Example Of A Typical L/O
Can some of you post what a typical L/O of a property looks like? I have a general idea but would an example with numbers would make it easier for me to understand the concept. From what some here are recommending, I'm also considering doing a L/O on a rental property which I'm purchasing right now to possible increase my monthly cashflow versus renting it out conventionally.
I'm trying to ultimately decide whether the future ppreciation value and a small negative cashflow would be better vs. getting money upfront with the L/O and having positive monthly cashflow.
TIA for your replies.
Anybody?
So far this is what I understand regarding L/Os.
1) You locate a tenant/buyer that is interested in purchasing your property at a given time. Usually 12 or 24 months later.
2) They leave you a deposit of 1-3% of the current appraisal of the home.
3) You charge them rent every month until the 12 months is up for which then they have the choice whether they want to exercise their option. Question, is the L/O rent charged usually a bit more than normal market rents?
4) You can give them rent credit from their monthly payments toward purchase of the house if you choose to.
5) At the end of 12 or 24 months, if they do not wish to purchase, then the initial 1-3% deposit is yours regardless. If they do decide to purchase, then the initial deposit is put towards the agreed sales price of the house. Question, how do you decide on the sales price of the home in the beginning of the contract? Average appreciation rates in certain areas in the country vary widely. 3%, 6% 10%, 15%, etc?
6) Say they decide to purchase at the end of the 12 or 24 months, what are the tenant/buyer's options toward financing the property? Owner financing, conventional loan, etc?
Any advice and help is greatly appreciated. TIA for your reply.
Hi,
You have a good idea of hoe l/o is done.
everything that you said so far is correct.
typically the rent is slightly more than market. say market rent is $800 you can tell the tenant that rent will be $925 and then tell them that you will apply say, $200 credit to the purchase price. it really is any number you wish just as long as they agree to it.
this does two things
1. you can get higher than market rent obviously and the great part is if for whatever reason they do not excercise their option you recieved extra cash when otherwise you wouldn't.
2. because you are applying rent credit the tenant will feel more responsible to the unit because they believe that it will eventually be their home, less headaches and your property should have less damage.
As far as determining purchase price, you said it. It all depends on what currently the market in your area is doing. If on avg houses are appreciating x percent then you can use that as a starting point.
Of course discusss all the numbers to the tenant and make sure that they understand exactly what will be applied for rent credit and what they can possibliy forfeit if they do not excercise their lease.
If they do decide to purchase then you can have them look into whatever financing that they could qualify for.
hope this helps a little.
Leo_Investor,
Kind of,
1. Get a house.
2. find t/b
3. get 3-5% as much as you can let them tell you what they have to put as OPTION CONSIDERATION not deposit (he who speaks first looses). As for a sale price take the current price x the yearly appreciation for your area.
4. Get above average rent.
5. Do not offer rent credit if they bring it up fine.
6. Just go with 12 month, yes if they don’t exercise there option you get to keep their NON refundable option money. Make sure your contract says that. You have to know your areas house prices get comps.
7. Seeing that you are in a sandwich will you finance their house……I think not.
[addsig]
Thank you for your replies.
Another question. I've heard in a couple L/O dealings here that after the tenant/buyer exercises their option, there is another large sum of cash collected (in one example, I saw $60K at the end of the 2 year L/O) which I assume is credited toward the purchase of the house as well. What do they typically call this payment? A down?
That other lump sum, 60K in your example, is not a down. They are just paying for what is leftover after the initial option money and whatever rent credit they have. That is just whatever kind of financing they got. You collect the rest of the money and go from there.
[addsig]
Leo_Investor,
"So far this is what I understand regarding L/Os."
1) You locate a tenant/buyer that is interested in purchasing your property at a given time. Usually 12 or 24 months later.
I do a 360 month L/O...
2) They leave you a deposit of 1-3% of the current appraisal of the home.
My deposits depend on the condition of the house.....MINT= 5% through....TLC=1 to2%
3) You charge them rent every month until the 12 months is up for which then they have the choice whether they want to exercise their option. Question, is the L/O rent charged usually a bit more than normal market rents?
No!....I do a 30yr amortized L/O including
PITI in their payments at the interest rate I choose.
4) You can give them rent credit from their monthly payments toward purchase of the house if you choose to.
NO RENT CREDIT!......I give them a Regular 30yr amort. MortgageLoanCredit
5) At the end of 12 or 24 months, if they do not wish to purchase, then the initial 1-3% deposit is yours regardless. If they do decide to purchase, then the initial deposit is put towards the agreed sales price of the house. Question, how do you decide on the sales price of the home in the beginning of the contract? Average appreciation rates in certain areas in the country vary widely. 3%, 6% 10%, 15%, etc?
The contract is at the TOP OF THE COMPS!
6) Say they decide to purchase at the end of the 12 or 24 months, what are the tenant/buyer's options toward financing the property? Owner financing, conventional loan, etc?
They find their OWN FINANCING....period!!!
HopeThisHelps....
....as always,
GoodInvesting, Rocky
Rocky,
What you are doing is not a Lease Option, but rather a Contract for Deed/Land Contract/Installment Sale Contract (or other state specific form). This is a bit different from a L/O and there are different laws/legal ways to handle it.
Anytime you are charging your tenant/buyer an interest rate, it is considered a loan, regardless of how the contract is worded. Depending upon how your contract is worded about default by the buyer determines whether you have to evict or foreclose to reclaim the property.
Roger
rajwarrior,
"What you are doing is not a Lease Option, but rather a Contract for Deed/Land Contract/Installment Sale Contract (or other state specific form)."
Don't you mean ...IMHO?
"This is a bit different from a L/O and there are different laws/legal ways to handle it. "
Maybe in YourState...but not in Florida!
"Anytime you are charging your tenant/buyer an interest rate, it is considered a loan, regardless of how the contract is worded. Depending upon how your contract is worded about default by the buyer determines whether you have to evict or foreclose to reclaim the property."
I AM SORRY.....BUT YOU ARE WRONG!
I have tested this in (FLORIDA) county and Federal Court and have prevailed.
....as always,
GoodInvesting, Rocky
Rocky,
The beauty of the written language is that unless it is specified otherwise, it is always the writer's opinion. It really is redundant to state, in my humble opinion.
If you have a contract that works and has proven itself effective in court, then great. As long as it works, regardless of what anyone calls it. But it's the wording of the contract that's important, not it's title. I'm sure that yours has a good procedure setup for the default of the tenant/buyer, especially in respect to the losing of any equity build up, money paid to date, etc. It also probably includes important clauses referring to them as tenants (not buyers) and outlining of the eviction proceeding (not foreclosure).
So, while I may not have been exactly right with your situation, I don't believe I was really wrong either.
The important part is that various states will have different laws concerning L/Os, CFDs, etc. To beginners, make sure to have your documents verified by a good attorney.
BTW, Rocky, your right about my state. You have to carefully word a L/O here or the Judge may view the tenant as 'holding equity' and say that you must file a foreclosure instead. But then again, NC is a conservative state for real estate.
Roger