Nervous as hail! 1st L/O deal in the bag!

Comps range from $310-350K
Behind $5,800 in prop taxes
Seller owes $240K to lender
$1425/mo is seller’s monthly payments to lender (princ. & int. only)
DC metro (Montgomery county)
1 month behind in payments

I offered a $310K option price to seller, no security deposit, covering only her payments of $1425 for 1 year with 3 additional 12-month options to renew. Seller responsible for taxes & insurance. Needs paint and a good cleaning; we agreed the seller will get it painted, I’ll get the cleaning taken care of.

Exit strategy: comps are renting for about $1400-$1500, I figure since I’m offering terms I may be able to push that up to $1600/month. Sell for $339,900 if I can get it.

Did I do ok with this? She emailed me today and said she’s getting the paperwork over to me soon, so if I screwed something up now is the time to fix it.

I’m thinking I can get at least a non-refundable $10K option fee is suitable (about 3%), to be applied to the down payment. Too much? Too little?

What should I do about the back taxes and the one payment in arrears? Although she is to be responsible for taxes & insurance should I still catch them up out of my option fee that I’ll get from the t/b to protect my interest?

Any ideas on the best way to sell this sucker? I was thinking about bandit signs (No bank qualifying / rent to own) and Craigslist.

What other things should I be considering? Home warranty?

Thanks guys. I’m nervous!

My first payment is due December as long as she sends the paperwork to me by the end of the month. I get access as soon as the seller sends me the signed agreement. It is vacant (tenant evicted).

Couple of questions.

  1. If she is behind on payments why didn’t you get the deed? :banghead
  2. If you don’t have a t/b already do you plan on making the payments out of pocket until you do? :huh
  3. Why did you offer so much if she is behind in payments? :huh
  4. How are you going to account for taxes and ins.? Do you really trust her to pay the taxes and ins.?:banghead2
  1. If she is behind on payments why didn’t you get the deed? banghead
    My first offer was a lowball all-cash wholesale offer and I almost lost her. I instinctively went right into a much more conservative L/O offer. In hindsight this would have been a perfect sub-2 deal. Probably could have gotten it if I presented it right.
  2. If you don’t have a t/b already do you plan on making the payments out of pocket until you do? Huh?
    I bought myself at least a month before I am obligated to start making payments. I tried for 2 but we settled on 1. I can pay a month or 2 out of pocket if need be, but why do you think it would take any longer than a couple of weeks to get somebody in there, especially seeing how tough it is to get a mortgage these days? It’s a pretty suburban house, great neighborhood.
  3. Why did you offer so much if she is behind in payments? Huh?
    I tried to lowball her and almost lost the deal. She is a landlord so she knows there is equity in the house. I may make $30K+ on the back-end as it’s currently structured. How much would you have offered?
  4. How are you going to account for taxes and ins.? Do you really trust her to pay the taxes and ins.?banghead2
    Well for one, she’s got a chunk of money coming to her when I sell. Tax foreclosure = no money for her. If she falls behind any back taxes owed would come out of her proceeds. I realize there’s a tax foreclosure risk if she lets them go altogether, in which case I guess I’d have to pay whatever is needed to avoid a tax foreclosure out of pocket. Any suggestions here?

Also I didn’t want to obligate myself to too much $ based on rental comps.

Screw rental comps! You’re looking for buyers NOT renters. Take the sale price and amortize it for 30 yrs @8-10%. You’re gonna need to see a rent payment of at least $2500-2900 on this baby. Which isn’t bad for a 340k house. You need to prove to the lender that your t/b can actually afford this house in 12 months. Why set them up with such a low payment upfront only for them to get slammed back into reality when they go to get a loan?

And definitely get 3% down AT LEAST. If this were my deal I would catch up the taxes and back payment immediately with your option money and just take it out of her proceeds. You want to make sure that you are going to have a clean title when your t/b cashes you out. Good Luck.

$2900? :shocked :shocked :shocked I’ll take it! LOL. You have a great point. I just may get it too, especially if I offer some type of rent credit. And $1475/mo positive cashflow from one property ain’t half bad either! I pray you’re right. I’m surely gonna try it at least. If no one bites at $2500-2900 I can always come down.

Great advice. I think I’ll do that. Question: how would I ensure it gets taken out of her proceeds when I sell? Put it in the contract?

Do people in DC really expect to pay 1500/mo for a 340k house? Sign me up for that deal.

Seriously though, you will be doing yourself a HUGE favor by setting the expectation with your t/b on the front end. Just be honest with them and tell them that their credit sucks and they have to prove to the lender that they can really afford the house.

