How to lease option in a down appreciating market

Hello REI club, I’m an new investor how currently has one rental that I purchased with my VA loan,I’ve been reading up on the lease option exit strategy and figured It could get more for my property, and sell For above FMV. The issue is that my home has lost value over the last two years eliminating the spread. Like-wise homes in other markets are losing value to. Do I look for another exit strategy like land contract or is there still a way to do lease options in down-ward markets.

How far down has the value plummeted? Do you have any equity at all?

How far down has the value plummeted? Do you have any equity at all?

the property has fallen from 183k to about 173k, but this is according to tax assessors web site.
several homes in the area have been selling for lower prices forcing depreciation. I only have about 10k of equity in the home

The tax assessor’s office is of no value in determining your property’s value. The only accurate indicator is sales of similar properties in the past six months. That’s the first thing I would do to get an accurate number. After determining your equity you’ll be in a better position to plan your exit.
If you needn’t sell at this time you might be better off using the property as a rental. But if you need or want to sell, then you are correct in thinking you can get a premium price via a lease option. That premium, however, will be slight based on your description of the local market. You can go with a long term deal to try and maximize the purchase price, the reasoning being there is value in time and a tenant/buyer might be willing to pay for that extended time.

But how will I calculate the appreciation? this is the issue. homes of similar composition have been selling for about 10k less. can I just ask for a higher price in 2 or 4 years, or does it actually have to be based off of annual appreciation? And if the price continue to fall, will the bank even consider financing a T/B with a home above FMV.

thanks for your input

Appreciation is always the great unknown. You can easily make the argument that prices will go higher, while I can make a convincing argument that claims the opposite.
You can ask for any price you want. But will the tenant/buyers you are looking for accept it?
If and when your tenant/buyers decide to buy the property, the lender will order an appraisal. If the house comes in below that then the option agreement you used will be a factor in what happens next. Does the agreement address this situation?

We need more specific information.

Actual market value.
Loan balance.
Interest rate/terms.
PITI(+HOA) payment.
Current market rents.

Once we know these details, we can show you what today’s most profitable exit strategy might be. Otherwise, it’s pure speculation and guessing on what to do.

Give us some hard numbers to work with.

here’s the gig,
mortgage & interest 1070
balance 166427
HOA fees 245
FMR 1695
*value at (County)173000 (rich dad)*178735
I’m currently in Afghanistan so the only value I have access to is county appraisal, And my rich dad software . though this seems like a good rental I only cash flow about 190 after management fees. ill be leaving AK, shortly after deployment and will PCS to GA… and I frankly don’t want to hold on to the property. its a nice home in a nice Community

Based on your data, the effective interest and terms on your loan is 6.7% over 30 years. This is a terrible rate, by today’s standard.

Since you didn’t list taxes and insurance separately, I’m assuming the HOA includes these two things.

So, the total PITI+HOA is $1,315/mo.
The rent is $1,695.

  1. Would you consider a long term financing option of four or five years?
  2. Would you be willing to sell the house for $180,000?
  3. Would you accept $10,000 down (or less than 10% down) and finance the balance of $170,000?
  4. Would you finance a buyer that cannot get immediate conventional financing?
  5. Would you consider using a 3rd party note servicer to handle and verify your Buyer’s payments?
  6. Would you help your buyer find a new loan?
  7. Would you accept less than a $100/mo spread on the interest payments?

If you’re willing to do all these things, then a land contract installment sale will:

  1. Commit a buyer to refinancing you out of the property
  2. Give you more cash up front than a lease/option
  3. Relieve you of debt liability
  4. Relieve you of maintenance responsibility.
  5. Provide a small spread to pay for monthly processing.
  6. Salvage your potential equity loss.

If not, we’re back at the lease option.

However, a professionally assembled lease/option involves most of the same details as a land contract installment sale anyway, so settling for a lease/option simply creates more busy work, and more risk of a failure to close. A lease/option doesn’t remove the need for professional management, since the tenant/buyer is still not responsible (usually) for repairs and maintenance.

Otherwise, you can attempt a lease/option, but these rarely close, as they are mostly pipe dreams for all concerned.

That is, unless you effectively disguise the sale as a lease/option, which may be necessary in some states that outlaw contract for deeds, you won’t accomplish what you’re after.

Hope that helps.

Thank you guys for the input, it was very informal :biggrin