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scotty205

Advice on this CA deal

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Hi Michael, I know its been a while, lol. I have a potential deal and here are the numbers.

Seller owes around 70,000 for a property that doesnt need much repairs. Comps in the area are easily 80,000. Rent is 900/month. The seller doesnt live here and is tired of renting it. Here is what I would like to do. Offer 70,000 and give say 50% rent credit for 1 year on a CA and collect around 5000 option money. So the purchase price for TB would be 80,500...I know you like 1 year deals but dont you want to get more than one year if you can? Your thoughts everyone on how you would structure it? Thanks....

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Hi, Scotty. The numbers you are suggesting will work, assuming you are correct about the $80K valuation. However, I'll be shocked if you receive $5K option consideration for an $80K property. Realistically you can expect somewhere in the $2,500 range.

And, yes, longer is better. So if you can get the homeowner to agree to 24 months instead of 12, reduce the rent credits to 25%. The bottom line is the same, but tenant/buyers love the idea of more time.

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Greatt, I was thinking that exact same thing. I thought the option money was to high. I'm sure the comps are correct so I will reduce rent credits and see what the homeowner says. Thanks a lot Michael...

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I would like to break down this deal to make sure I am correct on the whole process of this deal. My investor partner does not think this is how it works so please clarify if I am wrong on anything. The numbers changed a tad..

Seller price: 75,000

My offer: 80,000

Rent 1,000/month

2500 option fee

2500 rent credits

2 years with only 1 year rent credits

Now here is where we disagree big time. The $1,000 in monthly rent goes toward the purchase price correct? So, lets say the TB exercises his option after 1 year. How much would the TB owe? They would subtract 12,000 in rent and owe 63,000 correct? Please let me know if I am wrong. Thanks...

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Scotty, you owe your partner a dinner. Your numbers are incorrect. Let me explain. . .

 

Option to purchase price to the tenant/buyer is $80K.

Expected option consideration is $2,500. Assuming this is yours to keep, the net to the homeowner is $77,500.

24 month lease, at $1K/mo, with a 25% rent credit for 24 months equals $6K in total rent credits. Or you can offer a 50% rent credit for 12 months, with the remaining 12 months offering no rent credits, (can be a motivation for the t/b to exercise their option). But the rent credits still total $6K. That $6K reduces the net sale price to $71,500.

The only time the total monthly rent would be credited towards the purchase is if you are offering 100% rent credit.

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Yes Yes I guess I do, lol. Thank you Michael for clarifying that. The big reason I have'nt done deals with lease options is because for some reason I have a hard time wrapping my head around doing it the right way and getting the numbers right. I really want to use this strategy though so now me and my investor partner can get the numbers right together and start getting deals. Again thanks for your help, I understand the whole process a lot better now.

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