FYI- In real estate surprises usually SUCK!! :monalisa

To answer your question: YES! All jokes aside. The nature of this market is such that one can rent a house MUUUCH cheaper than one can own that same house. This is why L/Os rarely are used here, or at least that’s what I have been told.

I can dig that! Oh believe me I’ll have no problem collecting an additional $1K a month! LOL

Appreciating you guys’ feedback.

That’s because most people are morons. Jesmar424 is absolutely correct, you should set up your L/Os as stepping stone financing NOT as a rental.

In my market all but the very cheapest condos cost more to own than to rent and yet we have 70% home ownership rates. I realized right away that I couldn’t make any money if I followed the guru advice of charging just a little above market rent. So I threw that nonsense out and have based my L/Os on bank posted rates ever since.

Do you mean the values are 500k and up? I’m not always right but I’m pretty sure buying a 200’s house for 350k is not a deal. Please clarify.

And 70k down? They can get a conventional loan for that. You should be happy to get 3-5% down on a l/o.

I’m still kinda, sorta new, but that’s exactly what I was thinking.

The more I think about it the more sense it makes. Being a former loan officer I should have realized that payment shock alone would give the lender a fit. Not to mention the obvious benefit of a substantially increased monthly cashflow.

Best believe I got this loud and clear. I too was following a guru’s advice that you can’t expect to get much more than market rent, and thanks to you guys’ feedback a whole new strategy has opened up for me that I previously thought “wouldn’t work here.” I dread to think about all the slam-dunk deals I canned! :banghead

Thanks guys.

I think that whole notion of “slightly above market rent” came from low priced markets where it’s cheaper to own than to rent. In that case it’s a great deal to buy a house for say $400/month where market rent is $700/month. I’ve invested in markets like that, in fact I’m working on 3 deals that fall into that category right now.

But in my own local market there’s NO WAY that would fly! The cheapest house I’d be interested in would cost at least a couple hundred more per month to own than to rent, and it gets worse the higher the price goes.

I agree, probably one of those weird inverted markets in which a Guru found himself.

I always take the National Guru’s advice with a grain of salt and make sure to tweak it to what makes sense in MY area AND CURRENT market.

This discussion not only exemplifies that m.o. BUT also in regards to lease-options shows how a high monthly rent with generous rent credit vs. doing a low monthly with no or little rent credit are not really equivalent.

The former gets the t/b used-to (conditioned) to the monthly obligation and the gernerous rent credit slowly commits them and helps them qualify to buy (excercise) at a fair market purchase price whereas the low monthly rent lulls them into a false sense of ability with very little chance of being able to buy later.

It’s always best to set-up your end-buyers for success whether you’re flipping or doing L/O’s. :smile

In a “normal/usual” rent market (rents not being squeezed sky high due to unusually high demand) a L/O monthly which is substantially higher than regular market rent rates is customary b/c of the “option to buy” feature that a L/O provides. That is, the rent premium is justified.

Got my signed agreement back yesterday :beer Seller is having the interior painted, should be done in 2 weeks or less. I’m gonna get the carpet cleaned in the meantime, then stage her and it’s ready to occupy. My first payment isn’t due to the seller until 1/1/08 so I have 2 months to get it occupied.

I was thinking bandit signs and Craigslist to find a buyer (“Rent to own, no banks needed” etc). Any other ideas on getting it occupied?

Anything else I need to keep in mind?

Hard to believe I’m this close to getting a nice option check in hand…

Congratulation! Here are a couple of ways that I get my houses filled.


My signs say:

Rent To Own
You Can Move
In Today!
Phone Number

You don’t need to spend a lot of money either. All you need is a piece of neon yellow poster board, 2 wood stakes, a staple gun, a black marker and a small (2lb) sledge hammer. Write your message portrait on the poster board, hammer the stakes into the ground and staple the poster board to the stakes. Done. As cheap as these signs sound, they hold up way better than any wire h-frames that I’ve put up

Just a hint when doing this. Remember: hammer, staple, hammer, staple.

  1. Ads

My ads say:

Check! 1200/mo 3/2
Phone number

Obviously you will put in the numbers that pertain to your house. Sometimes I put the down payment that I want, sometimes I don’t.

Hope this helps.

Get ready to have a great Christmas!! :elephant

Good Luck

:cool Thanks for the feedback!

Signs and ads (online and offline) have always done the trick for me. But if you need more, I would call every mortgage broker/loan officer I can find and tell them I have a house I’m willing to finance to their turn-downs until they’re able to get them into a mortgage.

Great idea Doug…