Lease option: LOI or offer as first step

[stevegwhite]

I`m looking at a house and am in the final stages of due diligence on and would like to make an offer as a lease option. My partner and I are planning on holding the house for two years as a rental while building our savings into a larger down payment.

Can anyone tell me how they first approach a seller of lease options? Do you send a letter of intent, or a full offer contract with a cover page?

I`m also looking for two things, first a good lease option offer template and a referral for a lawyer who can look it over.

Thanks for your help,
Steve

 

[Dan_Eisenhauer]

Hi Steve;

First, ask the seller if they will rent you the house for X years, with an option to buy. There are many ways to structure that deal... DP up front... no DP up front (better for you). Fixed price at end of contract... outstanding balance of mortgage at end of contract PLUS X dollars.

Read some of the other ways of determining the future sale price that have been posted here within the last two weeks.

How are you going to determine the rent you pay? Fair market value PLUS Option Credits? The seller`s costs only? If you want to build up your equity through RTO, you need to contribute Option Credits over and above market rent. However, if you are going to do a sandwich lease, with the final TB buying the property, then your TB will contribute these Option Credits.

As for a lawyer and/or agreement, you need a lawyer who is familiar with Lease Options, and with the laws of your province. If I remember correctly, there is an Option template in the resource section.

Another option is to buy Mark Loeffler`s book. I don`t know if it contains an Option Form or not. I am sure he will find this thread and answer that.

 

[stevegwhite]

Thank for the response.

I`m afraid I`m not yet a member and can`t access the resources section. I have two properties I`ve found using the techniques in Don`s books (out of about 75 I`ve considered) and I`m going to use my investment saving getting those set up before I join REIN and begin planning my long term goals.

The property is being listed as a single family house, but fits perfectly as the rental I`m looking to offer - it`s been rented for many years. It`s listed at $116,000 and is a three bedroom row house and has been renovated recently for her son to live in while he`s at school. I was planning on offering $110,000 with a two year lease at 5% interest only and $500-1,000 deposit. The deposit alone will go towards principal.

I feel that this not only leaves money on the table for her, but also helps me get a rental unit that works very well for me without a lot of up front fees. She will be getting about $11,000 in lease/rent payments plus the $110,000 purchase for a $121,000 closing without realtor fees. I will be gaining two years of good positive cash flow to build a solid down payment, learn from the bumps and of course save for REIN.

Since I`ve just purchased my first family home and we`re on a little tighter income, I need to take baby first steps. I realize it`s not a traditional way of starting that many others here might have, but with a limited income/nest egg savings I feel it`s the best way to get started.

I`ve been speaking with a number of lawyers, but haven`t found one yet who has done a lease.

If anyone has any feedback, suggestions or a lease offer letter or contract template they`d like to share I`d appreciate it - [email protected]

Thank you again,
Steve

 

[stevegwhite]

I`ve also just pre-ordered Mark`s book. But have to wait until early January.

 

[Dan_Eisenhauer]

I see a couple obstacles in THIS plan. The way I read your information, Steve, is that the property is already listed with a Realtor. If that is correct, the Realtor is going to need to understand RTOs in order to present your offer properly. Most Realtors have no idea what RTO is, let alone understand it. The second thing is the Realtor is going to want to be paid, with little $$$ up front to pay him/her. And what happens to that fee if, for some reason, you do not close at the end of the term?

And perhaps the most important element is that you do not know, at least you have not expressed it, the seller`s motivation. Why do you think she would be interested in accepting your offer? Is it a slow market? Does she have no need for cash and would prefer cash flow over the two year period? Doing so, unless this is a principal residence, postpones Capital Gains tax. Have you information she would consider an RTO?

Unless you have your heart set on this property, you are better off finding a FSBO or home for rent to negotiate on without the Realtor.

You don`t tell us where you are located. If you are in BC, I can recommend an excellent lawyer, perhaps the most knowledgeable RTO lawyer in BC.

 

[stevegwhite]

Thank Dan,

No, I`m in Ontario.

The house just came on the market three days before I found it by the sign on the lawn. I was looking at another house at the time.

I called the agent asking for a viewing and the owner called me back saying the agent was busy, but she told me a bit about it and she`s selling the house as it`s the last of four she owned in a row. She`s listed it early, but doesn`t plan on closing until her son finishes school in April, which is a bit long I think. It`s well suited for a student rental and her selling schedule works well with me.

I was hoping she`d consider taking it off the market and doing the lease privately. I`m all for agents making fair sales on their listings, in fact one of my close friends is an agent who worked magic getting sellers to accept our offer on our own house earlier in the year. I have a lot of respect of what they offer and insight, but in this particular case the agent hasn`t had the house on the market more than a week or two, hasn`t done a showing and didn`t even have the professionalism to call me back. He forwarded my number to the seller to get in touch with me. I don`t think he`s earned a share of the sale. I would be open to covering his costs for the listing to this point and a fair finder`s fee, but since it`s been the seller and myself on the phone all along I`m not convinced he`s offered a service beyond hammering a sign into a lawn.

I do need to talk to the seller about what her contract with the agent says. I sure she`s required to use him if the house sells within a certain time frame.

I am quite attached to this house - professionally, not emotionally. It`s not something I`d live in, but because of the location, price, cash flow and layout works perfectly for what I`ve been looking for for about five months of searching. So I think it`s definitely something I want to pursue as a lease option. If that doesn`t work then I`ll purchase it traditionally, though that would limit my ability to buy a duplex in a great location I`ve been looking at closely.

Thanks for your help and advice Dan.

Steve

 

[mbal]

great thread and good tips Dan...in regards to your lawyers contact info, I reside in BC (lower mainland) and have been searching for a quality ethical lawyer and it sounds like you respect the one you`ve used in the past...appreciate the help, much thanks!