Case Study # 2
This is another lease with option to buy deal.
The seller has a large amount of equity.
In this case we have a seller who wants cash out of the deal. The seller is a retiree with very little income at the moment, but with a lot of equity in a three bedroom home that needed some repairs and updating. Just for the record there are a ton of sellers out there just like this one.
The home was in a good location, and had not been rundown or beat up. The seller still owed $35,000 on the home, but was no longer interested in maintaining or caring for the home and was looking to moving to a small rental.
By running the comparables on this neighborhood, the investor could see that near by homes were in the $75,000 to $80,000 range.
Because the sellers main imterest was in recieving cash out of the home as soon as possible, the investor told him, he could help him do that, "and if I could get you the cash imediately, what would be the lowest amount you would consider taking for the home?"
The seller had already been thinking " It is obvious this place needs repairs, which will cost more than I have currently to spend; but that will have to be done if I want to list this house with a real estate agent. Whats worse, I know that even that after the expenditures and hassle of prepairing to sell, it might take months to sell on the traditional listing method. And I relaize that there are other costs to selling." So he said "If I could get my hands on $30,000 cash I would be glad to walk away from this house."
What happened next was the investor told him he would be glad to help him, but that because of the circumstances he would need the seller to help out too. what the investor meant by this was, he needed a little more than wishful thinking to get through the next few months of repairs and maybe vacancy at the home.
The investor could use some cash upfront, too, in other words. The investor knew the only way the seller could get at the $30,000 he needed quickly, and so the investor could get some money to do needed repairs, in order to promote and sell the house, was to refinance the home. And the investor will make the monthly payments on the refinance (after all, you never want to put down your own money on these deals).
A refinance was somewhat difficult because of the sellers low income status, but by agreeing to higher than usual financing fees and a higher interest rate, He obtained a new loan.
The seller recieved the $30,000 he wanted.
The old loan of $35,000 was paid off.
And the investor took out $5,000 to cover the next few payments in case the house stayed empty, and to do the needed repairs.
The finance company charged $3,700 in fees .
At 9.8%, the new loan of $73,700, had a monthly PI (principle and interest) payment of $640 plus taxes and insurance of $50 a month, for a total PITI monthly payment of $690.
The seller goes away happy-he has his cash, plus he's free of mortgage payments and the upkeep and maintianceon of the home. The investor performed about $2,000 worth of repairs to the house, and made just one payment of $690 before he found tenants for the home.
The tenants agreed to a buyout option price of $82,000, and made an option consideration of $3,000 up front. Thier monthly lease payment was $900, giving the investor a monthly gain of $210, plus the $2,310 from the refinance, and the payout when the tenants purchased the home within two years.