NEED HELP Crafting this Lease option Deal

General Real Estate Investing
1

Good Morning,

I need help/advice on how to craft this:

Seller Motivation: Very motivated to walk away free and clear, open to lease option. He currently owes property 1) 222,000 2) 222,000 and 3) 153,000. 2008 appraisal was $288,000

The Property: The property is currently demanding ~850 a unit and currently only has one vacancy. The area is very good for renters and seems to be no problem finding tenants.

Now I have not ordered an appraisal yet but was going to do that next week. I figure that the property is going to come in quite a bit lower maybe mid 190s to very low 200s. If the deal works I could be seeing ~500 a month (for all three) in cash flow this is after all cost associated with the properties.

My Plan:
–Do an individual lease option on each duplex.
–7-10 year option with $2000 back to seller a year
–Offer a little higher than fair market value which is likely not his asking/walk away price

Exit Strategy:
–Hold for two years and actively look for a buyer, possibly one of the tenants/ lease option.
–Cash out with $20,000 to $30,000 per duplex.

Please looking for any pointers that you might be able to help me with. I think this is a good deal but want to make sure that I do everything right when I craft this up. Like I said the seller is just looking to walk away free and clear and is open to anything.
Thanks in advance and your time.

Best
Darin
aka: bulainvestor

2

For starters, you are never going to get the homeowner to agree to a 7 year option, let alone ten years. You said all he wants is to walk away free and clear. So why would he agree to a 10 year option?

3

Yeah, I’m confused, too.

How many duplexes are we talking about?

“Walk away free and clear” doesn’t mean the same thing to me as it does to you …evidently.

What I believe you mean is that… the seller wants to walk away without any cash, or equity in hand, correct?

And you’ve got three loans on one property, or three properties with one loan each, or what? This makes difference in whether the project is upside down or not.

Why do you need/want an appraisal? What difference does that make with your deal, if you’re not seeking replacement financing? Is the option priced based on this amount?

Is the option price fixed or variable, or perhaps based on an appraisal? If fixed, then what differences do the loan balances mean to you?

If the seller is walking away “free and clear” then your option price is obviously the total loan balances, correct? Otherwise, I’m very confused.

Is the lease and option mutually dependent, or are the options separate from the leases so that in the event the lease defaults, or is no longer worth the effort, you still maintain the right to buy at a fixed price?

When buying we like a separate option from the lease. When selling, we like them coupled together so that if the lease defaults, the option is extinguished.

I think you’re wiser optioning the equity in the property, rather than the price. This way as the loan(s) pay down, you capture the additional equity. Otherwise, the only equity buildup is what the market might provide if there is an appreciation whatsoever. Our thinking is that appreciation is going to be flat, and our profit centers are going to include what equity we actually capture at the beginning, and whatever subsequent loan reduction there is. Otherwise, depending on appreciation for the next 10 years, is really iffy.

Of course, forced appreciation is another issue if this is even possible. That is, can you increase the value by improving the property somehow; raising the rents significantly; reduce management expenses; lower maintenance costs; and perhaps cut utility overhead in a meaningful and sustainable way, or not.

That’s all I’ve got for now. We need more information.