Wednesday, November 28, 2007

A Solution to Real Estate Situation

One of my readers left comments suggesting that I rent out my properties to stop my financial bleeding, so for the past 3 weeks I have been feverishly trying to do that. I have received large deposits on both vacant properties that I have been trying to sell most of the year. In addition, I am refinancing my rehab from 9.7% to a 6.5% interest rate loan.

The "rent to own" strategy that I have used before is what got me a solution that works. Typically rents for homes in this area average about $1000 per month and many of the callers to my sign could or would only pay that. But I found 3 people who competed for the property and am getting $1750 per month. The couple that is renting the property with an option to buy are paying one months security deposit as well as a $1500 option payment to purchase the property in the next 12 months for a price of $199,000. At that price I will break even on this property (mostly due to the extensive carrying costs that I have incurred). So, I feel fortunate that for the next 12 months I should be cash flow neutral on this property and I shouldn't get burned when I sell. If they don't buy I will probably do the same thing again and should have a positive cash flow.

The "fixer-upper" that I have been trying to sell since February and couldn't give away at an auction has also been "sold". I've given the buyer a 3 year lease for $450 per month with a $375 per month rent credit (He paid a $1500 option price). So after 3 years he will have accumulated credits of $15,000 at which time I will Deed the house over to him. Although I'd rather have the cash this is equivalent to loaning out the $13,500 loan balance at 11% interest rate, so it is a pretty good investment.

My big education this year has been that "flipping" is for the people in growing metro areas - not any places where I have lived. But in areas with poor economic climates rent to own is a high demand product for houses.


rentals "R" us said...

have a question about rent to own properties. How do you set that up legally. Do you use an attrorney or is there anotehr way.

Connie said...

Hi Paul,

I've been reading back posts and following your situation-- so glad to see today's entry~!

Sounds like things are starting to turn around-- Congratulations and best wishes to you and your family :)

Paul said...

I use 2 documents. One is a standard lease agreement. The second is the option agreement which has the option price, describes rent credits and selling price. If I were the optionee I would have the option recorded at the County Records building. As an optioner, I prefer that it not be recorded. I don't use any lawyers for this, but will if the optionee excercises their option.

-=LRK=- said...

I agree with Paul. You need the two different leases. If he ever needed to evict them, one lease says they rent, the other says they own... technically, it's just easier if push comes to shove. Otherwise he would have a little mess on his hands.

I am so relieved for you. Seriously. It's been a month since your last post, and I really wanted to know what happened.

Didn't you say at one point that you needed $2300/mo? Maybe I'm wrong, but doesn't $2300 - $1750 - $450 = $100 out of YOUR pocket? I know the options can be used, but, damn that sucks. I know your relieved and all, but yeah, too bad it's a wash after all that.

My own tenants extended for another month. They've been dragging a 3 month temp situation into almost a year. I've got a profit of $550/mo so watch me complain.

Paul said...

thanks - you missed my reference to refinancing the property in the first paragraph. It will drop the payment by over $400 per month

-=LRK=- said...

"I'd rather have the cash this is equivalent to loaning out the $13,500 loan balance at 11% interest rate, so it is a pretty good investment"

Yeah, i had JUST thought of this. Since you now have a tenant, with terms, you could likely go and find another investor to simply buy you out. Your investment is $5,000, so if you could find someone to buy you out at $10,000, you can then double your money, keep the option, and wash your hands of the whole situation (Make wife happy too!) The investor would then make almost $2,000/yr. 20% Return is not bad money for doing nothing.

I mean, unless my math is wrong $450x36mo=$16200-$13500=$2700/3=$900/yr

Paul said...

I purchased that cheap house for $5000 but I have $11,000 into it now.(It cost me $2500 in legal fees thanks to the NY Home Equity Theft Act and $1500 in back taxes and water bill I had to pay. I also put in a new furnace to get the buyer in) I have not sold it on a land contract so I cannot sell the paper.