Lease/option *without* being a landlord??
Am just getting started in REI and just finished the Rich Dad book "Real Estate Riches". Unfortunately, the book focuses almost exclusively on L/O and barely mentions flipping, wholesaling, etc.
But anyway, I thought I had read (here and elsewhere) that a newbie would NOT want to get into the role of landlord. That role with property maintenance (and possible tenant management) takes away from your time to find the next big deal.
At the same time, I thought I would ask, since I understand (I think) that almost *anything* can be written into a contract. So would it be logical, feasible, sensible to do a lease/option where it would create a positive cash flow, and yet have the *tenants* assume responsibility for things that a typical "renter" would not be concerned with? For example, the toilet backs up, the garbage disposal clogs, etc, a renter simply calls the landlord, but would it make sense in a lease/option to have this be the *tenant* responsibility?
In this sense, I guess it would be similar to me carrying the mortgage for the "owner" for the first year or two years, except that only a percentage (what percentage?) of the monthly tenant payment would go towards his downpayment when he actually purchases the property?
Thanks for any/all inputs.
The contract I use for L/P is basically the same as the one I use for every rental property and includes a clause for handling these pesky little jobs.
Put in your contract a clause something like this: "Management will make necessary repairs to the dwelling and systems including electrical, plumbing (excluding blocked or clogged waste pipes), heating, and hot water heating with reasonable promptness after receipt of written notice from Resident. Resident agrees to bear the first $50.00 of the cost of these repairs during each calendar month. Management will bear all costs above the first $50.00 for repairs. If Resident and/or his guest cause any damages, beyond normal wear and tear, Resident agrees to pay Management the cost of repair with the next rent payment or upon termination of this agreement, whichever comes first. During the term of this agreement, Resident agrees to notify Management of any circumstance or condition which might cause damage to premises or which might threaten the health or safety of any person. Resident shall not remodel or make structural changes to the premises without written approval of Management"
This pretty much stops clugged toilet and burnt out light bulb calls dead.
BUT being a landlord is a lot more than just repair calls, so this does not solve all your problems.
In our L/O contract under maintance The resident is responsible for hiring qualified service people to take care of minor repairs under $1000. We cover the major things roof,water heater. a/c. We have never have had a challange yet. This also bring the reality of house maintance to the t/b. It is a good way to weed out the lame ducks.
Sire
Hey,
I am not sure about setting a limit of $1000 for "minor repairs". I can't think too many repairs that would be over $1000. I guess the whole roof could need replacing or a serious problem with the foundation, but these types of problems you should know about in your rental houses before you buy them.
So what happens is something goes wrong in the house, for example a pipe starts to leak, and the tenant is too cheap to get it fixed. A year later, the tenant moves out and you find out that the whole wall is rotted. So something that might have cost $75 (which the tenant would have paid $50 of), costs you a whole lot more.
The whole idea is to stop the calls for silly stuff.
Bottom line is: Be very careful of trying to outfox the tenants.
Bruce
I do see what you are saying, but we have had alot of success using this method. We do a walk through every 6 months and have ALWAYS had tenants call with even the smallest of repairs. At that point we remind them of the clause and refer one or two of our handymen to help. This way we can follow up with the tenant and the handyman. We also will help finance the repair if it is a large job.
We had a hvac unit go out, $700 this past winter. She financed the repair through us and we credited her $50 for the "finance fee".
If it is done correct it is profitable and helpful to the tenant. We are not working to out fox the tenant just teach them that home ownership is not just making a payment.
Thanks
Sire
Hey Sire,
So I guess there is more than "one way to skin a cat".
Do many of your L/P actually end of buying? The VAST majority of mine don't. I spoke to several RE agents and they said that my experience was not unusual. I offer the option to do a L/P on every rental house and for every tenant, but I always think "I am going to get this house back in a year". Maybe your rentals are at a different end of the market then mine.
For example: I have had tenants smash through the foundation and rerun waste pipes when there was a clog, instead of spending the $50!!
On a different topic, maybe they should start a forum for "War Stories with Tenants".
Cheers!
The average selling price of a house in my area is $132k and our average selling price is $144k. On our lower priced houses have more turn over and less care for the property. We do not do "Rentals". Most everything in l/o and advertised as "Bad Credit Ok",houses for sale. Now some houses we wait longer for a more qualified t/b depending on the monthly cash flow. This iswhen we are less critical of credit. As for our sucess in true closing(getting t/b financed) about 60%-70%. That means our first t/b may not make it through, but we have as of yet to get past a second gereration of t/bs.
