My First Deal: A Go Or A No Go?
Here's the situation--
I called up an Owner/seller in reply to the following classified ad:
"Wyndham Area (Berkeley Subdivision) - 3,300 sq. ft. Brand New Home for Executive Rental offering 4 bedrooms, 2.5 baths, 2-car garage and all kitchen applicances. Available Sept. 1st at $2,600 per month for a 12 mo. lease. Call "
I left a voice mail asking if he would entertain a lease option to purchase.
He called me back and left a message saying that he was not thinking of a lease option to purchase but he would consider my suggestion.
I called him back and began by saying that I know you were not thinking a lease option and perhaps it would not work for you. Then I asked him--"What would it take for a lease option to work for you? With a lease option, there are 4 important points to consider, purchase price, term, monthly rent, and upfront payment for the option right."
The Owner began to lay out what would make sense for him. He could accept a 6-year term (I read somewhere that the longer the term the better) but he would need a purchase price based on a current market value of $445,000 with a 5% annalized increase for each year that I controlled the property. He started talking about the need for some skin in the game and I quickly said I would not pay more upfront than 1% of the purchase price. He readily agreed. Then, he said he would have to have $2,400 a month in rental payments with a 3% bump up in rent each year.
Property values in the area have averaged a 10%-11% appreciation rate over the past decade.
The comps may be $425,000 in the neighborhood but I'm not sure. Need to check.
My profit would most likely come from the 5% downpayment I got upfront from the Tenant-Buyer minus the 1% I paid to the Owner/Seller. So, I'm looking at a $18,000 profit on the front end under this deal with these terms so far.
Q: If I pull $18,000 profit out of the house under the Owner's terms, is this deal a good go for my first deal?
I do not know the fair market rentals in the neighborhood but it's clearly a high-end, top of the line neighborhood in a Southern city.
I need the wisodm of you elders on this one. He asked me to send him a sample contract today.
After your lease option, do you think teh value of the property is there? can sell the property right away? What if the value of the property went down?
To check the right value, check your local title company for good comparable in the area or a good real estate agent. Tell the agent you are going to sell the house when your lease expired.
I'd definitely negotiate two points (or have them in the Contract he signs). First of all, you need to be able to back out of the deal in 30 days, in case you made a mistake. Tell him you need that time to check everything out (the house, the Title, the value). Six years is terrific, but make sure you are only bound for one year with the right to renew. I've never shared the appreciation with the Seller, since I am taking care of all the maintenance and repairs and that's one of the ways I get paid for dealing with their problem, so I don't like that aspect. I also don't like the one percent, but there's still a deal there. Although I don't like them, this sounds like a good cooperative. You could see the day-to-day activities of the rental, make the Seller responsible for paying any repairs and/or maintenance, split the equity/profit when it sells, split the cash-flow, and split the down payment (using your expertise, Contracts, and with you locating the Buyer). That way, you are not at risk and can enlist the Seller's help. You will make less, but it might be worth considering to eliminate the risks.