Surprised By Carlton Sheets Hotline Advisor Advice
Well, I just got quite a surprise. I spoke with an advisor from CS hotline (I took the course) regarding options to unload a home I bought. I questioned him about selling on a lease option and he told me that lease option isn't a good way to sell, but a good way to buy. This seems contradictory to what I've read in the course and on this site. Can anyone give me any insight as to why this advisor would advise against selling through lease option? He felt it wouldn't work with a home that is in the price range of mine, $165,000 to 170,000 because the monthly's would be too high, and that the deals very seldom go through to sell, which I don't necessarily see as a bad thing, cause then I'd still have the property and can start all over again! ????????
Jean,
I'd have to say that you have the correct idea. I would just make sure that I had a big enough down payment (10% +) prior to doing a lease option. Possible instead of doing a lease option possibly a wrap around mortgage.
You may get people with less then perfect credit and in that case I would also ask for premium interest rate (8% +) or better. The better the credit the lower you can go with the interest. Just remember if you do have to foreclose there will be costs involved. Doing either will do two things for you give you CASH UP FRONT and CASH FLOW NOW.
I too don’t under stand why this advisor would tell you not to do this, unless this is your first deal. Then you may want to proceed carefully.
Terry
Jean,
You have three sources of income with a lease option. First the option consideration, next is the monthly cash flow, and last the back end profit on the sale when the optionee exercises the option.
For many markets, there is a price point at which the lease option becomes more difficult to accomplish. In your market, you don't say what the market rent would be for a property similar to yours, but if the monthly PITI on your property is around $1300 per month, then your rental needs to be higher to see a cash flow.
What if the market rent for similar properties in your area is only $1000 per month. How hard will it be to convince someone to rent from you at $1400 per month?
To make any money on the back end, you need to set your option price higher than your current payoff. Let's say you took over that $165K property for mortgage and arrears that total $165K. You need to set your sale price higher, but to keep your price realistic after a two year option term, you decide upon $182K.
Now, with an option price of $182K, any potential buyer with 10% down won't need your lease option agreement. This buyer will buy today at current market comps and try to negotiate a better deal. The credit challenged buyer who needs a couple of years to clean up his credit to qualify for a loan is your target buyer. If this buyer has the cash for a 3% option consideration -- not a down payment -- you might get a deal.
Since the credit challenged tenant does not always get his affairs straightened out in time, the option will not be exercised most of the time -- and this first assumes that the buyer can afford the above market rent in the first place..
So, in the final analysis, the lease option is not the best way to get this property sold (unloaded, in your words). Note, I said SOLD. You will not unload this property very easily, and may even end up being a landlord for several years, until you decide to sell to a retail buyer.
I tend to agree with the CS advisor on this one, but only because I am making certain generalizations with no specific knowledge of your market.[ Edited by NewKidinTown on Date 06/20/2004 ]
JeanMarie,
NewKid adresses our idea as to your exit strategy of your property. The key here is that it seems you want to unload this property. Usually when the word "unload" is used, it means to sell in the quickest possible way. A lease option will not produce this result.
On the other hand, I use lease options in my area of Southern California quite often. It is an excellent strategy if you can recoup your initial cash outlay to aquire the property (or preferrably more), the rent rates in the area will allow you to have a positive cash flow, and you are willing to wait on average of 1 1/2 to 2 years to cash out.
You may want to pick up Conti & Finkel's book on Lease Options. Good Luck.
Dave
[addsig]
These postings are priceless. No need to buy a book. In the above postings it is all there.
Also there is something else that you are not considering. You are the Negotiator. You can as time goes by and the market changes or a new credit source comes on line. Interceed and change the deal. Make it possible for the rentor to go into title a little earlier. Of course a point or two might come your way.
You might suggest an expansion done on a card that will increase the value to the point that even more desirble financing becomes available.
The first Negotiation and Contractual Arrangement does not have to be the last. You can steer and rearange. You can even assist in a trade of his option position for another house. Oh the game goes on and on.
Jean Marie, you can twist and curve as time goes on. You enrich your prior tenant and, guess what, you make perhaps even a larger profit. Remember you can always create paper to take back and this can be sold at discount for cash or can be held to increase your Statement Worth which increases your ability to gather bank financing at some future date.
This game is never terminated on the first transaction. It goes on and on. And in this ongoing twirling interweaving of transactions you are the final winner.
Besides its fun. Lucius 8-)
Well let me try to analyse the risks in a lease/option from a sellers point of view. None of this is to say that this is not a good method to sell, only that it has certain strengths (which I think the other posters have done a good job of pointing out) and weaknesses (which I think they may have glossed over a little) . BTW, there are a group of strengths on the buy side which I think have not been discussed here but which are not relevant to your question 'cause you're talking about selling.
Usually a lease/option sets a sale price now to be exercised later. If you are buying in an uptrending market this is a very good thing because you lock in a buying price at today's price (or slightly higher) in hopes that future appreciation in the market will make that a bargain. But if you are selling under those conditions (and most of us, right or wrong, assume that this is the case for our RE most of the time) then the lease/option gives the future gain in price to the buyer.
The other major drawback has to do with what happens if the tenant doesn't perform, specifically if they do not pay the rent. If you attempt to evict them they may be able, as a result of the option portion of the agreement to argue that they are not a tenant but a purchaser. In that event they need to be foreclosed on, not evicted and foreclosure is always more complicated, expensive and time-consuming than eviction proceedings.
Finally, when your tenant buyer goes to exercise his option at the end (or sooner) of the the option period most lenders will consider what he is doing to be a purchase. Therefore he will need to qualify as a new buyer with a down payment, etc. and the LTV ratio will apply to his purchase price even though the main point of this exercise has been for him to participate in the increase in value. Now if you have structured your payments and down payment correctly then he will have the 20% down. But in some ways it is easier if you have sold him on Land Contract. Then the lender will consider the transaction to be a refinance and will underwrite it accordingly. Refinance underwriting guidelines are generally easier to live with than purchas guidlines.
Not that I think the Carlton Sheets guy knew all those reasons (though he should have). Someplace in the course it says don't sell on a lease/option so he tells you not to sell on a lease option. The "rules" of real estate are not rules in that sense. Know the reasons behind the rules and the rules can be very creatively bent and even broken sometimes.