I’m a new investor in L.A. county,(CA).
Property prices have gone thru the roof. At what price range(s) do lease option deals funtion? With prices so high in Southern California, it would seem that the mortgage to rent ratios are way out of balance and there’s no positive cash flow. So what price range would be effective to have some kind of cash flow and back end profit? It seems as though the less attractive areas are now at the $350k to $400k plus range and are now likely to be feasible deals. Nice Areas are way too expensive for lease options, seemingly.
How do you deal with lease options with this type of market and what areas do you target? :o
If anyone could anwer this, I would really be grateful.
Thanks, ComposureBoy
Hi there,
There are 4 strategies that generate profits within the LP strategy.
- Sandwich Lease: Upfront money, during (positive cash flow) and at closing (cash or a note).
- Assignments: Upfront profit. Your out of the deal once you assign the contract.
- Cooperative Assignment: Works wonders with nonmotivated sellers!
- Pure Option: A deal absent a lease.
If a positive cash flow is hard to pull together then consider doing assignments. After all, some buyer/tenant are after terms instead of rent credit, etc.
For example: I had a seller who couldnt sell his property. It was worth $110k and he had a mortgage for $105k. The real estate agent couldnt list the home because there was no commission there (6%). His payments where $1,100k PITI (principal, Insurance, Taxes, Interest).
Made a deal for $1.100 a month for a five year lease and a purchase of the balance of the mortgage.
Started calling my buyer data base which i have grown by marketing and found a buyer who just filed brankruptcy and needed time to repair his credit and save for a downpayment. I sold him the contract for $6,500. He wasnt looking for rent credits. He just needed time!
I was out of the deal and recouped my $1,100!
Don’t always focus on price, positive cash flow, closing profits, etc when structuring LP deals!
Thanks for the great answer Dianafontanez! I will take into consderation your four options. But my origninal question is-
How effective is it in higher priced markets? You gave me an example of property of $100k+ which makes it feasible. But what about $400-500k+ properties like in CA?
:-
Would appreciate your view,
ComposureBoy
lp’s are not effected by the market. The only effect the market has is a possitive one. Dealing with higher dollar houses in CA, can mean bigger up front deposits and huge backends at closing. Personally, i rather spend my time doing LP on higher dollar houses than lower dollar houses. LP’s will work in either situation, but most of the time in your advantage.
;D ;D ;D Best in Florida
Composureboy,
It feasible if you structure it correctly. Some ideas:
Try to get a lower payment from the seller then mark it up. If you give good value to a tenant/buyer then you are entitled to a higher than market rent.
Assign the contract if you think that a positive cash flow is not possible. Like I mentioned before, some buyer/tenants are not looking for terms but are looking for time.
If you are comfortable payinga huge monthly payment and hope to get a tenant/buyer then by all means go for it as a sandwich lease. Like i said, it all depends. If i were you I will go for the assignment of contract.
To your success,
Diana Fontanez
Lease Purchase Specialist and Consultant
Thank you Sky_14 for you helpful insight.
And, thank you Dianafontanez for you detailed explanations, I feel your expertise.
It would seem then that in higher priced properties, it would take qualified tenant buyers to be able to afford the higher rent/mortage, based on their desire to own the property eventually. And that the seller sometimes pays some of the payment. Is this typically the case?
Thanks again, ComposureBoy :-*
You need to do your homework here.
Check the monthly payments the seller haves. Compare local rents in the area. For example:
Payments are $1500 local rent is $1000 to $1500. Here you could mark up the rent to $1600 - $1700 thereby creating a positive cash flow.
Those numbers are low but you get the idea.
If the payments are higher than market rent then its not that feasible for a PCF. It just depends on the deal.
As long as you are not stuck making payments to a place you can’t move then by all means go for it!
Also consider the value you are giving to a tenant/buyer. I like to give 50 - 100% rent credit. It keeps the phone ringing and moving the home fast.
To do this you need to create a spread between the seller’s price and the price your selling. With this spread you will be able to absorb the option consideration and the rent credit from the tenant/buyer.
Remember to give good value, have a win/win mentally, some powerful contracts, great marketing skills and a great attitude!
To your success!
Diana Fontanez
Lease Purchase Specialist and Consultant
Online one on one mentoring to success!
Thanks again Dianafontanez!
I heard of 30-40% on rent credits, but I could see where 50-100% could entice a T/B and I could get more monthly cash flow. Makes sense.
I appreciate your detailed explanation. Your awesome!
thanks, ComposureBoy :-*
???How do give 50-100% rent credit without just losing that amount each month?Seems like lethal negative cash flow to me. Obviously, there must be something to your strategy that I’m unaware of. Please fill me in, cuz that becomes a HUGE marketing tool!
Sure! Let me explain how i give 50 - 100% rent credit.
