When to Use "Subject To" vs. "Lease Options" - Creative Real Estate Investing Training

[nick9283]

ahhhh hence the 5k in the hole or negative cash flow option. so their fked either way. excuse the french. why would they just not keep the property? or are we talking to people only who are going to lose their house and cant afford the payment i assume? big thanks

[nick9283]

i understand now that even if the seller sells to a full price offer they are still in the whole because the offer they can get now is not what they paid for and got a loan for originally

i dont understand this part though -> loan should have paid down to 185k and sale would NET 180k. Take a 5k loss out of pocket NOW or eat negative cash flow

[localmentor]

@nick9283 210k purchase price in 2004 @ 5% interest they would owe about 185k in 2011 (plug numbers into a basic loan amortization program). If They list it at 200k pay 6% commissions and 3% seller paid concessions which is normal they'll NET 180k on a 200k offer.

[nick9283]

payment 1200. rent 1000. if thats the case why would they do the deal in the first place if their losing money?

thanks again great videos

[localmentor]

@nick9283 - here's common situation for "Right Now". Seller bought the house in 2004, paid 210,000, house went up to 235k and back down to around 195-200k in top condition. Hiring a realtor (6%) and paying seller paid closing costs (3%) leaves the seller in the hole at a closing table with a full price offer....loan should have paid down to 185k and sale would NET 180k. Take a 5k loss out of pocket NOW or eat negative cash flow? Not to mention they'd have more $ fixing up for...

[localmentor]

@localmentor ...for a retail salve as opposed to "rent to own ready". You'll LOSE THEM LESS! You also have a loan that's 7 years old (paying down quicker), if you give them a carrot when you get it resold like part of the equity, part of the paydown...ultimately I'd try to show them how they'd get their money back later or at least some of it...and they don't have to short sale, or deal with renters,etc.

[nick9283]

In the first scenario you said to see I you could get a lease option for 1090 and then get a tenant buyer to pay 1200 in which you make the spread.

Why would the home owner do this if his payments it 1375 and he's only getting 1090 from you?

Thanks in advance.

[localmentor]

@nick9283 - Good Question, Nick...when negotiating a lease option deal, what the seller's payment is is irrelevant. I negotiate it based on what market rents are. Often a house may rent for 1,000 yet have a payment of 1200. IF the seller rents it with a manager they'll net 90% of collected rents LESS vacancy, maintenance, etc. Showing them all the out of pocket potential of traditional renting makes your lower than market rent payment look better....

[localmentor]

@localmentor ...I'll compare vacancy expense vs no vacancy, maintenance expense vs. the lease option deal covers the first $xxx dollars of maintenance (I usually put $500 then pass that on to my sub-tenant buyer). If you understand the sellers other options, then you can sell why you are actually offering them a good deal....and able to profit from it. Same deal above...1,000 rent, 1200 payment, I can usually get 1100 maybe 1200 on a rent to own and get a payment of 800-900

[localmentor]

@localmentor so getting 800-1200 spread...or 400 a month positive PLUS option consideration up front from my sub-tenant buyer - typically 3-4% on average. on a 200,000 house that's an EXTRA 6-,8000 cash up front.

NOTE: use your best judgement as to the financial stability of the seller. If you doubt they can make the negative cash flow for very long then it might be a "PASS" since it would be a mess if they default on the loan and you have a tenant buyer in there.

[bumblebeemoi]

Hi Mike. Let's say you buy subject to and sell with a lease option. My confusion is how to combine there methods so that the buyer can cash you out after just a few years. In most lease options, only a small amount of the "rent" is credited toward the principal. Eventually, the buyer can then get a traditional loan and cash you out. However, if you are now paying the balance of the seller's loan, how can the buyer pay off enough principal to get a loan? Do you understand my question? TY, Philip

[localmentor]

@bumblebeemoi - usually try to create a 15% or better spread between my purchase terms (buying sub-2) and what I can sell for on Lease option (rent to own). I'll get 3.5% down or more from my tenant buyer which goes toward the purchase price (think FHA min. req. down payment), then I'll build up their rent credit with how ever much over Market Rent they can pay. Over a couple years they should have enough built up to cover their own closing costs so.

[imstilloriginal]

Hey Mike,

I have a question. I like to challenge myself and I'm very new to the real estate biz. I haven't started yet but I'm learning from your videos a whole lot of information. My obstacle is that I am currently living overseas now in Japan but I plan to return to U.S(Atlanta) just to visti. What I would like to ask you is if I study all of this information now and up until the time I return to the States, would I be able to buy a wholesale property and flip it like you? Is that possible?

[localmentor]

I used a sony handycam on this one, most of mine are done with a Canon powershot digital camera - I carry that in my car and it's pocket sized so I can shoot at all the houses if I want. With a 4MB SD card I can shoot 32 min.s of video. My wife uses a flip Mino, but it isn't as wide of angle, but very easy to use - a couple of my vids are done with the Flip.

[KuNkLe81]

Mind if I ask what camera you use to record your videos? Crystal clear!