I am brand new to real estate investing and I am interested in doing lease option assignments. I have heard different people say different things. I want to make good money, but what I am most concerned with is doing business with fairness, honesty, and integrity.
Some say to do an A to B transaction, then a B to C assignment and take a 3% - 5% non-refundable fee, none which will be applied to the amount that C will owe on the house.
Others say to do the same, but divide the 3% - 5% fee with person A.
In the case of sandwich lease option, some say to take the fee and then apply it to the amount owed once person C closes during or at the end of the option period.
My question is this. In the case of assignment only: Is it the “right thing” to take a 3% to 5% fee, none of which is applied to the amount owed by person C? Or do people generally not have a problem with that type of transaction because they might be paying a real estate agent the same thing?
On the other side of things, is it the “right thing” to take the fee and give nothing to person A to help them move out? Or are people just generally happy with someone taking over their note alone?
I know that there may not be just one “right” answer for all of these questions, but I would like to hear some perspectives, especially from seasoned REI’s. How do I find the balance between doing person A right, doing person B right, and doing myself and my family of 8 right?
Your ideal of wanting to be fair and honest is all well and good. We should certainly be that. However, in real life, sellers rarely don’t know the value of their properties, rarely don’t know exactly what they want to accomplish, and rarely don’t get exactly what they need, or they don’t play ball. So “trying to be fair and honest” is a natural byproduct of your character and personality, not the investing strategy you’re attempting use.
Unless you’re dealing with sellers who either write with crayons and/or you’re lying to them to get deals, your concern will rest first with finding motivated sellers that are ready to rock and roll with your particular solution to their problem. The rest will fall into place.
You are right, that you will hear different things. I specifically structure the LO assignment to help the buyer finance. So the assignment fee will reflect as their down payment. I get a hair over 3% down, and FHA requires 3.5%, so at finance, they will need another .5% for the down. It’s certainly fair, and helps the buyer, and I usually give the seller slightly less than a mont’s payment, which is more than they would have gotten in most cases if an agent had leased the house.
It’s a win-win-win. If you DON’T apply the assignment fee towards the down, when the buyer goes to get financed, they are starting from scratch, and now need 3.5% (for FHA) and are still going to have the closing costs that the rent credits don’t cover, so odds are…they won’t be able to purchase.
So to answer your question, structure everything so it’s best for what everyone really wants, which is after all…the eventual purchase.
Everybody requires a different down payment amount. I would say 3% is normal in this economy. If you don’t apply any of the “option consideration money” aka “Down Payment” to their financing, they will have to start all over, and they will not be happy. You structure the deal, so the monthly payment covers not only the mortgage, but anywhere from $200 to $400 extra. That extra is extra for you (minus the process server fee $15/month - the 3rd party who accepts the payment form the buyer and makes the mortgage payment), and it will also be applied to their financing so when the tenant buyer’s time comes to exercise the right to buy it, it will be for their benifit & will help them getting a mortgage.
You’re gonna need a good loan specialist or mortgage broker who knows the loan specials like the back of their hand. If you get a really good mortgage broker, they can also help you repair their credit (with some things). They’ll tell them to NOT close any credit accounts - to pay them off or charge n pay down then charge again & pay off. After they pull the credit report, they’ll tell you to dispute anything that’s been paid off, or anything that the amounts haven’t changed on that may affect their credit, too. That’s what my old mortgage lady told me a few years ago. And, boy did I listen.
I hope this also helps you, too. Have a great weekend.
Good responses. Thank you all. So help me understand something. It seems like 3% - 3.5% is the standard LOA fee. In an assignment only situation ( not sandwich LOA ), when you take a fee of 3.5% and apply it to their balance, where does the money that you take home come from? Aren’t you ( “B” ) out of the deal once you assign the option, leaving the deal between “C” and “A”?
You’re talking about Cooperative Assignments. As you said, there is no one “right thing” with these deals. Each one is unique. The key is to offer full disclosure from the beginning so everyone involved knows what they’re involved with and what your position in the deal is.
You’ll do fine as long as you keep this in mind.
Regarding Cooperative Assignments, there’s no better source of info than The Naked Investor.
Good luck with your new venture.
Yes,it is the right thing.As you are new to the business,you will feel everything suspicious,and also you should.But with time and experience you will learn wicked ways of business.But think twice before investing.
all the best
