First Property to sell on Lease Option, did I do a good job???

I am closing on my first property on th 16th. :biggrin Under contract for $72,900, $8,000 in fix up and closing costs (I thought it to be lower but the boiler just blew after papers were signed). I want to Lease Option this to a Tenant Buyer. It Appraised for $113,000.

I think the standard would be to use a 5% apreciation each year for the sale price which would equal $131,797.00 (36 month term). I want $5,000 option consideratioan and $1000 per month with 25% rent credit.

Am I missing anything? I just want the first deal to go smoothly. I am financing with a hard money loan then refi to $100,000 (90%, yes I am full doc). So I should be cash flowing $200.

If I did good please let me know as well. I have been lurking on this site for a year now and finally have something to say. Thanks to everyone who posts really good info, you have given me the knowledge and strength to go out and get my first deal.

Congratulations on your first deal. Here’s my two cents:
I have never heard of a “standard” appreciation rate of 5%. Where did you get this from? In most parts of the country prices are falling. Some regions have no bottom in site yet, either. Try to inflate the price and you’ll never move the property.
Also, $5K option money might be a stretch on a $100K property.

I want 3-5% for the Lease Consideration. and 5% appreciation is what is historical for the real estate in this area. And I figure the 36 month term would be enough to get out of the current market slow down. This house sold in 2004 for $154,000.

How about the numbers though? Do they look like I calculated correctly?

Thanks for the help.

This is going to be blunt and to the point, so hang on to your hat.

First thing is first. You really need to step back and take a look at this deal without the rose colored glasses on. You just bought a property that 3 years ago, sold for about 30% MORE than it’s currently worth, and then you say that “historically” 5% annual appreciation is normal. Forget ‘historically.’ We don’t care about that. What’s important is what can it sell for TODAY. Don’t know your area, but from your numbers, I seriously doubt that you’ll be getting any 5% appreciation.

If you’re expecting to get 3-5% down as option consideration, then you might as well find a good mortgage broker and SELL the dang thing. Unless a person’s credit is totally shot, if they have 5% down, then can get a loan on a property. No need for a L/O. We’re routinely getting 590’s scores 95% financing, and in some cases, down to 550. If it’s worse than that, chances are good that you DON’T want them as tenants.

Can’t tell about your numbers, as there isn’t enough data on your area to say. What is current rental market? What is current rents for like property? How much is the cost of refinancing? Is your $200/month cashflow after ALL expenses are paid?

Refinancing 90% in a down market is risky at best (I’m being nice here. Most would say it’s plain stupid). NEVER go above 80% and preferrably, 70% of real value.


That’s interesting, because I have looked through a whole lot of posts on this site of people advocating exactly what I want to do. And by your reasoning no Lease Options would ever work.

Is it just mine that looks bad? I am just using the numbers for the Option consideration that I have read on this site. Also, if I am able to pull out $10,000 in cash and still cahflow even $50 I would have the equivilant of cash flowing $150 for 100 months (10,000/100+$50 per month) right away. A bird in hand is better than two in the bush.

I am here to learn, and I did post it to get back advise whether it be nice or harsh. If it is indeed a bad L/O then should I rent it out. Average rents in this neiborhood are $850-$950 for a 3 bed house and $650-$750 for a duplex.


Cooley, you may want 3-5% down as option money, but you’re not going to get it. As Rog already pointed out, with 5% down Joe Buyer will buy, not lease. In that price range, expect around 2%.
Put yourself in the shoes of a t/b. You have an appraisal for $113K. You’re asking $132K. Would you take that deal?

What you read, especially on a public forum, needs to have at least a bit of real world logic thrown in before you decide to take it as fact.

Getting 5-10% down on a lease/option is pie in the sky dreaming, under most current market situations. Gurus throw out these numbers and newbies spout them back out here, so you hear them alot. Once you put real world logic into play, however, you see how tough that is to get, though it can be done.

