A small equity deal

[SC2007]

QUOTE (jvarcoe @ Oct 30 2009, 11:12 PM) Hi Shawn,
Your correct. The monthly payment doesn`t have to be an exact science. The key is to create something that works for both parties. As a minimum you`ll want to set your minimum monthly rent to ensure your costs plus extra are being adequately covered. Then to determine the monthly payment ask the tenant buyer: "what`s the most they can afford to pay per month." Let them determine the payments.

Regardless of their response, say: "Is that the best you can do?"

As a quick rule of thumb you can calculate the total monthly payment as being 0.9% of the market value for the home (i.e. $200K home = $1,800/month lease payment). Then attribute 20% of the lease payment as their option credit (i.e. $1,800/month = $360 credit to lessee).


Hello Jeff,

Thanks for your explanation. I am trying to figure out how to apply the lease option strategy to my case.

My 2-bedroom condo in Edmonton:

• Appraised value: $290,000
• Current rent: $1500
• PITI: $750
• Condo fee: $300

If I choose Lease to own:
• Monthly payment: $2610 (0.9% of market value)
• Monthly credit: $522 (20% of monthly payment)
• Down payment: $8700 (3% of market value)

Is it realistic to expect a monthly payment of $2610 for a tenant buyer in the current market?

In addition to the monthly payment, will the tenant buyer also pay tax, insurance and the condo fee? That would be another $500-$600 out of their pocket.

Thanks,
Shawn

 

[tonypeters]

Zander, I am going to start the education ahead of my workshop that you will be attending this coming weekend. My first question for you: Have you asked them WHY they are selling?

QUOTE (ZanderRobertson @ Oct 27 2009, 09:03 PM) Hi fellow REIN members,

Calling FSBOs today, my wife and I came across a free and clear house. We haven`t made any offers yet, so I don`t know if the seller would be receptive, but I`m just trying to think around some of the creative deals we might come across. Essentially:
a) There is not much equity in the deal - according to the seller, it`s worth 340,000 but he`s asking 327,800. I know RLG says that we either need to get significant equity on the front end or know how to get some as soon as we make the deal.
b) My thinking, if we were to pursue this deal would be to offer them a small DP ($10,000) and the rest of their equity in monthly payments, with the option to cash them out at some time in the future. If they would accept 1000-1500 per month for a 5 year term, we could Lease Option (with a $2000-$2200 payment monthly) it on the exit with a minimum DP of 10,200 (3%) and depending on the market, there will be an equity upside to match the medium of two independent appraisals (when TB exercises the option to buy). The exit sale would be for no less than the original $340,000 (numbers to be verified). This would leave us with a $500 to $1200 cash flow spread monthly. We`d borrow the initial DP from a private lender and pay a yearly balloon of around $1000 (10% of $10,000) max.

The deal (with these imagined numbers) is pretty good in terms of cash flow. The front end income (3% DP from lease option tenant) is not great, and depending on the market, the back end is minimal to great!

Is this what RLG had in mind when he talked about creating equity in a deal with little to no equity? If not, what else if anything could we do to create equity in this deal?

Again, the seller has not been approached about this, I`m using this example as a way to try to learn the different strategies.

Thanks everyone,
Zander

 

[Jeffrey2144]

QUOTE (SC2007 @ Nov 5 2009, 06:40 PM) ... I am trying to figure out how to apply the lease option strategy to my case.

... Is it realistic to expect a monthly payment of $2610 for a tenant buyer in the current market?

In addition to the monthly payment, will the tenant buyer also pay tax, insurance and the condo fee? That would be another $500-$600 out of their pocket.

Hi Shawn,

I don`t know the Edmonton market that well but I would say that $2,610 is definitely too high for a 2-bedroom condo unit. And, keep in mind that with a lease option deal you TYPICALLY pay tax, insurance and the condo fees so set your rent accordingly. It looks like you`ve held this property for a while considering your PITI is only $750/month. That being said, you should have some flexibility to offer a lower monthly rate and still cash flow nicely.

You`ll need to research your market to find that "sweet spot" is but I`d suggest starting with the $1,500 market rent then offer monthly credits to the buyer for anything they are willing to pay above and beyond the $1,500.

If you advertise aggressively you should get a good response. From there just ask the potential tenant buyers "what is the most they can offer as a down payment" (referred to as an option deposit for lease option agreements) and what is the most they can afford to pay on a monthly basis.

To encourage a higher monthly payment you MIGHT want to offer to match their extra payment depending on the amount. For instance, if they offer $1,600 then they only get $100/mnth credit. But, if they pay $1,800 you`ll through in another $150 (making their monthly credit equal to $450 [$1,800 - $1,500 = $300 + 150 = $450]) and if the can do $2,000/month then you`ll through in another $300 making their credits equal to $800/month.

The amount of their monthly payment will also depend on the amount of the upfront option deposit. The more they give you up front then the less they "theoretically" need to pay month-over-month to still be able to qualify for their own mortgage in 2-3 years. You also have the option of adjusting the annual rate of appreciation. For instance, if they cannot afford to pay much right now you may want to extend the duration of the term and increase the annual appreciation rate from 5% to 6% so that you collect more equity appreciation on the back end.

In reality you can structure the lease option payments however you choose -- It really depends on what the market will pay. Once you have a serious buyer then sit down with them and go over the numbers. The variables you can play with are:

• Market Value of the property
• Annual Appreciation Rate
• Amount of Upfront Lease Option PaymentAmount of Monthly PaymentAmount of Monthly Credit

If you PM me your e-mail address I`ll send you a spreadsheet that will allow you to play with the numbers so you can see how certain changes will impact your ROI.

 

[Miguel]

QUOTE (jvarcoe @ Nov 5 2009, 10:02 PM) If you PM me your e-mail address I`ll send you a spreadsheet that will allow you to play with the numbers so you can see how certain changes will impact your ROI.

Can I get it as well, please? My email is [email protected]

Thanks in advance!