Steve and I were discussing possible ways to limit or eliminate the liability of making payments on vacant SLOs. Turns out a seller that I have a deal lined up with for January had the answer. They will take part of the option consideration, and in exchange they'll take responsibility for any vacancy or repairs. Nice! So I'll keep a few bucks upfront, all the cash flow, and the back end and not have to lose a wink of sleep worrying about my T/B skipping out in the middle of the night.

How's everyone's business going in the run up to Xmas? I've got motivated sellers coming out of my ears, 10 years doing LOs and I've never seen it like this before!

I'm new to this (goin on my 6th month) and still no CA's done. Thanks for askin

Hey Doug-

Yes, we talked about SLOs and the pros and cons as one builds up a portfolio. Having multiple properties I have at times more than one vacancy at a time. This can create a negative cash flow. To minimize the any loss, we know that the option consideration received up front is a cushion and it is important to set aside a reserve. Now I am a ‘tight wad’ and I don’t want to give up any part of a reserve either. So, we tossed back and forth ideas to not have to be responsible for the rent payments should a property become vacant. One idea as Doug mentioned is to share part of the t/bs option consideration with the seller. I am still resoling with the idea because being the 'tight wad' I am I hate giving up the front end profit too. Although I may have a negative cash flow for a month or two with SLOs, I look at the monthly passive income for the full year to realize the profit.

Doug, where did all those sellers come from? For me it's slimmer pickens for sellers this time of year, but there are tenant/buyers out there.

Hang in there SteveK. People are thinking more about the holidays right now; except in Canada...

It's the Steve's!

SteveK, like <Steve> said, hang in there. If it's slow where you are now around the holidays it should pick up around mid-January.

<Steve> nothing special, just plain old dialing for dollars. I still don't much care for 'cold' calling but I'm pretty good at it now and comfortable with it when I actually get around to it LOL! The possible deal I mentioned above was a no 6 weeks ago, now it's a probably.

Oh believe me, I'm searching for a way to get all the money and not have any responsibility Another simple way to do it although you'd be giving up the back end profit as well (not a problem if it's a marginal deal to begin with) is to do an assignment and carry back a note for the cash flow.

Example:
Your deal with seller...
Price: $200k
Rent: $1,500
Term: 2 Years

Let's say the house isn't worth much more than $200k but you can rent it out for $2k. A normal CA would have that cash flow (or part of it) go to the seller and you take say $8k. But why not keep that cash flow for yourself? Assign the deal for $20k...payable $8k upfront and $500/month for 24 months, all of it credited to the purchase price.

That would be kinda half way between a CA and a SLO on the profit scale, and you would have zero liability for vacancy or repairs. That's what I'm going to do on my next deal just to see how it works out. Lots of deals to be had here where the seller wants or needs too much for a SLO to be worth it.

I hear ya guys. What I seem to notice is that the areas that have been hit hardest by the housing crisis, So Cal (I'm in San Diego), FL, NV, AZ seem to be the toughest to do anything with because there are so many homes upside down on their mortgages and everyone here did 100% financing. I can do a phone call and in 5 minutes say what I need to say but when I crunch the numbers, it always comes out to $80 - $100k+ that the seller would have to come out of pocket with at close. I also notice nearly all the LO's on craigslist in my area are FSBO's doing their own LO. At first I thought I was doing comps wrong but then Michael and I did comps for the same addy and it checked out so I know it's not me.

Fortunately, I didn't go out and buy that Aston Martin expecting $6-$15k a month in CA's.

Doug-
A kind of hybrid of a CA/SLO. So, are you thinking the t/b would cut a rent check to the owner and a second check to you for the $500., and the $500. is the rent credit the t/b receives every month? Or, the seller receives the full rent amount and cuts you a check for the $500.

I am just thinking how to market the advantages to the seller. Maybe, you handle the administrative side of keeping track of the rent credits and the option consideration the t/b has paid, so when the t/b exercises the option you can provide the documentation/records of what the t/b receives at close. I guess you can also offer the advantage to hold either the t/b or sellers hand through the closing process too.

On the other side, I can see that although by agreement you would be out of the liability of rent payments and repairs, but if there was ever a problem you would still receive a call from either the t/b or seller. Not saying that the problem can't be managed. With an SLO the seller and t/b are kept separated from each other and with a CA you are released from the relations between the seller and t/b, with this hybrid L/O all three the seller, t/b, and investor are in the same deal together. You know what I mean. So, there may be other liability issues to consider, or maybe not.

I think it is a great idea. I had a seller a few days ago that I was explaining a CA to and as she was trying to understand how it works. She mentioned that I would receive the option consideration and the rent credit amount and she would receive the balance of the rent.

Howdy, boys. Creativity is the mother of invention. Way to tweak your approach, Doug, and make the deal more palatable for your preferences. As always, there's a give and take in these deals. Give up something here to gain something eleswhere in the deal.
And, yeah, it's December, meaning slower days for real estate. Most folks are wrapped up in Christmas and all that entails. Buying or selling a house gets pushed back a month or two. So it's not only you, SteveK. I think most of us are seeing the same thing.
However, the upside down situation is definitely emphasized in SoCal and Florida, and a few other parts of the US. Not much you can do about it other than to keep marketing. Not every homeowner is ass backwards in their property. In the meantime, push the idea of a straight rental to homeowners who really have no other choice. A little something is better than a whole lot of nothing.

You can simplify the liability issue on a SLO by using percentage rent. Instead of a fixed rent you pay, for example, 80 or 90% of income. If there's no incoming rent for a month, 90% of zero is zero.

