Jump to content
The forums have been archived and are now read only. Years of great info saved for your reading pleasure. Thank you! Visit us on Facebook: https://www.facebook.com/NakedInvestor/ ×
The Naked Investor Forums
dretke

Lease Purchase Strategies

Recommended Posts

HI,

 

I'm a novice investor trying to find my niche. Lease Purchase seems to be a good option. I have a couple of questions about the initial transaction. When negotiating with a seller, do you also pay an "option" fee like a TB would to you? ^_^

 

Also, what kind of research do you normally do on these types of deals? It would seem to be that there wouldn't be as much research needed.

 

Thanks.

Share this post


Link to post
Share on other sites

Hello, dretke, and welcome to The Naked Investor. I hope you spend some time on our new boards. In the meantime, let's see if we can help you out...........

For starters, I agree that lease purchasing is an excellent way for a novice real estate investor to get started. It's not the only way, mind you, but it is one way where someone with little or no cash and experience can put together a deal or two and get on their way.

To answer your specific question, we may or may not pay any option money to the homeowner when we set up a lease purchase deal with them. Typically, I don't. My general rule of thumb is if I must pay some amount of option consideration I limit it to the equivalent of one month's rent. Even then, I don't pay the homeowner until I collect my option consideration from my tenant/buyer.

There are exceptions, of course. But for the most part the vast majority of deals we do will be nothing out of pocket. As an investor you should get used to that way of controlling properties through lease purchasing. If a homeowner is insisting on a large amount of cash, move on. There are other, more motivated sellers awaiting your help and problem solving abilities.

As for research, are you referring to comping out the value of a house?

Share this post


Link to post
Share on other sites

Thanks for the warm welcome and for your expertise. I'm trying to learn as much as I can. The trick is to keep it all straight upstairs! :D

 

I'm glad to hear that you typically don't put down any money.

What might some of those exceptions be that would have you put money down?

 

By research I meant the due diligence that you would do if purchasing a property.

 

What if the seller has a second mortgage. Are you responsible for that one too? Or, would those be ones to avoid?

Share this post


Link to post
Share on other sites

Dee Dee, I don't expect to put down money. Sometimes, though, it is necessary to make the deal happen. I look at the big picture. If I want the property, if the numbers all work, if I look at it and know this is a quick property to move based on previous experience with similar properties in the neighborhood, I am not opposed to putting some option money down to secure the deal and get control. Little, or nothing down, is always better. But in some instances that isn't possible and then you have a decision to make. Still, it isn't a bad thing to be able to put down, say, $1200 to control a $150K property for 36 months, is it?

The same due diligence required for the purchase of any property is required when you lease purchase a property. also. This includes property value, local rental market, condition of the property, liens, etc.

Lastly, if the seller has a second, or even third and fourth mortage, that is not a factor in what we pay them. The market, Dee Dee is what we concern ourselves with. If the rental market is, say, between $700 and $1000 per month, as wise investors we will try and get in at the lower end, and turn around and charge our tenant/buyer the higher end. That spread is one of our profit centers.

If the homeowner has terrible financing and has an $1100 per month payment, we are not going to pay an above market rent to cover their monthly cost. The homeowner would have a decision to make: whether or not they want to do this deal with you and accept a several hundred dollar per month negative cash flow. (It beats making payments on a vacant property).

On the other hand, if the homeowner has a monthly payment well below the going market rent, we certainly will try to get in at as low a monthly payment as possible.

What I'm saying is that the owner's monthly cost is not necessarily what our cost will be. As you can see, there are a number of factors at play.

Share this post


Link to post
Share on other sites
Guest MichaelR
Hello, dretke, and welcome to The Naked Investor. I hope you spend some time on our new boards. In the meantime, let's see if we can help you out...........

For starters, I agree that lease purchasing is an excellent way for a novice real estate investor to get started. It's not the only way, mind you, but it is one way where someone with little or no cash and experience can put together a deal or two and get on their way.

To answer your specific question, we may or may not pay any option money to the homeowner when we set up a lease purchase deal with them. Typically, I don't. My general rule of thumb is if I must pay some amount of option consideration I limit it to the equivalent of one month's rent. Even then, I don't pay the homeowner until I collect my option consideration from my tenant/buyer.

There are exceptions, of course. But for the most part the vast majority of deals we do will be nothing out of pocket. As an investor you should get used to that way of controlling properties through lease purchasing. If a homeowner is insisting on a large amount of cash, move on. There are other, more motivated sellers awaiting your help and problem solving abilities.

As for research, are you referring to comping out the value of a house?

Michael when you pay the owner of the house your option consideration say 500.00 dollars that money is coming from the tennant buyer. Do they get that back when they excrise there option to buy the home?

 

Michael :rolleyes:

Share this post


Link to post
Share on other sites

Michael, you are correct when you say that even if I need to put down some option consideration it still does not come out of my pocket.

For example, if I agree to pay the homeowner $1500 option consideration, it is also agreed that I will make that payment when I collect option consideration from my tenant/buyer. Say I collect $4500. I pay the homeowner his $1500, and pocket the remaining $3000, (which is promptly given to my wife :rolleyes: ).

If and when the tenant/buyer exercises his option to purchase, he would be credited the full $4500 toward the purchase price.

Share this post


Link to post
Share on other sites

×
×
  • Create New...