How do you determine "option consideration" aka down payment for a Lease Option deal?

It depends on how long the lease is and if the property will appreciate in value in that time. If it doesn't then it's probably not a great candidate for that strategy unless you have a long lease option. Greg Murphy figures his like this - whatever it takes to get into the property + $2000, that's the option fee. Then whatever the mortgage is + $200.00 monthly. Then he figures he wants to make at least $20k on the back end. I hope that helps a little.

Dallas,

I am estimating approximately 5% for option fee/DP. In my researching I have seen estimates from 3%-7%. Banks require 20%, so this is reasonable. So with my 5%, if a house is $100K, option fee is $5K. $200K/$10K, etc. It's up to you and what your people can come up with. You can always be flexible.

With the monthly pmt you will have to see what the pmt is initially vs market rents. Here in CA pmts are already so high I am planning to mostly just do Co-ops.

John Jackson, who has a big L/O co in TX and teaches classes recommends ONLY doing co-ops for the first year until you get it down. By doing that, you will also get familiar or the feel of how the market is responding in your area and better able to estimate future mark up on your pricing.

I think if you are in a very depressed area, you will probably have to have a longer L/O period to give your T/B more time to build up a little equity and DP.

I would say that it is whatever you want to negotiate with the tennant buyer.IF there is no equity in the property then you want an amount to cover any costs you incur to make the deal happen,such as closing,advertisements,etc......and a few thousand.....pref 4_5k then you want a 2_400 cashflow per mnth.keep in mind the tennant buyer will be paying all the taxes,insurance,maintenance and if not you need to figure these in and add y ou r profit per mnth.
On the end..sale price you can add whatever you wNt say at least 10000 more to the final price.you also can collect the interest on the payment just like the bank does.I like to include at least 7or 8 percent.
EVERYTHING is negotiable,it depends on what you have for expenses in the deal and what ANY buyer has to spend.this is why it is so important to have the buyers listWITH WHAT THEY HAVE FOR A DOWN PAYMENT AND IS WILLING TO PAY PER MONTH'.......so.......you can go lock up the property that fits THEIR NEEDS.
Jay

It is all up to what your mortgage broker has for mortgage specials, their requirements for the different programs out there, and you don't have to necessarily rely on the 20% down that most banks out there want. I think I picked this up from re-reading "Profit In Your Town" book by Dean last night. Greg talked about how he would keep current with his mortgage broker on the different specials, buyer requirements and different programs that are out there. Am I on the right track here with this?

That is a good way to consider it, Karen. Thank you. Basically if they have a mortgage, you want to have enough that their monthly payment covers the mortgage, and provides a little cash flow every month, of $200 to $400.

What are Co-op deals? Are they something new or they basically where you team up with another person who's doing this to make money & show you the ropes a little bit?

Thanks for your answer, Shaun. Is there a certain amount that the house would be over/under by, before you walk away from the deal? Say, you were looking at a prospect deal - The mortgage is $80k, and current value is $40k or around 50% of mortgage amount. Would this deal still have potential?

the length of the option but I wouldn't do it as a L/O. Unless you think the FMV will go up 100% because you generally want to be 50% - 60% of FMV when you sell it. you could go a little less but not much. But everyone's strategies are different, there are some people that if the terms were right they would do that deal, me at my early stages I would walk away.

A Co-op or Co-operative L/O is the same as a wholesale L/O. You collect the option fee and connect seller and buyer together and you step out. You coordinate everything between the two (paperwork, etc), get your option fee and you are finished.

This works well if there is no equity or the home is under water. For example, here in CA mtg pmts are often already so high that you cannot realistically add another $200/mo and keep it affordable. And if they are already underwater how can you add extra profit on top?

John Jackson recommends not doing a L/O if a home is more than 10% under water. You are then putting the T/B in a very difficult position of them being able to get financing when the time comes for them to exercise their option to buy. Negotiating the term of the L/O for a longer period can help giving T/B time for some equity to accumulate on the house.

I usually do 3.5% of purchase price since that is what FHA requires and your tenant buyers will usually go FHA before conventional for a mortgage. ESPECIALLY if they have a foreclosure, they won't be able to get a conventional mortgage.

So if I get this straight, if the house is valued at $100k, and the mortgage is $95k or $90k, or maybe slightly over the value, the l/o deal is probable with the original seller. Then, get the tb to do 3.5% down. Or, figure out how to do a "round robin" auction approach for a l/o, and sell the house for more than your original contract.

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3-5% option payment for the T/B and the markup on the backend should be between $5,000 to $10,000. Rent pmts should be at market norm, so it's key that the mortgage pmt is $100-$300 less than the market rents in the area. In general, high risk borrowers (bad or no credit, etc.) usually pay more because of the risk. Rent to own buyers pay more because of the great terms (living in the house while paying down his/her downpayment and/or improving his/her credit score), so don't be scared to ask for more.

the seasonality and the length of time that I've held the property, I use $1,000 (for properties that I need filled NOW), $2,500 for my normal fee and $5,000 for a property just on the market. I base my fees on the 3.5% rule for FHA loans so I know the T/B is serious about buying. I can deal with credit issues, but it is hard to deal with cash issues.

Great answer and explanation of why do co-op for a while before sandwichs.

Btw, Kg I dont have any people...do you have people? Dallas Im glad you brought up this thread.

Reno

Bill, your comment re: dealing with credit issues and not dealing with cash issues reminds me of Randy's rule, "the TBs cash is their credit". I totally agree.

Reno

Depends on what you mean by "people. Have you visited my journal lately?

Dallas,

this is what I learnt at a workshop...

you get a 3-6% non-refundable deposit. You add 10% of house price.

Ex: if you lease a house ($95K from your example)for (4) 12 months terms (that way you have option to buy or not every year), you find a lease to own buyer; get a 6% non-refundable deposit, offer the house for 10% over the $95K over a 3yr lease; the monthly rent should be more than the mortgage payment. Renter has option to buy property anytime during the 3 yrs; if he decides not to buy at end of term, you still get to keep the deposit, plus the monthly $ extra from the payment. If renter decides to buy, you apply the deposit to the purchase, but now you will get $9,500 (10% over $95K).
If you cannot sell the house by the end of the 4 yrs, you simply 'give it back' to previous owner.

Wishing you great success,

valerie