Using a RE agent with a Lease Option purchase..

real estate like life, IS NEGOTIABLE!!!
i don't know everything and i'm learning daily, but i have to at least say congratulations for thinking creatively. in my mind if it works for all involved and everyone's agreeable, why not? you may want to have a slightly higher end purchase price though. remember you took a non refundable deposit, but that money is toward purchase price. if you have to wait a year to cash out you might want a higher spread. my two cents for what it's worth.
keep moving forward, rob

By the way, your strategy is called a "sandwich lease option" if you want to do more research on it, while you wait for replies.

But I have a few questions:

1. Why are you paying the Realtor part of your option fee? What kind of work did they provide for you to earn that up front? If you think that's fair then go ahead, I just didn't have all the info there. We usually only pay the Realtor when the option is exercised. Or maybe you could pay the Realtor that 1k up front and just say you want it back after they get their full commission.

2. Why are you paying the Seller part of your option fee? If they are desperate enough, they should be fine with you just taking over their payments without any sort of fee. I wouldn't give the seller anything initially if you can get away with it.

3. Why do you have a list of tenant buyers if you're just getting started? This isn't necessarily a bad thing, but you should really target cash buyers (investors) when you are new to this. I suggest you focus on wholesaling, because it's very simple, and you don't need money or credit to do it. You don't need money or credit to do a sandwich lease option either, but it's a more complicated process. Just a suggestion, but do whatever you feel most comfortable doing!

Things to note: Don't overlook expenses! From what I understand, you think the property can cash flow $200/mo. But are you taking into account: Mortgage Payments, Taxes, and Insurance? Just a thought. Maintenance and Property Management are other expenses, but aren't highly necessary for a lease option, but you might want to see what those would cost too, just to be safe.

To Rob: From what I understand, there are two types of initial payments on lease options: Option Fees, and Down Payments.

Option Fee's do NOT go towards the purchase price and are usually not refundable. Think of them as "points" a hard money lender might charge you. Remember you ARE the lender in this case.

Down Payments DO go towards the purchase price, and I'm not too clear if they are refundable or not. I guess it really depends what you negotiate (like always in real estate)

You should always charge an Option Fee instead of a Down Payment, because it is way more beneficial to you to have it not go towards the purchase price (for obvious reasons). If you ask for a 5k option fee, but they want to give you 10k, I guess you would just take 5k as a fee, and use the other 5k as a down payment towards the purchase price, then maybe decrease their rent a little. Just some thoughts.

Tom,
Lease options are a great way to make money in this biz, but be careful who you deal with. If the tenant buyer stops paying, what will you do? Are YOU going to make the payment? What if they trash the place? Are you going to pay for the fix up costs? I'm not asking you these questions to discourage you, I'm trying to make a point that this is a great no money down strategy, but you need to know the answers to these questions. Dominic was right, WHY give the seller so much down? And if the Realtor is going to make their full commission on the back end, WHY give them more in the beginning? Maybe give the seller $1,000 and YOU keep the $4,000. Just don't spend it on useless stuff. You should put it aside in case of "emergencies" like if the tenant stops paying, then you can make a payment or 2 while you find a new buyer, and its not actually coming out of your own pocket. Also, they say the actual percentage of tenant buyers actually BUYING the house at the end of the year is about 20%-30%, because most investors put buyers in the property, take their down payment and run, setting the buyer up for failure because they do nothing in that years time to boost their credit to where it needs to be to actually purchase the home in a year. So sometimes a 2 year lease is best, unless you get a buyer in a credit repair program while they are in the property. Your broker will know how many points they will need to boost their credit to be able to purchase in a year. If you seriously want the buyer to be able to purchase in a year, so you can also make big money on the back end, get a good buyer in there who has a good chance of qualifying for a loan in LESS than a year, and check up on them every month to make sure they are doing what it takes to boost their credit. This will give you a 75% chance that they will buy in a year, much better than 30% as stated above. Keep learning about this strategy and put it to work!!!

Joeseph made some great points. But think of it as an opportunity if the buyer backs out and doesn't purchase the property. Remember, you gathered a 5k non-refundable option fee from the first buyer, and now they backed out. So you can keep that 5k, and then turn around find ANOTHER buyer to give you ANOTHER 5k non-refundable option fee. Rinse and repeat!

Heck, I'd rather do this every year and pay 1 month expenses out of pocket, than actually find a buyer that will buy it!!!

The only downside that I can see to a buyer not going through with the purchase would be your terms with the seller. If the seller requires you to purchase the property after two years, and your end buyer doesn't buy it, that might cause some issues. So always try to get the longest terms for your contract with the seller, and get the shortest terms for your contract with the buyer.

Lease Options are a great tool. I personally love them!

This is one area where the buyers are the easy part. Finding a seller that is willing to do a L/O is the more difficult part here.

There are a few points that have been brought up here, that I do not quite agree with.

First of all, when you enter into a Lease Option agreement, the seller cannot "require" you to purchase the house--hence the "Option" in the title. If you enter into a Lease Purchase Agreement (which is different, even though the terms are incorrectly used interchangeably) you are obligated to purchase the property at the end of the time period. So always use a Lease Option when you are the purchaser. This is the method used most often anyway.

I also do not agree that you should look at it as an opportunity if the buyer backs out and hope that that happens so you can keep making money on the non refundable option fee. It should be a win-win-win for the three of you involved and if this happens, you are the only winner. The buyer loses their hard earned money. The seller ends up with a house they don't want and, actually, you don't win either, because you end up with a bad name if it happens repeatedly.

