Lease Option Scenario
Lets say I found a HOUSE A and the Seller and I have agreed on a “purchase option” price that is the balance of the current mortgage balance of $134,900 as described below:
Property Description: This house is not Vacant the Owners are still living in it.
Strikingly beautiful redwood home; 2 bedrooms/1 full bath on main level; master suite/ bathroom on upper level; great room with open beam construction; 3 decks; 10x12 shed w/electricity; extra large dog kennel; oversize sandbox w/swings & play area; 2.15 acres located minutes south of city in Briardale edition; many recent updates.
The Sellers Monthly PITI is $1054/Mo.
So I fill in the Purchase Option contract as follows, see this link http://bis.midco.net/healthwave3/RealEstate/PURCHASEOPTION_A.htm
If you notice I have left (1. TERM OF OPTION) blank because I have not yet found someone to rent this house and I don’t want to pay any rent yet. I have not signed a Lease Agreement yet, again, I have not found anyone to Rent either. Now I have told the Seller, since we didn’t sign this Option Agreement yet, they can continue to try to sell it. If they do, I walk away and they go on their happy way selling their house.
My question here is this…How do you show this place since now I and my Seller are in competition with each other to sell the property? Isn’t this a cumbersome situation? How do I show it to potential Rent To Owners? Do I ask my Seller, that I have to show his own house to my potential client? I would have no problem with this and I would have let the Buy in on my deal from the start. They would know what I am up to, because I don’t want any hard feelings and that would be the ethical thing to do.
Now I go spend about $50 to $100 dollars in advertising this property and here is an example:
RENT TO OWN
$1500 + 1 month rent
Move in condition, 3Br, 2 Ba,
beautiful view, 30% rent credit,
call 123-555-5555. 24 hr. rec. msg.”
Now when I get a Rent To Own Tenant to agree to these terms here is what it means.
Tenant will pay me $1500 Option Consideration “Non Refundable”, plus one months advanced rent, and continue to pay a rent of $1,500 per month with a signed 1 year lease agreement. Now I go pay the Owner $1,000 and keep $500 for myself, plus his $1,054 house payment because this is my rent payment to them. Now I have $446.00/month cash flow (30% above the $1,054/mo) that if the renters exercise their option will be credited toward our agreed to price of $145,000. Basically, when the deal goes down, I have $946.00 dollars in my bank account, with a positive cash flow of $446.00 each month.
They fill in a Purchase Option agreement that does not allow Assignment and then I go sign my Purchase Option with the original owner that does allow Assignment Plus another Lease Agreement for 1 year.
Now I have a Purchase Option with Owner, plus a Lease Agreement and I also have a Purchase Option and a Lease Agreement with my Tenant?
Or how does this work? How can I have a Purchase Option with my Tenants if I don’t really own the property?
It seems like something is missing. Have I structured this the right way?
Do I need an escrow account since 30% rent credit is being offered?
Do I have Equitable Interest problems if I need to evict this person for failure to perform the Lease Contract and would I have to foreclose instead?
I have many questions and I want to do this, but I feel as though something is missing. I have read and read and read until my eyes are bulging and I have been studying for months on this subject.
If anyone tells me to go buy a L/O course I ask they refrain from typing it on this post. That is not the answer I am looking for. This is a Forum and Forums really shouldn’t be trying to sell me on a product. I’m looking for help not a sales pitch.
Thanks[ Edited by JoDa on Date 11/02/2004 ]
My gawd, read a L/O book most of these questions are answered in the most basic of books. Your post is so long it is confusing! lol
Basically you want to get as long as a lease/option from your Sellers as possible. You want to do a shorter L/O term with your Buyers.
I would advertise and qualify all buyers before even telling them the address of the house. Tell them what part of town it is in, but I wouldn't give the address until you have confirmed they have the money to do the deal and you have checked their backgrounds, etc. This will cut down on the number of people you are taking through the property.
If you find several people qualified I would execute the L/O with the Sellers to give them notice that you are moving forward as obviously they have to move still.
Continue to advertise the property while showing it. You can tell the people you are showing the property that these are the current tenants that are moving out, but it would be better if you could get the Sellers to be out of the way while you show the property.
You don't need an escrow account, I wouldn't show the property until you have an L/O executed, and I would continue to advertise the property until the deal is completed as that will also help you build the pipeline for the next deal.
dnvrkid, thanks for giving the advise I specifically asked not to be presented “My gawd, read a L/O book most of these questions are answered…”. Tell me what BOOK! I have read everything you posted and I have not found any book that shows what to write in a contract specifically. LOL! Oh, sorry my post was so long it confused you. Sure am glad there was LeaseOptionKing to save the day..LOL!
LeaseOptionKing, your help is great. I do have the right to extend addendum. You mentioned, "Who gets the loan pay down?" Do I need a separate addendum for that or should I have this written into the first L/O agreement with the Seller? The Purchase Option I posted is one of two that I have. The one I posted is what I consider a pure Option Agreement, contingent upon a Lease performance, and the other one is a L/O so I suppose I could use it as you described. Obviously, it is the contract end of this whole thing that I am weak in. I’m not to hip on going to a Real Estate Lawyer, since I have read (somewhere in this or another forum) they aren’t very privy to these kind of purchases. That’s another subject.
In summary, I need to have the “Right to Extend” and I need a section on “Who gets the loan pay down.” I am guessing you mean who gets what funds at closing…maybe you could expand on that particular subject.
All that said, and I hope I don’t confuse “dnvrkid” Hee Hee, LOL! What do you think of how I basically structured the deal. Am I headed in the right direction? Any advise would really be helpful.
Thanks for all your help, and I know this is long and confusing, but thanks for your help too “dnvrkid” LOL![ Edited by JoDa on Date 11/04/2004 ]