The secret is to create a spread. This spread is created by negotiating an under market sales price with the seller. The bigger the discount the better. Now other investors flip out at my strategy but get ready for this.
I want to give all that spread away! All of it! I dont care about back end profits. I want to create so much value that my phone rings off the hook. And that is the goal. To move this home ASAP so you are not stuck with monthly payments.
For example:
I found a home at $210k and negotiated for $190k. Thats only a 10% discount and that creates my $20k spread. Since I am been flexible on the terms I could raise the price to $215k. Giving me a $25k spread.
A good question to ask a seller is “Mr. Seller, since there are no real estate agents involved. What is the best price you could give me on this home?”
Now lets see how the rent credit works.
Supposed the rents in the area are around $1,400. I want to make $200 monthly positive cash flow.
I will run an ad that says:
Rent to Own
$1595.00 rent - 100% rent credit.
NO qualifying, credit problems OK.
Call me now xxx-xxxx
Since I am giving away $19,140 in rent credits, I am entitled to an above market rent. If we substract that amount from my $25k spread i have $5,860 left. I am looking for around $5k in option consideration. Which will leave me with $860 at the end of the deal.
Do you think I am not going to receive phone calls from this 100% rent credit? You bet!
Thats the way to move a home! Giving exceptional value, bigger rent credits, and negotiating a good deal with the seller!
And yes! That is a GREAT marketing tool!
To your success,
Diana Fontanez
Lease Purchase Specialist and Consultant
??? Thanks for the reply, but now I’m more confused than ever. It seems there must be an assumption here that your lease/purchase is for only 1 year, at the end of which your end buyer completes the purchase by paying off the balance and you keep whatever is left. It also seems that if your end buyer does NOT complete the purchase in that time frame, then you are beginning to experience unlimited loss(after you have given away all your spread through lease credits). How do you ensure that all this happens as it should, particularly working with credit challenged buyers? Also, are you not counting on keeping your option fee as profit, making $5,860 rather than just $860? And why would you or anyone do all this work and take on all this risk for just $860? These deals, though simple in concept, are not easy to put and keep together, in my experience. Finally, it appears that you are not working in Texas and having to deal with the very restrictive new lease/option/purchase laws here (Texas SB 629). I currently have 13 properties held in lease options and would very much like a way to market them without running afoul of the law.
You are creating more confusion lol
Simple:
I gave the owner maybe one month worth of rent or maybe 2.
1 month = $1400
My profits:
$5k option consideration
$195 x 12 = $2340 Positive Cash flow
$860 back end
Total $8,200
It doesnt work that way all the time. I am just giving you an example of how to use the 100% rent credit. Sometimes it goes for 20, 30 or 50%
I try to get a 2 to 3 year lease with the seller.
In the event the buyer can’t exercise his option I will give him another year but he must give me more option consideration. A year has passed if appreciation is present i will raise the purchase price by 5% again. Thus giving me another spread to work with. In the second year I will not give rent credit but will carry the rent credits and option consideration given in the first year to the second year term.
In case the buyer doesnt want an extension I just leave it as a monthly rental. Once again, its just an idea.
Your right. I am not in Texas. I am just giving you an example of how my technique works!
To your success,
Diana Fontanez
Lease Purchase Specialist and Consultant
:banghead:Thanks! that clears up some stuff. Our current understanding of the new law here is that we won’t be able to take and keep non-refundable option fees at all, so I still have a problem. But it is a neat program in states where capitalism still rules.
If I understand this correctly, it is your spread that will be the basis of which you will give out rent credits. The smaller your spread, the less likely you will give out 50 to 100% rent credit. Basically, it seems Diana is more attracted to receiving a positive monthly cashflow vs backend profit. This will also allow her to move her properties a lot faster as long as the spread permits her to do so. Have I understood you correctly.
You got it!
That is my strategy. That is why is important to negotiate an under the market price with the seller.
Other investors have different strategies and so do I but I personally “don’t care” about backend profits. I want to move this home ASAP.
Imagine if you have a $2,800 monthly rent home with little rent credit and can’t move it… Now you are stuck with a monthly payment, need to find a part time job to cover that expense and at the end you become a motivated tenant lol
I want to move this home ASAP and recover my initial investment which ranges between $1.00 - 2 months rent. So it is important that i create value from the beginning.
Cash is king. If i want to receive cash inmediately I could sell my positive cash flow and backend profits for a discount to another investor. Of course, my main profit comes from the option consideration but I could easily sell the positive cash flow and move on to other deals.
Tip: Powerful question to get a discount from a seller.
“Mr. Seller, since there are NO real estate agents involved and you will save closing costs. What is the best price you can give me on this home today?”
That is why I like to go after the expired listings and have a team of powerful agents who understand this wonderful strategy. PLus, the seller needs to sell and was willing to let go of a 6% profit.
To your success!
Diana Fontanez
Lease Purchase Specialist and Consultant