The option fee DOES count toward the down payment on the house. It is nonrefundable if the buyer does not follow through on purchasing the property.

I advise always having a minimum of two years on your contract with your buyer because most people will need two years to get their credit straightened out in order to qualify. Many may merely have not been reporting their true income, using loopholes and deductions that help with their taxes but when it comes to qualifying for a house shoots them in the foot. It will take them two yrs to show recorded income in order to qualify. A mortgage broker will be able to advise as to how long it will take each on an individual basis.

I also agree with Joe and normally require that they get into a credit repair program.

I DO agree with trying to get longer terms with your seller just in case it is needed. The buyer can always refi early if they want, but if you need longer, it is more difficult going back and trying to renegotiate longer terms.

VERY IMPORTANT! When deciding what you are going to set your resell price for (to the end buyer) you have to be sure that the house will appraise at the end of the time period so that the Tenant/Buyer will be able to get a loan. If the house is priced too high, everything will blow up!

As far as splitting your option fee... If the seller is VERY motivated, you may not have to give them anything. They will be happy just to get out of the monthly mortgage obligation. Sometimes, you have to give them something. If they do not insist on it, I tell them that that is how I am paid. That is the truth. Personally, even if they insist, I would never give them more than half of my option fee. But that is up to you. As for how much to give the realtor...the rule of thumb is to offer them 1/2 a month to one month's rental rate for them to walk away.

I hope this helps.

Karen

All of the points above are great ones.

The only item to add is the fact you're saying it's a $100k house and you want to sell it for $110k in 1 year. Why do you think it will be worth $110k in a year - what if it's only worth $100k still? The bank will only lend on the appraised value. If you're requesting "holes to punch in your scenario", that's one I see.

Good luck!

- Tom

I never claimed to be a lease option expert, and Karen is very knowledgable in lease options compared to me, so I would take her advice over mine! But, I just want to clear up a few things I said because I feel they might have been taken the wrong way.

I never said that the buyer backing out was a win-win-win situation. I was just trying to make a point that you shouldn't let it stress you out if it does come to that. Why? Because you don't lose anything, and the seller is still having their payments covered by you. Obviously, you shouldn't hope this to happen, but if it does happen, you're covered.

As for the option fee counting towards the purchase price, I disagree. It's called a fee and not a down payment for a reason. When you buy a car, whatever you put as a down payment goes towards the purchase, and however many points, or interest you pay on a loan do not go towards the purchase price.

But as always, everything is negotiable, so you are correct if that's how you prefer to do it. I just don't see why you wouldn't charge a fee if you can get away with it, and you can! We're in this business to make money, right? Maybe I'm missing something.

You are right. I AM an expert on Lease Options. I have attended Lease Option training all over the country, specific to that one form of investing.

The option fee is called a fee and not officially called a down payment because if the Tenant/Buyer backs out then it can legally not be refunded. If it were called a down payment, you would have to refund it. Why would someone even consider putting thousands of dollars into an option fee if it would not count toward their down payment?

Yes, we are in this business to make money, but to do it by helping and not hurting other people.

Comparing purchasing a car to doing a Lease Option is like comparing apples to bowling balls.

Karen

easy now, don't get all fired up lol
keep moving forward, rob

from all of you

As usual, I agree with Karen. I used to be a pert, but now I'm an expert although I'm not sure I'll ever be as pert or ex as Karen.

I would add though one has to be very careful about option clauses (like any other clause) are written in a contract. Here in Texas, the government frowns upon such things, and most realtors avoid them like the plague. The good thing is, business can still be conducted on a handshake here in Texas, and can rent to buy or lease with an option to buy and it not be in the contract. Of course, a handshake is not as binding as a contract, still.

As far as the handshake deal is concerned though, one may not actually take ownership in the short term but rather do so in the long term, like when the option is exercised.

When I approach a seller about a sandwich lease option, there are two things I do in order to be in the middle of the deal.

The first is I guarantee the rent, so even if my tenant buyer doesn't pay, they will still get the rent.

Second, if things go downhill and a purchase isn't made, I also have written that the house will be left in the same condition that I received it in.

I feel these are both very fair to the seller and helps with their piece of mind.

Ahh I see your point. I guess I was just taught the wrong way then. Goes to show you shouldn't listen to everybody's advice!

And by the way, im not implying you have to hurt people to make money. I was just saying you should take opportunities if they present themselves. If the buyer is willing to pay an additional fee because they want it badly enough, then you aren't hurting them, you are still doing them a favor. You're not forcing anyone to do anything!

If you think about it, the same idea goes with putting out low offers: One person might argue that it's hurting people by "stealing" their property, but people like us would argue that we're doing them a favor because they dont HAVE to accept our low offer, and since they want out badly enough we are actually helping them. I guess there are just two ways to look at it.

But I'm glad you cleared up the fee/down payment terms for me, now I can approach it the correct way! I trust your advice due to your extensive knowledge on the subject, I'm not trying to argue with you, I just had bad information. Learning every day!

here's a link that Karen did several months ago regarding lease options... great info!

http://www.deangraziosi.com/real-estate-forums/everything-else/71370/lea...

also, you may want to fill out some info on your profile so that other investors here know a little about you and where you're from so they can network with you.

great thread!

Wishing you success,