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Chaniël

Rehab Lease Option

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Dear forum members,

 

I am new to the forum. Recently I trying to do a normal lease option in the Caribbean real estate market.

I have found a seller who has a property that is not completely finished. There will be an investment in cosmetics like: doors, sanitary, electrical wiring, gardening. I want to make an agreement that as a consideration fee I will finish the property.

I am planning to rent the house to tourist visiting the island

 

These are the details:

Asking price 324.000

Costs of repair 10.000

Monthly market rent (due to seller) 2.500

Market value after repairs 350.000

My montly income would be +/- 4.000

I will propose a lease option deal for 4 years

 

How would you guys as professionals look at this deal?

 

Some other questions:

 

If I understand correctly I will need 2 documents: lease and option agreement

 

Do I need an escrow account?

 

I know my seller has very good connections with the bank who financed the house. Is this a bigger risk for me you guys think? Regarding the Due on Sale?

 

How can I avoid being double crossed by the seller with the Due on Sale Clausule?

 

I hope to learn from the professionals! Maybe someday I will be one also.

Thanks in advance

 

Chaniël

 

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Hello, Chaniel, and welcome to The Naked Investor. :)

It sounds as if you are looking to work this deal as a sandwich lease. If so, you need to be certain of several areas of concern. For starters, property value needs to be determined with accuracy. The homeowner is asking $324K. Where did that figure come from? LIkewise, the $2,500/mo rent. Is this at the lower range of the market? Because that's what you're shooting for if doing a sandwich lease.

Are you certain the repairs will not exceed your estimate?

Are you prepared to make rent payments to the homeowner if you have a vacancy?

You asked about an escrow account. You'd be wise to use one, rather than make payments directly to the homeowner and hope he pays the lender as he is required to do.

The due on sale clause is more a concern for the homeowner than it is for you. If somehow the lender were to find out the property was optioned to you, (unlikely, by the way), and the mortgage stated that this could trigger the DOS, then the homeowner would need to scramble to get new financing on the loan. The likelihood of him "double crossing" you isn't very high, considering the burden it places on him.

Bottom line: if you're new at this and approaching your first deal as a sandwich, there are many things to be cautious about. Proceed with slowly and with caution.

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Chaniel,

 

 

Monthly market rent (due to seller) 2.500

My montly income would be +/- 4.000

 

Will you be receiving a total of $6,500 per month rent? If so, will the market support that?

 

 

Lynn (FL)

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thanks michael and lynn for your reply,

 

@michaelc the 324.000 is the asking price of the seller, It is too high for a property that is not finished. I am planning to offer him a 275.000.

 

excellent advise concerning the rent of 2500. This is the local rent in the area but for the higher segment. the lowest price in the area is 1750 a/month

 

The 10.000 renovation costs is a rough estimate. If the seller agrees with a ooption lease, I will have a look with some contractors to estimate the exact price. I am proposing a consideration fee of 2% of the current value. in my opinion, if the repairs are more then the 2%, the selling price will have to go down too.

 

@lynn I am planning to rent the house to tourists visiting our island. Tourism is growing in the recent years. the 4000 will be my income from this. the 2500 (or less see above) will be my monthly lease to the owner.

 

@michaelc which documents will I need for this rehab - Sandwich lease option?

 

@michaelc what is your opinion about me renovating the property instead of paying the consideration fee? Do you think this bring certain risks?

 

Thank you guys for the quick reply.

 

Greetings

 

Chaniel

 

 

 

 

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I have no idea if the asking price is too high or if it is the deal of a lifetime. That's something you will have to determine based on your market analysis. If you don't know, find a trusted professional who does.

Regarding repairs, have a contractor look at the property before making your offer.

The option consideration you are offering, 2%, is way too much for you to be paying. If you collect, say, 3%, there isn't much upfront cash for you. Offer nothing until the owner brings up the topic. . .and he will. Then you can see where he's at and make a low ball counter offer.

Which documents you need I can't answer since I have not done any deals on your island. Generally, here in the States we work with a variety of agreements, depending upon our position in the deal.

Finally, be very careful with making repairs before you take title to the property. If something unexpected happens and you can't close, the seller retains the house with all those sweet repairs you made. Not good.

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