How would you determine the purchase price (option price) in a L/O deal?
A lot of buyers and sellers do not want to commit to a pre-determined purchase price in a the agreement. Some sellers want to wait until at the end of the lease to determine the purchase price (Option price). They want to wait until at the end of the lease to see what the market value will be at that future date before they will commit to a purchase price (option price) to complete the deal.
Thanks.
Peter
I’ve never had an issue with people not wanting to have the numbers set ahead of time.
AFter all, when prospective T/B’s call on a house, one of the things they will typically ask is…“How much is the total price?”
Imagine responding with a resounding “I don’t know, we haven’t decided, but put down a non-refundable $5,000 and I’ll let you know at some point…”
Yeah…not gonna fly…
As far as setting the Option Price, I would first say don’t over think it. You can ruin brain cells trying to determine EXACTLY what it should be by using some concocted formulas etc.
When I set the price, it takes less than 5 minutes of time and I’ve determined all of the figures and sent them off to the seller with the Seller Price Sheet and a prescripted e-mail.
When I first get a call from a seller, I ask a few basic questions.
Address, How much is it listed for (or how much was it last listed for) how much is owed approx. and approx. how much are the payments.
I get the sellers e-mail address and I’m ready to spend the next 4-5 minutes putting the figures together.
One nice thing about marketing to listed houses, is that the listing agent has already pulled comps, and in most cases the list price is going to be in line with the comps. (Not always of course, as there are bone head agents out there, but you get the point)
So, I actually use the listed price as my starting point, then I pull the tax records, look at the tax value, (since I have a very good feel for the tax value vs. actual value for my area) then I can quickly determine, if the list price is in line or not.
If I’m not quite sure, you can do a quick search on Zillow just to see what other houses are listed in the immediate area, and compare price per sf. etc. You can use Zillow as a reference tool, but you don’t want to put too much weight on the data, just use as a reference.
Keep in mind, the market in the area will play a big role in where to set the option price, depending on if the area is appreciating, depreciating, stable etc.
Knowing your target area really helps, and don’t worry, it may take a few houses to start getting the feel, but it will come along just as everything else will.
If you have buyers and sellers refusing to do a deal with the key terms in place, they’re yanking your chain and aren’t really serious. Who in their right mind would sign a contract to buy or sell a house with the purchase/option price missing? Besides, doing so doesn’t fly in court, (which is where the deal will end up, I assure you), because this is known as an illusory contract and is unenforceable.
In this area (Washington, DC) most seller/landlords will not do a L/O. They say they are waiting for the market to go back up before they will consider selling their property.
The sellers that say they may consider a L/O say they want the purchase price to be determined in the future at the end of the lease…which is not a lease purchase. They say they are waiting for the value to go back up and they say they will lose a lot of money if they sell at today’s prices versus the future vaule. They tell me they are not desperate and to get lost.
So I guess I need to find people that are desperate in order to do a L/O deal. In this area, the time frame is about 3 weeks, once the NOD is listed in the legal paper and then goes to auction. That seems like it’s cutting it close…3 weeks… to contact the pre-foreclosure seller, put the dela together and find a T/B before the auction.
You don’t want a pre-foreclosure seller.
My sellers aren’t “desperate” just not wanting to let a house sit empty for 6 months or wait to move till the house sells.
If someone says they don’t want to do a LO because they are waiting for the market to come back up, then ask then ask why they didn’t sell 3 years ago… HA!!!
Seriously though, if they want to wait till the market rebounds, then that means one thing…they don’t want to sell.
So…a LO isn’t for them.
Who is in the driver’s seat? You or the seller? There is no way a seller should be jerkin you around about terms or anything like that. What the hell is that all about? Are you kidding me? How can you realistically make money in a deal if you don’t know what the option price for you is going to be upon cashing out? For all you know, you could take a massive loss if the seller decided to do something stupid, right? One of the cardinal rules in this business is ‘do not enter into a deal until you know how you will exit’. If you even entertain doing a deal with the seller dictating price at their convenience, there is no way for you to determine how you will make money, which means there is no deal here. Just my humble opinion.
Great post!!
“Who is in the driver’s seat?” That’s really the first question. Everything we negotiate pivots on the answer.
