My third deal as a real estate investor involved almost no money out of pocket for me at all. The home was in good shape and had only been built about 14 months earlier. The home is in a neighborhood where several builders had unsold homes on the street making it very difficult to sell a used home. The seller had an unusual motivation for wanting to be rid of the house: he wanted to forget an ex-girlfriend as he had bought the house to get married and for them to live there. The seller contacted me through an online lead site and looking over the deal I knew it was in an area that isn’t very good for retailing homes right now due to over building in the area. So what I did was offer to lease option the property from him. Like many sellers, the idea of a lease option doesn’t sound that enticing. Most sellers need all cash and have no equity. Well my seller had a little equity, didn’t need any walking money, and knew he couldn’t sell the home otherwise and had been trying for a few months with no luck.
After about a month the seller contacted me again about doing the deal. So we met at his house and signed a purchase and sales agreement, a memorandum of option, an option agreement for 72 months, a lease agreement with right to sublet and a seller’s disclosure. We agreed to a $125k purchase price and a $1038 rental payment. Other similar homes in the neighborhood were listed at $145k and this seemed like a reasonable deal to me. I agreed to start paying him rent as soon as I found a suitable tenant/buyer.
I paid to run an ad in the local paper which was my only expense. I had several interested people and took applications from a couple of prospects and selected the best applicant. We received a $3500 non refundable option fee towards the future purchase of the home at a price of $149k and a rent agreement for $1250 per month with $100 credit towards purchase for every on time payment with a 2 year agreement. With my tenant buyer we signed a purchase and sales agreement, a lease agreement, an option agreement, pet disclosure, and a couple of other papers. This is a pretty good deal as I have a decent tenant who can probably qualify for a mortgage within the 24 month time span we agreed upon giving me about a 50% chance they will buy at the end of the option period. I received a non refundable $3500 check up front against my back end profits which isn’t taxable until the option is exercised, as well as a $212 monthly rent profit. I expect to make close to $30k profit on this deal once my tenant buyer refinances and cashes me out.
What I did wrong on this deal was agree to pay the rent directly to the seller instead of having the checks made payable to the lender directly. On a positive note the deal is decently strong and I have good cash flow and if my tenant doesn’t buy I can easily put another tenant buyer in this property and collect another option fee as this is a desirable area.
David Neese is a real estate investor from Memphis, TN. David offers a free E-course on quick start strategies for getting started in real estate investing that is delivered free via email and tele-clinic at: http://www.FreeRealEstateInvestingCourses.com and .
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