First post on these boards, lots of great info here. Sorry to be asking such an open-ended question, but I am away from my books on the subject and would like to move quickly on this.
I am looking for advice as to how I should word an option to purchase some resort rental properties that I’m looking at.
The sellers are offering me a 15% discount on 3 properties that are situated near each other as an incentive to buy them as a group.
Asking price would have netted them $250K, but it is being offered to me for $215K. The problem is that I was only looking to purchase 1 property, and have only got around $15K to work with.
Just some basic info on the properties:
The units are only 7-8 years old, occupy an aggregate of roughly 2.5 acres, and come furnished, ready to rent.
Their occupancy rates for the last 3 years suggest that they could be self-sufficient eventually. I say eventually because the resort rentals show an erratic and seasonal monthly income, I’m prepared to goose them with cash once in a while until they establish their own reserves. That should happen within the first full year of ownership.
I have looked into financing them with an 80/20, (7.375%/13.125% respectively) and the lenders want 6 months of reserves in the bank to do this. With PITI, I’m close to $15K already on just the reserves, and still have the other closing costs to consider.
I have not broached the idea of seller financing yet, I wanted to have a proposal ready beforehand. I’ve never used options before, so please let me know what you think of this offer, and how I can fine-tune or correct it…
I was thinking of offering them 5% down ($10,500) to buy a 1 year option to purchase the properties at $199,500. I could pay them a note on the other $199,500 at 12%(amort. for 30) for $2057.23/month for the duration of the option, with 1/3 of that amount to be applied as downpayment when I exercise the option.
I would like the option to be able to be exercised before the 12 month period is up if I choose to do so.
Is this a viable offer or is it way out of line with what you see out there?
I suppose I should start at 10% interest and 1/2 applied towards down to give me room to negotiate? I don’t want to insult the people, I’m not yet sure what their attitude is regarding seller financing.
The 10% and 1/2 towards down scenario would net them an extra ((1755.14x12)/2) $10,530.84, and give me the same to put down. Obviously this seems best to me, but is this typically enough incentive for the seller?
The 12% and 1/3 towards down scenario would net them an extra ((2057.23x12).66) $16,293.26, and give me $8,146.63 to put down. Worst acceptable case, but am I selling myself short badly in this scenario?
Come to think of it, should the principal paid during the option period count towards the final selling price also?(Edit-Upon further thought, I guess this isn’t much to worry about, considering the amount of interest paid vs. the amount of principal paid in the early years of a mortgage.)
If I decide to not exercise the option for whatever reason, I guess I forfeit all monies invested so far? (edit: Yes, read about that in the articles section)
I also assume that I should include language that would allow me to sell the properties to someone else while under option?(Edit: Read that , nless expressly forbidden, options are assignable and sellable in a double-closing type deal)
Thank you, thank you, for helping the newbie.