I would add eviction costs to your rent offsets.

. . . seems simple enough

Interesting take on it randian.

The only issue I would see is from the good folks at the state's REC. What I pay the seller is distinct from and independent of any obligation between me and my tenant. This was a strong argument from my attorney to the REC and I wouldn't want that to be compromised. Basically, I am the seller's tenant and have permission to sublet; however, I still pay the seller as their tenant whether or not my tenant pays me.

The percentage idea grays it a bit for me. Don't mean to play devil's advocate.

BTW Steve, with the approach I mentioned above where you take back a note for the cash flow. You're liability would be no different than a standard CA. All you're really doing is taking part of your assignment over time in a series of payments instead of a lump sum.

One big difference between a tenant with right to sublease and a property manager is that the tenant has right of occupancy and the property manager doesn't. An owner usually doesn't have a right of refusal with respect to a subtenant, while an owner can always tell a property manager yay or nay. A tenant takes primary landlord liability with respect to the subtenant, while a manager, being an agent, generally takes no liability for the actions of either the tenant or the owner. Besides, percentage rent is common in commercial deals (retail mostly). Anchor tenants with a lot of leverage often negotiate percentage-only lease deals. If the REC challenges you, they implicitly challenge other percentage rent deals. That's a lot of mighty angry commercial landlords to content with.

randian, thanks for the reply.

Ok, I understand, but this issue I have is:Being an investor, I am not an agent or property manager which requires licensure. Any ideas how to get around this?

Performance Lease Option with the right to Sub lease option.

Under terms of agreement seller to get fixed amount of price
Under terms of agreement seller to get 85% of net cash flow when collected
Under terms of agreement Investor to get set amount of cash above sellers fixed amount
Under terms of agreement anything above investors fixed amount of profit the profit can be split 50/50

That will work.

Hey Jonathan-

So the "Performance L/O" is away that will work for the investor. Cool deal!

Same here! I've got sellers like crazy but all my buyers suck and my business has almost come to a standstill. I haven't come close to a deal since October. I know things are supposed to slow down around this time, but c'mon... I guess the serious buyers, the ones who understand basic economics and finance, have all closed down for the winter. The last two buyers I spoke with could only afford rent payments at 70% of market and $1-2k upfront. They were both interested in foreclosed homes because they heard "you can get one for really cheap." These people really believe that they're qualified to own a home? Here's hoping things pick back up in January.

Been thinking, for now I am not going to reinvent the wheel. In a SLO being responsible for the rent during the lease term is a great advantage for the seller. The t/b is resposible for repairs, and I have a $dollar limit with the seller for repairs I may need to do. We have a cancelation clause in the agreement that works well. I think I will disclose to the seller that I will pay one months rent should their property go vacant. It typically only takes 4 to 6 weeks to place a t/b anyway. If they don't want to cancel after a month, I can continue to market the property and not be responsible for continued rent payments until another t/b is placed. I will just have to use that charm technique learned from the manual.

This way I can keep all the front end profit as typically there are no problems with tenant/buyers. If there is, I am only liable for one month vacancy. I still like the percentage idea too.

I'm currently in negotiations on 3 homes that look like they will all be the hybrid assignment I mentioned here. All of these are cases where the seller wants more or less what the house is worth, so there isn't any equity to make the risk of a true SLO worth it, there's no huge payday at the end of the rainbow either. So I may as well assign it and be out of the deal. There is some upfront cash (all of these sellers want a piece of that too) so the real profit center in these particular deals is the cash flow, which I'll capture through the assignment/promissory note route.

Nothing wrong with that Doug. I wonder if you can set it up where you can assign the promissory note for a fee to another investor and pick up another pay day? Or wait a couple of months and see if the t/b would be interested in buying the note at a discount for a lump sum.

Of course it's possible.
On the other hand, how is the investor
secured with said note? If there's little
to no security, then you'd have to heavily discount your note


This would be my preferred option.
There's no better buyer of a note than the person paying on it.

Good point Jason. Have the t/b secure the note with their car, or a boat would be nice or maybe a diamond ring. . .

Hey Doug,

How are you? I was wondering, with the assignment/note, do you put some sort of memo of option at the court house to cloud the option or hold the option in escrow for the T/B untill all payments have been paid in full to you?

Otherwise, how would you collect your payments if the T/B stop paying you monthly payments on the note?

Thanks, baron

That's a good question Baron.

I wouldn't think you could cloud the title, because most likely, neither you are the t/b are on title with a CA.

Doug ... how would you secure your interest in that?

If the property really is only worth about $200k, you're either selling it for 10% over market (if the net to seller is $200k), or your deal with the seller should really be $180k net. Which is it?

Does the note substitute for rent credit, or are you giving rent credits on top of that?

Chances are they're going to buy or abandon before 24 months is up, in which case they're certain to stop paying on the note. I doubt it's worth the time and expense to pursue them.

The cash flow is nice though. One a month for a year and you have $6k/month semi-passive income.

Rents seem to be a lot higher in Canada. A $200k house here would rent for more like $12-1300. I couldn't take $500/month out of the cash flow without offering an insultingly low rent to the seller.

In a standard CA the seller gives up equity in the form of rent credits, but they're getting full market rent in compensation. This deal offers less than market rent plus the equivalent of rent credits. Seems like a harder sell. Is it? I'd like to presume sellers don't know there are alternatives to what I'm offering, so they'll assume what I'm offering is "just the way it is", but I am always surprised how sophisticated many of them are.