Equity Partner on Lease Option Deal

So how would I approach an investor to partner on the lease-option deal described in the previous blog?

In my previous blog, I talked about how I would structure a lease-option purchase for a waterfront property listed for $325,000. In this blog, we will look at how this agreement would appeal to an investor and equity partner.

A conventional mortgage of $250,000 would be needed to replace a hard money loan currently in place on the property. So an investor/equity partner would be someone who was able to qualify for a $250,000 mortgage. As owner of the property, I would be listed on the loan with my equity partner.

The loan would be a conventional, non-owner occupied, interest-only loan, as we expect our lease-option buyer to be able to purchase the property from us in 2-3 years. We could also take out a fully amortized 30-year loan, if we had doubts about the ability of our buyer to exercise their option to purchase, or if we wanted to build in flexibility for future exit strategies. A fully amortized loan would cost us more, but interest only, with taxes of $308 and insurance of $50, would cost us $1800 per month.

If our buyer is paying us $2500 per month (see previous blog), then my investor and I are splitting $700 per month for three years ($25,200 total over three years).
I will cover all the costs of the loan out of the down payment provided by the buyer, so there is no cost to the investor to take out the mortgage—and they are making $8400 per year. In addition, as my equity partner, they get to deduct mortgage interest from their taxes and depreciation on our investment property. Since we are paying interest only, approximately $1440 per month of interest is tax deductible. In addition, they get to depreciate the value of the house (but not the land) over 27.5 years, further reducing taxable income.

As added incentive, I agree to split the net profit on the house over and above my basis of $325,000. So if the house sells for $337,000 ($357,500 less $12,500 as option fee and $18,000 in rent credits), we split another $8000.

So my investor/partner earns a total of around $29,000 over three years for their ability to take out a mortgage, an infinite return on their initial investment of $0. Not bad, eh?

Lease Option on Rocky Point Waterfront Home

Here is a case study of how I might work with a lease-option buyer on the purchase of the property highlighted in the last few blogs. In my next blog, I will discuss how an investor would profit by underwriting the mortgage for the lease-option buyer.

On a lease option, I typically pay the selling agent 1% of their commission up front, and the remainder when the option is exercised. So the down payment has to cover commission costs, option fee, and other related costs. I typically like to see 3 1/2 - 5% down as a non-refundable option fee. I used to bump up the purchase price by about 10% per year for seller financing and future value on an option, but in this market I'd be okay with $357,500 as a purchase price in three years for the house parcel.

Monthly payments should be equivalent to what monthly payments would be on the take-out loan, including taxes and insurance. Lenders like to see this too, as it demonstrates ability to repay.

If the buyer went FHA with a loan amount of $345,000, the FHA funding fee would be $6,000 so the loan would be for $351,000 then the payment with a 5.50% rate would be $1993 plus $161 for Mortgage Insurance (MI), and $308 for taxes and $50 for a total of $2512 a month.

Assuming the buyer put $12,500 down as an option fee (applied toward the purchase price), then monthly payments on the loan amount above would be roughly $2500 with taxes and insurance. I would be willing to apply $500 of the monthly rent as rent credit towards the purchase price, assuming payments were made on time.

At the end of the three year term, the house would be purchased for $357,500 less the option fee of $12,500 and rent credits of $18,000. The loan amount would actually be for $337,000--and payments would be even less per month. This is a good option for a buyer who cannot qualify for a loan today, but may in 2-3 years.

Sell Houses Fast using the "SOLD" method!

In today's economy, everyone is running for cover hoping to wait outthis recession before it breaks them. Refuse to participate in thisdownturn! There are smart ways to continue to prosper, sell your housein record time, and keep that necessary cash flow spigot open. Excess inventory and falling market prices can be turned to your advantagewith a very simple system that William Bronchik calls “the S.O.L.D. system. “ This is the system that the best investors use, those 20 % of wealth generators who seem to consistently outperform everyone, even in the worst times. Any house can be sold at a fair price within 30 days using this system- even now. The basic principles of the SOLD system are:
S- Salesmanship- how to best market and present your property and close the deal
O- Owner Financing- many people don't have large down payments available, but may be able to buy if the owner accepts part of his equity in payments rather than large cash closings. A larger pool of potential buyers obviously increases the likelihood of a sell!
L- Lease/Options - rising interest rates have resulted in greater rental enthusiasm, with the benefit of higher rental rates. You can lease/option to avoid broker fees and pay no commission upon sale.
D- Dressing it Up- Staging gives your propertythe extra "wow factor" to promote quick sales for the optimal price. Confidence is often the key to success.

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