What does a seller do or say that helps you answer that quickly?
It’s all negotiable. You definitely have more bargaining power but it does no good to ask for too high of a purchase price knowing that the property will not appraise when the term is up. I suggest you negotiate a fair purchase price then find out the most the buyer can pay for down payment and option price. Whatever they say you can always ask for more, worst case is they say NO. But you don’t want to create an impossible situation for them, be far, it should be a win-win.
Quick question for you, what kind of L/O are you doing…sandwich or doing an assignment?
Easy solution for you: tell them you need to lock in a sales price for the 1st year, and this price can even be slightly above market if it’s a problem. Then simply tell them after that first year the sales price will be the appraised value at the time of sale. Just write it up in the option. That’s fair to both buyer and seller.
By the way, the buyers are much more concerned with the rent and the upfront option fee than they are the sales price. And you can sell it for slightly above market value because you’re making it easy to buy, therefore it’s worth more…just like buying furniture from rent-a-center vs. paying cash.
Wait, are you saying you’re pitching L/Os to people in foreclosure!? Who told you to do that? How will you catch up the back payments??? Uhh no.
You don’t need “desperate” people per se, but people who would consider having their payments, repairs, and maintenance guaranteed until the house sells for cash. They don’t need to be “desperate” to consider that, although the more desperate they are the better for you.
Currently I’m working on L/O assignments, but thinking about later working on sandwich L/O deals.
Yes, that’s what I was saying the sellers want…the property appraised or market value at the time of the sale.
No I’m not marketing to pre-foreclosures. I was thinking of marketing to pre-foreclosures. A certain “guru” teaches marketing to pre-foreclosures for L/O deals. A student of another “guru” says he doing VERY well marketing to pre-foreclosures, making up back payments and doing and sandwich leases.
I’m been unable to locate people from Clist or Forsalebyowner willing to actually do L/O deals.
When you say “people who would consider having their payments, repairs and maintenance quaranteed until the house sells for cash”…so if the T/B does not pay or defaults on payment that you would pick up the slack and make the payments?
Thanks,
Peter
If you’re doing assignments don’t worry too much about the sales price. As long as it’s within the realm of reality what do you care, you’re not getting any of those proceeds when it sells anyway.
Perfecto…pitch them what I said earlier and that problem is solved.
I’d recommend against that strategy in almost all cases. All your front end profit will be eaten up catching up back payments.
I can assure you they are there. But it wouldn’t hurt to do other forms of marketing such as bandit signs, yellow letters, etc.
If it’s an assignment, no. With a sandwich, yes.
Yeah, the problem that would I see in potentially marketing to pre-foreclosures with the LO as your entry is that with a lease option you only control the property, but you don’t own it. If someone is in a pre-foreclosure situation, means something bad is happening like behind in mortgage etc. So what if you decide you will enter with a LO in that scenerio, bring the payments that are behind current and not own it. Since you’re not on title in the LO situation, homeowner can put another lien on the home, or do any number of dumb a*s things to screw up your deal. Thats why in those situations I prefer full ownership via the Sub2 deal (if the numbers make sense of course). Never even consider doing a lease option deal in a situation where the owner is behind or in financial duress. Some will advocate that you can still do it with LO by adding more paperwork to protect. Bunch of crap. Take the homeowner out of it completely and have them convey full ownership to you.
I think you have to set a purchase price up front. What if you guys disagree at the end of the term and they are faced with you walking with their down payment and option price money? I think you have to make sure the down payment and option price is enough for them to be committed to executing the purchase contract. It helps to make it mandatory that they go thru a credit repair program, doubles likelihood of the purchase contract being executed. I have also seen a verbage where the purchase price can go up a max of 10% or down a max of 10% based on appraisal. No bank is going to loan 100K on an appraisal of 90K anyways so it makes sense.
Don’t know who this “guru” is, but I have my suspicions. :rolleyes What you describe is a dangerous combination for a new investor.
The idea of controlling properties with lease options is to do so in a low risk, low cash kind of way. If you are making up back payments that would seem to fly in the face of that very approach. Sounds like just one more way to sell crap under the guise of get-rich-quick. :bs