maybe a l/o for a personal SFH residence?

General Real Estate Investing
1

I’m not sure whether to put this here, in the Lease OPtion forum, or what. . . so here goes.

Found out that a house on the street I grew up on has been recently vacated (my mother, who still lives there, and who is an avid walker saw the tenant belongings on the street when they were evicted about a month ago). I decided to look up the owner and sent a short note about how I grew up in that neighborhood, I’m looking to move into that county from my TH here into a SFH that I could rennovate, blah, blah, blah.

Never in a million years expected to hear anything - yesterday got a phone call. They are the original owners of the house, have sentimental ties to it, loved the fact that I too grew up in that neighborhood and that my parents are still there. . .

The long and the short of it is the following:

  • owner has several properties within the state of MD - currently lives on the Eastern shore on the water. Experienced in REI

  • Looking to do a 1031 if they decide to sell it.

  • Presented the idea of me leasing optioning it for 2 or 3 years, while renting out my current property.

  • We didn’t talk actual numbers because I want to see the house but said he would be VERY flexible in terms of monthly payments.

  • Houses on this street are about 40 years old - average about 2500 sq. ft and up - and are selling for 525K and up (needing a lot of work). this is a 4/2 1/2, 2 car garage, finished basement, colonial.

They are currently doing a lot of painting and flooring work inside. The outside needs siding - still orginial wood - and all the windows need to be replaced (single pane with storm right now). Like I said, I haven’t seen the inside yet so I don’t know about the kitchen and baths - though the owner claims they are in good shape.

Roof is 8 years old.

My situation -

My husband, daughter and I are currently in a 6 year old townhouse, about 1700 sq. ft, 3/2.

My husband wants to get closer to his work, which this would put him in the same county and mileage wise not so much closer, but the route to work is much faster as it avoids the congested highways here in Md.

I know I could refi my mortgage and pay off my $19K heloc and still be able to rent this house out with a minimum $200 monthly cash flow.

My current payment is around $1K a month. I’m a stay at home so we are quite tight on $ at this point and cannot go much higher.

My question is - how do I negogiate with this gentleman on price if we decide to pursue this? I told him straight up I couldn’t do a full market price offer, which is when he presented the idea of a lease option. I was really hoping this guy would want to sell it for around $250K and then WE could do all the work - I told him about my thought in contacting him initially was hoping that he was just fed up with the eviction and having the property and wanting to just get rid of it, and that my husband and I would take care of repairing it.

My husband will finish his MBA in AUgust and with that we are hoping on significant pay increases either in his current job or a new position.

We wouldn’t even want to stay in this house for any great length of time- our objective is to get from a TH in this crazy MD market to a SFH in the county in which we work. . . so it’s basically trying to get our foot in the door,

Having my parents in the same neighborhood has its pros and cons as well. . .

Any advice on how to negogiate this and what not to do/do would be appreciated.
Thank you,
Immy

2

Hey Immy:

Appreciate your thoroughness in your post. Too much to go over in great detail, but a few things :

Make sure to file a “Memorandum of Option” and record it. This gives you protection in the future when buying the property.

Keep all receipts, checks, etc paid monthly to the owner. You can find a lender when it comes to purchasing that will consider it a re-finance saving you $$$$$

A L/O gives you almost no home ownership benefits, especially tax advantages (although your current home- future rental- will create many new advantages- so they may “even” out.)

Make sure to create an LLC for your rental property. This will give you liability protection and also create many new tax benefits that you might not currently have (your rental is now a business-many new write-offs)

Make sure it’s not an open-ended L/O. Have specific dates and purchase price included. A lease/Option Agreement/Purchase Agreement is needed with other forms in this transaction.

Feel free to leave me a private message with your phone number if you want me to call you back to answer any specific questions.

                                                John McNamara
3

John,
Thanks for your reply; it is most helpful. We’re still deciding what to do.
Immy

4

Immy,

I don’t think that anyone will really be able to give you a good answer to your question (which was how to negotiate the price) because you didn’t get the asking price, or any of the terms, etc. for the property. At this point, anything would be purely speculation, and personally, I hate speculation.

