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Author Topic: Economic Downturn Risky for Lease Options with no equity?  (Read 4843 times)

Offline timmym22

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Economic Downturn Risky for Lease Options with no equity?
« on: November 21, 2008, 11:05:37 am »
I have several opportunities to do sub 2's or sandwhich lease options in new subdivisions that have a lot of cookie cutter type homes. Is this a risky investment if there is not much equity in these properties? most of these people bought these homes at the height of the real estate market and were able to get 100% financing. So equity is not huge in these homes. However, the houses are nice and new and about 25 mins outside of charlotte north carolina. If i am caught with these properties that are worth less than i have the option for i guess i could always not exercise my option, however i'm not sure that would be very fair for my seller. Any ideas, advice would be appreciated.

Offline AJ290

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #1 on: November 21, 2008, 11:12:58 am »
One can say it's always to buy a property without much equity.  But I think optioning a house with little equity certainly lessens the risk.  You say it isn't fair to the homeowner if you don't exercise your option, but I disagree.  Are you saying something otherwise to secure the deal?  Are you guaranteeing a purchase at the end of the lease agreement?  If not, go ahead with a clear conscience.  And keep in mind the homeowner is benefitting from you taking over his monthly payments in the meantime.
Two favorite sites:  this one, and
The Naked Investor

Offline herbster

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #2 on: November 21, 2008, 01:18:44 pm »
One shouldn't take over using a Sub2 unless there is a lot equity. Why make someone else's problem your own.Herbster

Offline timmym22

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #3 on: November 21, 2008, 01:56:33 pm »
So let me make sure i understand this right. If there is a lot of equity do a sub 2. If there is little to no equity do a sandwhich. is that right? Also, let me make sure i understand this right. If I do a sandwhich lease option and there is little or no equity in the property, i should still make out because i am buying at today's price whereas my tenant buyer will be buying a year or 2 away? is that correct?

Offline tjdean01

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #4 on: November 21, 2008, 04:25:43 pm »
If it's your first deal you probably shouldn't do it.  Do something that will make you happier for a future pay-off as to not get depressed and out of the RE game!

If it's worth $90k now, chances are it was worth over $100k a year or two ago.  Say that loan is worth $90k too.  You could make some monthly cashflow over the next few years until your buyer gets a loan and you cash out the original mortgage.  If that buyer has a purchase price of $90k or more, you're covered even if the price goes down to $60k.  Then your buyer would choose not buy and you would choose not to buy from the seller, and keep the $100/month cashflow.

If you're experienced, do it.  I wouldn't do it.  If I had more experience I would. 
I've studied real estate investing intensively.  The reality is, though, I don't know what the heck I'm doing!  :)

Offline ggraha01

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #5 on: November 21, 2008, 06:23:40 pm »
First of all... you need to make sure the deal works for you... if it does not then don't do it.. having said that I believe that the seller should be good with the decision they make as well.. if they are not... then don't do it.. it is best to go into all transactions with the intent for a win-win scenario..

If there is little to no equity, then it does not really matter if you do Sub2 or Lease/Option with a Sandwhich.  I personally perfer to do Sub2 deals... but it is also what the seller wants to do.. A lot of sellers feel more comfortable leasing a property then just handing over the keys.

The question that I have for you is.. what do you intended to do with the properties once you take control?  Rent or sell via owner finance.  If you are going to rent, will the potential rents collected cover the monthly mortgage payments? 

If you are looking to sell via lease/option (sandwhich).. then you can make money now on a non refundable option agreement down payment, as well as set the lease agreement a little higher then the current mortgage payment for a little bit of cashflow (if the market will allow this), and then set the sales price to your buyer higher then what the current market value is.  Just remember with a sandwhich lease option you might have to deal with all things that are involved with being a landlord (tenants, toilets, and trash)

If you sell via owner finance, find a credit challenged buyer.  Set the sales price $10-$20k higher then the current market values, require a 5-10% down payment, you will receive a monthly cash flow from the difference in your sales prices over the currenly monthly rent, and require a balloon payment in 24 to 36 months meaning you will get a chunck of change at the end.

You can make money either way.  The first goal is to get control of the property (get the property under contract...).  Then determine how you can make money.  If you can't then, walk away.. If you can... then happy investing..

Hope it helps,

Gary
« Last Edit: November 27, 2008, 11:07:56 am by Mdhaas »
Gary Graham
www.pse-re.com

Offline johnnyMB

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #6 on: December 16, 2008, 09:04:43 pm »
its such a weird time right now. I would watch the market carefully before buying through a LO.

especially if there is little to no equity

Offline James Andrew

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Re: Economic Downturn Risky for Lease Options with no equity?
« Reply #7 on: February 01, 2009, 10:37:58 pm »
I pick up properties "subject to" with very little equity all the time. 

I make them work by selling them with a lease option at a market premium.  This is basically my main business model.

The reason I feel comfortable doing this is because my credit is not on the line and I have little or no money in the deal.  The tenant buyer is the one making the payments and if they leave I find another one.

If the market tanks and I can't find anyone to lease option it, I hand the property back to the original seller.
James is a Real Estate investor in the Southwest Wisconsin area. He has been investing in real estate for 13 years in both residential and commercial property.  He enjoys talking with those just starting out His blog can be found at:
http://www.realestategozone.wordpress.com

 




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