Lease Option Deadbeats
I am curious to know from anyone here that has experience in the area of deadbeats who don't exercise their options on your propertiesthrough L/O on the buying end. It is my belief that there would be a lesser number of these types of people involved with the purchase of a house for 350K than there would be of say one at 50-75K. Would this be an accurate assessment? Also, those of you out there doing these deals, does the price range of the house become a limiting factor as the price of the house rises? I am trying to determine if a 350K house has limited potential of sale through this technique. I have a SFD that I need to sell (listed at 299K) and even at that price, it will seriously cut into my profits when it sells. (Long story). So I am considering selling on a lease option but don't know if these things will be a factor or if so, how much. Any help at all here people, will be greatly appreciated.
Thanks
Dave
L/O Deadbeats? New REI term?
Under a L/purchase aggreement you can charge above market rent and sales price.
Say you have TB lease up for two years...You get up front option money, higher rent and higer sales price.
If TB decides NOT to exercise option...guess what.....all that money is yours to keep! Start all over...option money..etc. AND the value of your property in that time period just increased!
Deadbeat? Not if done properly
Welcome Dave,
I wouldn't call a TB who didn't exercise their option a Deadbeat. As Charlotte said, if you structure your L/O agreement properly you get your option fee up front, you are not responsible for maintenance or repairs, they pay your mortgage payments plus some each month. If they don't exercise their option to buy you keep the option fee, thank them and wish them well, and do it all over again.
BTW, you are getting max value for your property based on what it will be worth at the end of the option term, not what it's worth today.
Just be sure to have the right forms and the proper education on the subject.
Glad to try and help a Pittsburgh guy. Grew up in Munhall and now live in the sunny San Diego, Ca. area. Good Luck.
Dave
[addsig]
Thanks for the replys. I was actually wondering if it becomes less likely to sell on L/O as the price of the house rises?
Dave
Dave,
The possibility that someone will exercise the option has a lot to do with how good of deal the option after time passes. If the option is out of the money they the buyers will not be interested. If the strike price is way below fair market and they have the right to assign or otherwise sell on the option they most will find a way to get a deal done.
I did read somewhere (not here) that 50% of the options are not exercises. The percentage is a bit misleading as it really does come down to how good a deal was offered in the first place.
It is not a negative if you do not end up selling the place. It might cause problems but there are other ways to make sure you are OK even when it does not sell.
There was a couple of comments in a reply that I want to either clear up or challenge.
"you get your option fee up front"
You have to receive consideration for the option to be valid. This more or less means that you get paid a fee to start the option. The fee can be credited towards the option price or it can be a one-off that has no impact to what the buyer will eventually pay. There MUST be consideration to start the option.
You only pay tax on the consideration after the option expires or it is exercised as the IRS needs to know how to classify the fee. Until it is clear what the fee is for there is no tax due. If the option consideration is a one-off and not a credit towards the eventual purchase that might change the tax status of that specific amount.
"you are not responsible for maintenance or repair"
This is not accurate or legal in all states (maybe none).
On a L/O you are still the landlord. You have not sold the place, you get tax deductions, etc. It also means that you are still legally liable to provide a clean and habitable property that has working utilities. The specific requirements are set locally (maybe as low as at the city level).
There was a court case were the landlord tried to evict for non-payment. The deal was on a L/O. The case went to the judge when the tenant disputed the filing. They showed the judge pictures of defects that had not been repaired. The landlord said the L/O says the tenant is responsible for such repairs. The judge indicated that this is not correct. A landlord can not force a tenant to be responsible for the repairs and the eviction was invalid. The landlord had to make the repairs, pay the court fees and make a payment to the tenant plus not file eviction proceedings for the next 6 months (non-harrassement clause in this location for all failed evictions).
You can agree that the tenant do the minor stuff, be the one who meets the repair person called from a list of suppliers, etc. You are responsible to making sure the repairs get done.
Alternative sale prices that shift the repairs but also some other rights is a land contact sale.
John
PS. There are many landlords who think the tenant is responsible because of an option agreement. In some locations it might legally stand up. In other situations because the tenant did not challenge the issue no one knows it is not going to hold water in a court.