For example, you say that the going price is about $525K (needing alot of work) for this type of house. So, what would be a good deal to you? A 3 year L/O at $525K? Is the market appreciating? How about a $1K a month lease with a $600-700K purchase?

Here’s what I see from what you posted. Take it for what it’s worth.
Every deal needs to be a win-win situation. I really don’t like the “win-win” saying, because what it really needs to solve everyone’s needs, which at the time may not really be a “win” rather than a solution, but I digress.
What is the solution for the seller? Can’t say because it wasn’t really discussed. Is selling for $250K in his best interest, or is it simply to get it rented/leased, even for $1K a month?
What makes this a deal for you? A $250K purchase price or a $1K a month payment? Here’s some numbers to crunch. A $525K purchase price financed at 7% for 30 years (yes, 7% is a little high, but it covers most of the added costs, too) is about $3500 per month. A $250K loan financed the same is about $1675 per month. So in either case, a $1K a month lease is STILL a good deal, unless the option purchase price is $1M or something.

Just my thoughts,

Raj

5

Raj,
Thanks for responding - you’re right there are a lot variables here that are not discussed. I think from what I can determine, the house is owned free and clear. So ANYTHING is pure profit to him. He had the hassle of the eviction, so I think he wants a buyer or doing the lease option because of the buyer-like mentality of the leasee. He said if he sells it he wants to do a 1031 exchange. Now, I know nothing about those. I don’t know if he HAS to sell it at the “going” sold comps (baseline) of 525K in the area or if he can sell it for a $1 as long as he buys another like-kind property for a $1. . .

I appreciate your examples - the 1K a month is not a problem; it’s that $3500 payment in 2 or 3 years that is. Because even though my husband will have his MBA and after all this work the plan is that he will be making significantly more than he is now. . . just like an investor, I don’t like to bank on appreciation. I want to make my money when I buy. There is a good chance we may have another child which would preclude me from returning to teaching and hence, the additional salary. WHich is why I told this seller when I contacted him that my hopes were that he wanted to dump the place and let ME put the money into fixing it up. So I guess I posted to see what people might say about an offering price. Like I was thinking in the low 300s based on sold comps and repairs (of which he is doing many).
I know you don’t know unless you ask, but I guess I have that “traditional buyers mentality” of “offending” the seller with the price. But then I read here in these forums that if I HAVEN"T offended the seller, my asking price was too high!

If we decide to proceed and actually go see the property, I will be back with more info and probably more questions. The biggest issue right now before we get back in touch with the seller is - my parents will be living about 10 houses down the street. This can be good and it can be not so good! :-\

6

Immy,

Stranger things have happened, my friend, but I seriously don’t that this is a property that you can, or want, to get into, based on your posts, especially if you want your payment to be around $1K a month.

Reread above. Even if you got it for the $250K (which you’ve already upped into the $300’s) that you originally were planning on, the payment is going to be around $1700 a month, which may or may not cover all of the taxes/insurance (depends on rate/term, etc).

IF the property is free and clear, what is the seller’s motivation for dumping at a discount, especially at 50% or less of value? Is the property a dump ready for a major rehab? If so, can you afford to fix it up, even if you got anywhere close to the $1K/month payment?

The 1031 isn’t something that you even need to be concerned with. That is purely the seller’s issue, unless you have another property that you can sell him for the same, or higher, price.

Again, there is no way of determining a good asking price because we don’t know why the seller wants to sell (motivation). Once you do, you can structure a deal that will work for both of you.

Remember, the bottom line price isn’t always the best. Wouldn’t it be a good deal at $500K owner financed at 0% for 30 years (payment of about $1400/month)? Answer is heck yeah! Especially if it’s an appreciating market. (that’s a very unrealistic option, btw. Just showing an example).

hope it helps,

Raj