L/O Basic Question

General Real Estate Investing
1

I am a newbie and trying to completely understand the premise of L/O’s. Let me get this straight: You purchase a property “subject to” and you turn around and lease option the property to a tenant. You get a non-refundable L/O deposit up front (usually a couple thousand dollars). You then charge a higher interest rate to get a couple hundred dollars extra cash flow per month. Here’s the part I don’t exactly understand. After a couple years the tenant will exercise their option to buy it by refinancing. Is this accurate? How much money do you make at the closing? Is it the difference between the remaining mortgage and the actual value of the home? So, if you’re paying on a $50K mortgage and the house is worth $100K, do you get a check for $50K? Much appreciation to whoever can answer this question for me!!!

Take care.

2

Howdy Stangqd:

The option price is different for diferent investors. Some will set the price at a fixed amount usually 10% per year over todays value. So you may set the option at $120,000 two years away on a $100,000 house. Some will set the price at the actual appraised value of the property at the time the loan is paid off.

Either way you are right in that if they pay the $100,000 option price and you only owe $50,000 that you would get the $50,000 difference less any closing costs that you have to pay.

Tim Randle has a great course on doing these and suggest that you buy below market and below the median price range where the payments are lower and you have a bigger spread between the option payment or rent and mortgage payment. Check it out it may save you thousands.