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

http://www.localmentor.com Colorado Real Estate Investing Expert, Michael Jake, discusses the strategies for buying houses "subject to" and controlling houses with lease options. For more real estate investing training on foreclosures, creative real estate investing, subject to, lease options, owner financing and no money down investing techniques - and to claim your free real estate investing course visit http://www.localmentor.com

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Education

Tags:

• Subject To
• lease option
• no money down
• Michael Jake
• mike jake

[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]

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

[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.

[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]

@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....

[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.