[addsig]
John
Thanks so much for taking the time to clarify this. This house originally was put up for sale for 319K based on an REA's CMA that indicated it comped out with other properties in the 320-340K range. It subsequently received no action, determined that the original CMA done was seriously flawed (a hard lesson learned none the less) and was reduced to 299K. Since that reduction, it has received a little action, but not what we had hoped for. Since we are incurring holding costs at 1700 per month, we are now entertaining L/O as an exit strategy. But I am unclear as to whether a house priced at 320K is a viable candidate for this strategy.
Our thought here is:
Sell it on L/O for a strike price of 320K
Option period to be 2 years.
15K down (option fee)
2500.00 per month (average rents for comparable houses are getting between 2000 and 2200.00 per month.
Crediting 500.00 per month towards the purchase price. Which would leave us with 900.00 per month with positive cash flow.
My primary questions regarding this strategy are.
A. Is the fact that this house is priced at 320K a limiting factor in this strategy (are only lower priced houses viable candidates for L/O)
B. Would there potentially be more or less chances of the TB not exercising his option at the end of the option period solely because of the price of the house.
From what I gather in your explaination, that wouldn't be the case. The only real factor here is whether the original deal is a good one for the TB.
Have you ever sold a property in this price range on L/O? Did the TB exercise their option on it? I agree, that it would not be a bad position to be in if they didn't exercise their option and we repeated the cycle in 2 years (factoring in the appreciated value over that time frame for the new sale price. And it is our intention to make any necessary repairs during the option period, simply because we wouldn't want to alienate the TB, which could lead them to not maintaining this house properly. And since I am a retired GC, the only real cost to us for these potential repairs is in the cost of materials and my time, so we are in essence doing them at a wholesale cost to us, so it makes more sense to take this approach in that regard.
Thanks again for your assistance, as this area is completely uncharted waters for me.
Dave
It is harder to find buyers for the higher priced homes because they must have a higher income to cover the pymts. With that said, you will probably be looking at professionals or business owners with that kind of money which is a good thing. Check your numbers and due your due diligence.
maxwell
Yes, I agree. This is an area that has lots of professionals. The school district is at the very top of the list. I am working on my due diligence for this and just trying to ascertain that I am not missing something.
Thanks for your response
Dave
Hey,
I think the truth of L/P is that most (80%) do NOT exercise the option. And if you really stop and think about a L/P that makes sense. Why does a person (buyer) uses a L/P instead of a standard purchase? They have to put down a sizeable chunk of change and pay a high rent. The only answer is....they have bad credit.
I know...I know...I know everyone of us can make up the sweet dream of the new business owner who has tons of cash, but can't get a loan as their business is too new, but let's stay in reality for the moment.
Generally, a person gets BAD credit because they did not pay back money they borrowed. It is that simple. And that bad habit does NOT go away, just because they have a larger income; instead they just spend more and more.
With all of that said, I still think L/P is a good option for you to use, but just realize that you will be finding another T/B in six months.
John,
Let me clear up a possible misunderstanding as far as what I meant by "option fee up front." In all my L/O contracts it states that should the TB exercise the option to buy, the option consideration is applied to the option purchase price as a downpayment along with any rent credits. However, it also stipulates that should the TB not exercise the option, the option consideration is non-refundable. My reference to "up front" was only from the standpoint that this consideration belongs to the optionor at the commencement of the agreement.
My agreements state that I will pay for the first $100.00 per month for any repairs and the TB is responsible for any maintenance amount per month over that amount. If I have a good TB who put a 5% to 8% option consideration into a deal, pays his lease payments on time, and takes care of the property like he is going to own the property, I am more than fair in keeping him happy. You are right though, I have never had the maintenance/repair clause of my agreement challenged. My attorney seeems to be O.K. with the wording.
BTW, I allow my TB to have a home inspection done if he/she so desires and I try my best to make sure the property is free from defects, as I have a home inspection done on each property I buy or control. I know some would have possible arguments to that practice but it is a small cost to allow me piece of mind.
Thanks for the critique. I hope I made myself clearer on this post. Apologies to all as I was not intentionally trying to be inaccurate. I agree I should have used the term "option consideration" instead of "option fee". My agreement says "option consideration".
Dave
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"Opportunity is missed by most people because it is dressed in overalls and looks like work." (Thomas A. Edison)
[ Edited by dealfinder on Date 06/26/2004 ][ Edited by dealfinder on Date 06/26/2004 ]
Why would you want someone to exercise their option? I am overjoyed when my L/O "deadbeats) as you call them don't excercise their option. I can L/O to someone else!!!