Step One: I buy a property for 85k. It gets appraised at 94k. It can rent for $1,000 per month.
Step Two: I find a tenant interested in a LO. I Give them the option to purchase in a year for $95k with their option money and $100 per month going towards purchase price. Rent would be $1200.
Step Three: When the year is up, they either exercise the option or a new LO contract is drawn up with slightly higher rent and purchase price.
I am just trying to get a handle on how LOs work and if this is a way to get better tenants and sell for top dollar when you get a slight deal on a property AND to save $$$ because no realtor fee.
In the example above, if they use the option in one year, 10k is made just from the sale. The extra $100 rent = $1200 + other profit from normal rent.
I am sure this is all wrong
If the property appraises at 94k now, Im sure you could get more in year (say 10%) more. Where Im at thats the minimum appreciation annually.
Hope this helps a liitle.
The area I am looking at only sees a couple % appreciation if that. Houston is pretty flat compared to say Vegas, where I live.
I have been reading Buy Low, Rent Smart, Sell High. It is an ok book on doing this but they have this high and mighty attitude and fail to consider market swings.
They say to set your sell price in stone when you do the option and for THREE years. So basically I tell them on the home, you can buy it 3 years from now at 95k. That is completely insane.
I do like the idea overall though. Buy a home at a discount, rent it on a LO, sell for profit and no realtor fees.
They say people who agree to sell at current appraisal price when sold are sharks. I do agree that one needs to have a line between profit and green. What goes around comes around.
I was thinking of structuring a deal like this:
I rent it out for $x over market rent, with 75% of that overage going to their credit. So $100 over = $25 for me and $75 for them. Price for buying within first year is in the contract. In my example above, this would be 95k.
I give them a 12 month option with the option to renew. The renew would include 3% rent increase, no credit increase, and a X% sale price increase. The X would be based on area. So if the area is seeing just 3% increase, perhaps I do 2-3%. This would also allow me to ensure I don’t get burned if the area suddenly booms.
They have a maximum of three years. I read that some states have maximums on LOs.
I was also working on a clause that would shift all repair responsibility to them after a few months. They are afterall buying the property and since it is optioned, I can’t sell it. This would reduce possible expenses and put the property on autopilot potentially.
Late payments = no credit.
Still working to figure out if this is better than simply buying, renting, and holding. Seems like this is the way to go if worked property.
Wow i also live in Las Vegas!! 95/Durango area how bout you wer should hook up!