Yes, I said that it can be done. I’ve gotten 4-5% down on a L/O before. However, the situation was unique. And I know people that simply won’t take less than 5% down. How do they do it? They WAIT. And wait…and wait…for the right (or wrong, as the case may be) person that fits into that criteria that HAS to do it. In some cases, I’ve L/O’ed out a property TWICE before that investor has one in it. Now, comparing mine to his and including debt service, who do you think made out better?

I see nothing in my post that says NO lease option works. I do them all the time. You again have to simply add in real world logic to the puzzle. Take yours for example.

Current ARV is $113,000. Advertise FOR SALE OR LEASE WITH OPTION. Get calls. Screen calls. Anyone asking about the L/O, you say, “Alot of variables in the L/O. Your monthly payment will depend on your option fee (or down payment). For example, with $1500 down, your monthly payment will be $1000.00 with $200/month going toward the purchase price, if you decide to buy, which would be $115,000.”

To shorten, assume that they take it. They need $1500 for option fee $2000 for first and last month’s rent AND the remainder of whatever month they move in. Minimum of $3500 + remainder of month = your 3-5% down. You could also thrown in a security deposit if you want.

BUT WAIT! IT GETS BETTER!!! Say that YOU have taken it a step forward. You’ve already get a good mortgage broker lined run your credit applications. Once he runs one that will qualify for financing, you get to go back and say to the potentials, “I’ve got GREAT news. I had to do so talking, but you don’t have to do this L/O. We’ve managed to get you financing and all you’ll have to bring is what you needed to put down on the Lease/Option. Isn’t that great?”

As far as taking cash out of this deal, you’re on your own there. What happens when that $10K is gone and you’ve still got bills to pay AND the property is now only worth what you owe? How do you intend on getting out of it then? There is a reason for the 70% rule after all.

And no, you should NOT ever, repeat EVER, “just rent” anything. You can always command more monthly from a lease option over a rental (if done properly) and you’ll always get something as an option fee, which is your cash at time of possession, compared to a security deposit, which you can’t touch.


Thanks Roger J.

Anyone else?

I thought that I would give an update. I am getting a T/B in the house on Saturday 36 month lease $2000 Option consideration and $975 per month with $250 per month rent credit for on time payments. $129,900 sale price minus $2,000 and $9,000 (rent credits) for an adjusted sale price of $118,900.00.

Purchased price of $71,900 (72,900 minus $1,000 earnest monies) HML of $82,500. HML took the 4 points at closing leaving me with $7,300. Rehabbed and in process of refinancing HML.

I have realized that there is not a single true correct way of doing these deals. We all have our own opinions on what profits we would like to see. Some of you will see this deal as having too much risk and way over leveraged, yet others will see this as a great buy and would do this in bunches. I wanted to post my deal so others can learn from the comments posted.

Have at it boys…

P.S. Thanks for all the posts on these forums. Without them I probably wouldn’t have taken action. Closed on second property yesterday…

Congratulation on your first deal. You didn’t mention the refi choices, but there’s a big difference in the final numbers from the original post. They now sound realistic which is probably a big reason you already have a t/b.

Did you start advertising before closing?!? Two weeks for a deal seems amazingly quick.

Our Denver area is a hot rental market largely driven by the rate of foreclosures. Obviously, property conditions, pricing, etc. come all into play, but assume all the numbers look good.

Is 3-4 weeks a realistic timeframe for finding t/b? That would be amazing.

I did start getting a T/B list 2 weeks prior to closing. But amazingly This T/B wasn’t on that list. I put an add in the Post and this was the first person that looked at the place. I did have two different T/B to pick from. I think that might be a function of my pricing. I was really scared and I went with something a little lower than what the market would bear. I also put my heart and soul into the updating and made the nicest house on the block.

I have learned not to do that now. My second SFH that closed on the 27th is not getting the 5 star treatment, but is still very nice for the area.

What part of Denver are you in?

We’re in Superior about 15 minutes NW of Denver.

What kind of deals are you finding North of Denver? It should be fairly good up there…