchase with bank or owner financing.  The lease/option term is set for one full year, as a kind of test run before committing to a contract for deed.  If the tenant/buyer works out well for that year, then the offering of a longer term more permanent owner finance / Contract for Deed can be entered into with down payment.  The seller & tenant/buyer can consult an attorney to put it together; maybe you can locate and suggest a good attorney. You may not get the 20K, but you can get option consideration.  Or if comfortable, work as a consultant, receive a consultant fee down the road for the set up of the contract for deed.

 

 

Jay, I agree with Steve.  And this is one of those times when it might be the prudent thing to speak with an investor friendly attorney, (one who is a member of a local REIC?), and explain what you're trying to do.  There's a potential for a nice payday and you don't want a paperwork technicality to screw things up. 

 

 

Good ideas, all. After researching more on CD deals, we are looking for a local mortgage broker to write up/originate the docs to comply with the SAFE act.

Actually, on this deal I'm going to talk with the owner to go over the advantages of doing a lease purchase over a contract for deed. Even if we make less, it seems to me it's a way better (less risky) option for an owner.

 

For any future owners who are dead set on a CD over a lease purchase, we will have the m. broker write it up for us.

 

Thanks again.


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#9 MichaelC

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Posted 22 August 2013 - 10:32 AM

Jay, I agree.  A lease option is definitely a better deal for the homeowner.  If something goes astray, he's dealing with a simple eviction of his tenant, as opposed to a possible foreclosure action against his buyer. 


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#10 DanielSun

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Posted 22 August 2013 - 01:53 PM

It doesn't sound like an easy deal to me, low margin, huge down payment requirement, what is the property worth?



#11 JvM

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Posted 24 August 2013 - 02:50 PM

It doesn't sound like an easy deal to me, low margin, huge down payment requirement, what is the property worth?

 

Yeah, I'm working with a friend out of state on this who talked to the owner before I got involved. We went back to the owner & he wants to do a L.O. now instead & got him to take less down.  It's different from how I wet up deals, but it's in a great school zone & area & will work with the new, reduced numbers.

 

Thanks all!


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