I did three lease option deals in Alabama (although I live in California) in just a few months' time with over $70,000 in equity! Deals #1 and #2 were bank REOs that I bought through an agent. The third came from a painter I called to give me estimates for work.
Sold: $230,000 (three-year lease option)
My Payment: $1,200
Profit to me: If cashed out before year three; $200/month plus $40,000 back-end profit.
The tenant/buyer is now in year two of the lease, so the contract price has gone up by $10,000. If he goes into year three another $10,000 is added. I bought this one with conventional financing, which I would not do again, but it was the only way to get an REO at the time without using hard money.
Sold: $49,900 (three-year lease option)
My payment: $250
Profit to me: $250/month plus $11,900 back-end profit.
The tenant will be cashing me out in about 30 days. I bought this with my equity line of credit, which I would not do again unless I had a quick flip. Live and learn.
Sold: $170,000 (three-year lease option)
My payment: $950
Profit to me: $150/month plus back-end profit of $30,000 in year one, and an additional $5,000 in year two.
Deal #3 is the best part of the story! I called a painter to give me an estimate on deal #1. He said he would love to buy on a lease option, since his divorce messed up his credit, and his new fiancee was moving to town to marry him. I told him I was going back to California, but if he found anything that looked good, he should call me, and I would try to get it for him.
He called about three months later! He said they had found a great, old two-story farmhouse on three acres. It was on the market and vacant for over a year, and they could not qualify for the loan. He asked if I could try to buy it and sell to them on a lease option.
I contacted the broker, made an offer of $135,000 with seller financing on 10% down. (The house was free and clear.) The seller countered back at $140,000 agreeing to pay all closing costs if I would get a new loan and cash him out.
I called my buyer and said that it was a take it or leave it, as-is deal, and he would have to pay for any inspections himself. He did, took it with no repairs as-is, and gave me an option payment of $12,000. So I was only in the deal for about $1,500.
But it doesn't end there...
A few months ago he called to say the A/C and heat pump units needed to be replaced for $8,400. All of my lease options require the tenant to pay for ALL repairs and maintenance. He was willing to buy the equipment, and the power company would finance 100%, but only for the property owner--me.
I got the power company to finance it for me at 9.9%, and I charged the tenant 17.9%. He was ecstatic!
In over a year and a half, I have never received one call to fix anything. I am actually making $35 per month on the spread for the A/C equipment. I have been paid $24,500 in up front option payments, and have a current back-end profit of at least $65,000 on these three deals.
Deal #4 in the making
Today I am writing an offer to an investor who wants out of NINE houses with fixed-rate loans and equity of around $190,000. He will leave all the loans in place for 3 to 5 years if I give him $50,000 up front. That leaves equity of about $140,000 on the table.
The beauty is that he is willing to get a $50,000 1st mortgage on one of the free and clear homes to get his cash! The positive cash flow each month on this portfolio is over $1,300!
Thanks to CRE Online and the many great authors, instructors, and fellow investors that inspire me to go for it every day!