Our system is built more around selling. So we have a few more hoops to get people through, but they don't seem to care as long as they get the house.
Thanks,
Sire
[ Edited by sire on Date 04/03/2003 ][ Edited by sire on Date 04/03/2003 ]
Hey,
I think you summed it up very nicely!
Your method is about selling and mine is renting, which explains your much higher success rate on closings. I did a quick review and I have had only two houses EVER sell through L/P. That would put it under 5%.
I wish you the best!!
re_jon:
You can always try and get your tenant to agree to a "triple net lease." This type of lease is common to commercial properties, but it is not limited to those type of properties. You can use the same concept for residential properties.
Triple net lease means that the lease agreement makes the tenant responsible for property taxes, maintenance, insurance, etc.
However, the risk you run is that this is out of the ordinary for most residential tenants. Since most of these tenants do not have as much risk as a business does renting commercial property (since a breach of a commercial property and eviction can make their business come to a screaching halt), I would advise against the tenant assuming the responsibility for maintenance, etc. unless you are doing it on a lease option contract. With the option contract, usually the tenant has more at risk (option consideration higher than a normal tenant's deposit; the tenant is a "home owner in training" and will likely fix up the property because they will be buying it).
Hope that helps,
Taxjunkie
Can anyone suggest a formula for lease options? What is the best price to charge without cutting yourself short or over- charging your tenant?
Let's use the following example:
House for 100,000;
the seller will charge you $850 w/ a rent credit of $150. Down Payment of 5K. Total due in five years.
Rents for the area are about $650-$750
Would you charge the t\b an addition of the average rate of appreciation for the property?
Ervan
edickens82@yahoo.com
Quote:
On 2003-04-07 00:49, edickens82 wrote:
Can anyone suggest a formula for lease options? What is the best price to charge without cutting yourself short or over- charging your tenant?
Let's use the following example:
House for 100,000;
the seller will charge you $850 w/ a rent credit of $150. Down Payment of 5K. Total due in five years.
Rents for the area are about $650-$750
Would you charge the t\b an addition of the average rate of appreciation for the property?
Ervan
edickens82@yahoo.com <IMG SRC="images/forum/smilies/icon_wink.gif">
First, I would not take the deal under my criteria. I only enter into lease options where the rental amount is less than the fair market rent for the area. I personally need to make some cashflow each month for my efforts.
Also, you don't say what the house is currently worth. Is it more or less than $100,000? If it is more than $100,000 I would walk away from the deal because you are only speculating (gambling) that the house value will increase in the future. That is not prudent investing. Remember, you need to make a profit when you buy the property and not rely on the assumption that the property will increase in value.
If the property's value is greater than $100,000, then I would look at charging the tenant a premium over the current market rent; probably at least $850 (assuming you can get it for $750 per month from the owner), so that you are making $100 per month for your efforts and to have a cash cushion should unforeseen expenses arise later. But since you have the deal for $850 per month, you will need to charge $950. Most lease option tenants will only pay that amount if they get at least $200 or more of their rent applied toward their down payment when they exercise their option, so you need to make sure there option price is high enough to take this into consideration and so that on the back end you will still get some dollars out of the deal.
Hope that helps,
Taxjunkie
Thanks so much Tax junkie,
Now you said that "I only enter into lease options where the rental amount is less than the fair market rent for the area." I have been finding that homeowners don't really know what a L\O is. They have some ridiculous numbers. One guy told me that he charges the rent for the area plus an extra $200-400 which some or all of that amount will be applied to the credit.
I've seen another guy charge $1200 w\ a $100 L\O. And I've seen sellers offer 100% rent credit. When I see these offers, I enter a state of confusion. Because if your charging $1200 and the rnts in the area are $750. A $100 credit is an insult. And if you give 100% it's just like letting the T\B live rent-free. They aren't paying you to rent the place, they are just investing in "their home". And you have just became a savings bank.
Ervan
edickens82@yahoo.com
edickens82,
Giving the tenant/buyer a 100% credit is not the same as letting them live in your property for free. Remember that with Lease Options you can make money up front (Option Money), in the middle (cashflow) and at the end (backend profit). If two of these are pretty juicy you can go low on the third one.
The tenant might be thinking he is living there for free, but he agreed on a price that is a lot higher than what you got the house for. 100% rent credit is a powerful marketing tool.
Dennis[ Edited by Nexus on Date 04/07/2003 ]
If you offer a 100% rent credit you have to have a LOT of equity.
