Raj if you don’t mind could you please help me out? I have been reading all I can on lease purchase and noticed in your post you prefer sale option, if you have a minute could you write up a sample of one of your deals? Like how much you paid, how much you took out, how much down you wanted, how much rent during the lease? What determined the prices?
Thanks,
Thanks spacecoast for starting this in a new topic.
Now, what you’ve asked for there have been whole books written about it, so it’ll probably take more than a minute and it still won’t have all of the details of the expensive courses, but I’ll do what I can 
Sample deal: Purchased property with ARV of $105K for $55K. Rehabbed and refinanced for $85K (roughly $10K in costs, so $30K-$10K = $20K in pocket). Total monthly to me, about $650.
Offer property For Sale or Lease with Option to Buy. Accept $2000 as option fee and a 2-year lease at $800/month and an option purchase price of $100k. Offer $100/month rent credit IF paid on time.
What determined the prices? ARV is determined by the market. My offer was determined by what I was willing to pay and what they were willing to accept.
The $2k option, because from experience, I know that I can get that amount around here without too much wasted time and it’s an amount that means something to the T/B. More and you hold the property longer. Less and it becomes a rental.
The $100k option price, because I like to give the potential buyer a headstart on their equity buildup.
The $800/month. $100K @ 9% interest/30 year term is about that. Low to middle credit scores will qualify for about that rate, so you want to make sure that your monthly is about the same, or a little more, than what they will be paying when they purchase.
The $100/month credit, it’s a good solid number, plus it’s about double what they would get if it going toward principle if it was financed.
Hope it helps,
Raj
Raj,
I just want to slow down your numbers so I understand them–
You bought the house for 55k and then had it appraised at 85k. That was 10k in closing and rehab costs so you’ve already put 20k in your pocket before you even lease option the property. Your costs on the 85k money, insurance on the property, etc is $650/month, but you’re ok since you’ve already put 20k away.
Now you’re lease/optioning the place at $800/month and rebating $100/month for on-time payments. So you’re still positive $50/month. AND you’ve gotten 2k from them as the option fee.
So in the end here’s where you’re at–
Income= 45k (100k sales price-55k purchase price)
$1200 two-year cash flow if nothing breaks down and more than that if they’re late with a rent payment.
$2,000 option fee
Total of $48,200
Cost of money, insurance, etc—$15,600
Total profit of $32,600 over two years
And, since I’m looking deeper at flipping properties than lease optioning them, a different option would have been to sell it at 105k right away and walk with 20k minus any temporary holding costs?
I think I’m understanding what you’re saying. I also think I’m overanalyzing and making much of this more difficult than it has to be. It just seems like the economics of this should be more challenging, but they’re really not.
Thanks for the help.
naperbill
Yep, naperbill, you’re overanalyzing it.
First, I did not have it appraised for $85K. I borrowed $85K, which is roughly 80% of the value of the property ($105K). And that was $10K in TOTAL costs on the property (including potential costs on the sell) and my payment covered the total costs of insurance, payment, etc, etc.
As to the monthly cashflow. It’s $150.00 positive month in REAL cash. I don’t “rebate.” The $100/month credit is given ONLY if a) the rent is paid on time and b) they actually exercise the option to purchase.
As to just flipping it over lease optioning, two remarks: One, different strokes for different folks. And two, have to know all of the facts.
On one, some investors would prefer the L/O to a straight sell for various reasons. Two that come to mind are a) the monthly income and b) the tax breaks, both during the year and at time of sell
On two, this was a Deeded Doublewide property, which in a nutshell means that it is deeded with the property that it is attached (just like a regular stickbuilt). Unlike a stickbuilt, at the time, they were not selling very well mainly because the people that wanted in this type of property rarely had the credit to qualify straight up (which is the main reason behind any lease/option deal).
$105K is the outside extreme of FMV for this property at the time. If I had simply fixed and resold, my net sell price would probably have been somewhere around $80-85K. I say ‘net’ because what you had to do was sell for $100K minus closing costs, minus FHA fixup, minus crediting their DP, minus this, minus that.
So if I had done that, I’d have ended with $20K in gross profit, then I would have had to be taxed on that profit as ordinary income, which is taxed at your current rate (depends on your bracket).
By contrast, I pulled $20K out (tax-deferred) to use, made $150/month (basically not taxed because of write-offs) and when sold I’m only taxed the capital gains rate of 15%.
Hope it helps,
Raj
Raj,
My mistake for posting in the wrong thread! Thanks for the reply! I really like the idea of lease purchase I think there is a big market for people who need affordable housing!
Thanks again!