Lease Option on Major Rehab?

General Real Estate Investing
1

I purchased my first investment property 7 months ago for $110K. I purchased it for $75K + the balance to rehab the place. I now owe $105K.

I attempted to rehab it over 7 months - total nightmare over 2 contractors.

I’m totally out of the rehab money and stretched paying both the mortgage for my rehab, plus my home. I want to get out fast.

Problem is, my contractors left the home still needing $20-30K in additional rehab. It’s still a total gut, with a lot of work needing to be redone.

Many people who has seen it appraised it at $85-90K, including the agent I decided to have list it this week. This places me in a short sale/negative equity situation. Also, I have absolutely no desire to try to continue the rehab myself.

However, I got an offer to lease purchase it for $100K from a young man. He has already had a contractor look at it, and based on the rehab price, is still offering $10-15K more than what I know it’s worth. He is also offering $5K down.

My overriding question is this - is it dangerous to enter into a lease option in such a situation? My gut feeling tells me they are risky enough, however, I am nervous as:

-I would be taking on additional risk by depending on this guy to rehab it correctly - thus making this a 3rd contractor experience. Major rehab is still needed. So I will be taking on the normal financial risk of leasing, as well as the risk of good contracting.

-I ran the numbers being an RE agent in NJ, and found he would probably be in the red for what he is offering, and what I know the rehab is and the property is worth. I don’t want this guy to realize this, then 6-9 months down the line, get into an ugly situation because he can’t sell the house for what he needs to cover. He in no way wants to live there.

Or, is there anyway I can get into an ironclad lease purchase with this guy for $100K, that would work out beneficial to all?

My only other alternative is to get it in the MLS, and hope someone can purchase it outright for what I’m asking ($110K). I will be coming into about $15K cash next year, and am open to buying myself out of this mess if I can’t get an offer to cover both what I owe and the transaction costs.

Or, if anyone can advise of an alternative to such as situation, I would appreciate it.

2

It sounds like the offer that the young man made would work for him. So if it works for you, it might be a good way out of your situation.

FYI: I have not done a lease option yet, but intend to lease/option my house valued at about $950K after I move into the new house I just bought. This way I will still get to write off the mortgage interest for 3 more years. I have done a lot of deals and am looking for lease options currently and have made several offers.

From what I have learned about lease options…

As the seller, you will want 2 separate documents. 1. Lease Agreement. 2. Option Agreement.

Break up the $5000.00 down payment as follows. $1000.00 Security Deposit (refundable), and $4000 Option Consideration ( non-refundable) This is because some states are looking at lease/options as purchase transactions. You want to be governed by lease rules for the lease and purchase rules for the option.

Typically, people offer what they hope you will accept…and what works for them. The prospective buyer may be good at rehabs, or something. It might be a great deal for him. If it works for you go for it.

You could require that you will need to inspect his work to make sure the rehab is done correctly.

Chip

3

Lease options are great! We’ve done 4 rehabs and while a cashout would have been nice we quickly turned them on L/O. Its a quick way to get rid of a property and to get close to what you are wanting for it…and by the sounds of things…you should take that deal.

Nate-WI