Example house worth $100,000 Rent $850 and they exercise the option in 5 years (60mo)
850 X60mo + 51,000credit
100k house with 4% appreciation in 5 years is worth $121,500 - $51,000 purchase price in 5 years $70,500
Same house same #s
We figure if someone finances at 8.5%(2.5% over market) at next years purchase price.($104K with piti) Payment of $890 credit $100.
$121,500-$6,000=$115,500 Purchase Price You pocket appreciation and should have the nice cashflow.
As was said before we focus more on selling and not as much on the rental.
Sire
Thanks! I am just loving this. I guess everything in RE depends on percerption and interpretation. As an REI, I understand that it is my job to convey the positive picture to my clients.
I am really starting to understand that anything is possible. It's just a number's game.
Ervan
edickens82@yahoo.com
Remember, the rule here is to be creative and have fun while improving your lifestyle. Don't be afraid to think outside of the box. You can "twist" your L/O explanation with your tenant-buyer to make them think they are getting 100% credit!
Example:
Break the monthly rent charge down to them. If you are charging $950/mo., show them that part of their rent payment is for principle and interest, another part for property taxes, another part is for insurance, and some more will be used for upkeep/maintenance (In truth, IT IS)! Its all just been lumped into one payment. When all your numbers add up to $950, you will have demonstrated to them that they are getting 100% credit for their monthly rent payment. You can even go so far as to provide an amortization schedule (based on the P&I payment you showed them) that shows how much of their P&I payment is paying down the principle each month. You could easily show that 3 years of payments only buys down the principle about $3600 (rent credit of $100/mo.)
Here's the bottom line: You could easily prove to the tenant-buyer that 100% of their rent payment is accounted for toward the future purchase of the property.
I think this would be a great way to "train" your t/b into thinking like a home-owner. With this method they will begin to truly understand the costs associated with owning a home.
Just my 2 cents worth. I hope I explained this well enough for everyone to understand what I was trying to say.
[addsig]
Bruce, sire, where did you get your l/o contracts from? Would you mind sending a copy this way to look at as an example? rjarnold@cfl.rr.com, thanks!!
~Ryan
I got many of my contracts from Bronchick, Legrand and my attorney. L/O contract for T/Bs came mainly from LeGrand. My attorney and I sat down and put a few clauses that were needed for my state.
Sire
edickens82:
As you probably see from the posts, it depends on how you structure the L/O deal.
"A $100 credit is an insult."
Note if you get a L/O with a locked in purchase price at FMV now and have a term for many years (5, 10, 15?), especially if you have very little money invested in the deal. The name of the game is reducing your risk and getting the highest yield on your money and effort. If you had a deal that you could get at say, $800 per month and the FMV of the rent today is $900 (my numbers, because my criteria is that I need a little money in my pocket every month for my effort and dealing with subleasing tenants, especially some of them that sometimes don't pay!), and the owner locks in the purchase price for $110,000 (when the FMV is only $100,000). Most unexperienced investors would walkaway from the deal. However, most experienced L/O investors would try and negotiate a 5 year or longer L/O term. If properties in your area on appreciating, on average 7% per year, at the end of the 5th year the property would be worth $140,000; that gives you $30,000 of equity to do a simultaneous closing and sell the property,making $30,000 cash (less closing costs).
As another poster points out, with L/O you can make money upfront, on the backend or both. You need to keep that in mind when negotiating the L/O.
"And if you give 100% it's just like letting the T\B live rent-free."
Again, not true if the option price is substantially above market value. However, the risk here is that a court might construe the option as, in substance, a sale with the amount above FMV as "interest."
Hope that helps,
Taxjunkie
rjarnold,
Try this link for L/O forms. Taxjunkie has pointed out some very important details about L/O and how much "credit" you give your tenant-buyer each month. Giving a T/B too much credit could definitely be construed by a court as giving the tenant an "equitable interest" in the property and you risk having the L/O deal treated as a sale. Just a heads up.
http://www.totalrealestatesolutions.com/realestateforms/index.cfm#leaseoptions
rjarnold,
Try this link for L/O forms. Taxjunkie has pointed out some very important details about L/O and how much "credit" you give your tenant-buyer each month. Giving a T/B too much credit could definitely be construed by a court as giving the tenant an "equitable interest" in the property and you risk having the L/O deal treated as a sale. Just a heads up.
http://www.totalrealestatesolutions.com/realestateforms/index.cfm#leaseoptions