Some homeowners when approached to sell their homes have expectations of receiving prices that haven't existed for years. These folks seldom or never get their price because of appraisal and financing issues. There are solutions for investors to control these properties and for the homeowners to sell them, if there is equity in the property.
The American Dream was to buy a home in a nice neighborhood and pay off the mortgage so the asset would become part of a person's retirement nest egg. This happened many times and retirees often have properties that are fully paid for or have very small mortgages. Using creative financing an investor may be able to buy these properties, but often the seller wants to cash out. For these people a butterfly lease option may be an answer that is a win-win for all the parties involved.
The process usually starts with a homeowner who says he won't take less than a certain amount for his property. Usually, this price is close to fair market value because the homeowner has done his research. His home may be the largest asset he has so he has spent time watching sales in his neighborhood and comparing prices and conditions. When an investor approaches him, he may be cagy about a price and give the investor a sales pitch based on neighborhood comparable sales.
As an example, let's say a homeowner's asking price is $100,000 and he has no mortgage on his property. The fair market value of the property is also $100,000 so there is no equity for an investor if he pays what the seller is asking. This situation could be an ideal candidate for a butterfly lease option and become a win-win for all three parties involved.
Do not try proposing a lease option over the telephone to a seller. It is too complicated without a complete presentation and the average time an investor has to capture the interest of a prospective seller is only 30 seconds.
In a butterfly lease option, the homeowner (optionor) gives a perspective buyer (optionee) an option contract that specifies the terms of the Option Contract. These terms will include the time to exercise, strike or purchase price, non-refundable option consideration, who pays for what repairs, extensions if available and the sale price. In addition, the buyer will sign a lease with the seller that states the usual terms of a lease, such as monthly rent and term of the lease. The two documents may be "linked" so that a default on a rental payment nullifies the option agreement.
In a butterfly lease option, the tenant and optionee, re-options and re-leases the property to another so called end-buyer who will actually close on the property and live in it for years to come. The original seller and the investor as optionor and optionee will be called A to B for this example and the investor and the end-buyer will now be called optionor and optionee but B to C. The investor (B) will collect rent from end-buyer (C) and pay the seller (A) a lesser amount of rent. The investor's non-refundable option consideration will be $100 but the end-buyer's will be $3,500 or more. Finally, the end-buyer will have a purchase (strike) price of $120,000 if he elects to exercise the option in a year or so.
In an ideal world, the following can happen:
1. The seller is paid $800 a month in rent or a 9.6% yield on his $100,000 sale price without selling the property.
2. The investor charges the end-buyer $1,250 a month rent and pockets a profit of $450 per month or $5,400 income a year on his $100 option consideration investment.
3. At the term of the lease/option, the end-buyer can exercise the option and buy the property in which case the investor will make an additional $20,000 or the difference between what the seller wanted and what the end-buyer paid.
4. At the end of the lease/option, the end-buyer can change his mind and not exercise the option and move on and forfeit his non-refundable option consideration (not a deposit). In this case the investor makes $3,500 and loses $100 to the seller if he doesn't exercise his original option.
In summary, the benefit to the homeowner is that his equity he will take out of the property will now earn many times the income he could have gotten with a certificate of deposit in a bank. He also still owns the property and can resell it in the future if this doesn't work. The best tip I could give you is do a single document lease and option with the seller and two documents ( lease and option) with the end-buyer for your protection. Many states have passed consumer laws to protect optionees and optionors, so always check with a local real estate attorney before you try this yourself.
About Author: Dave Dinkel has over 35 years experience in real estate investing which has given him a unique perspective into the real estate market. Pick-up a FREE copy of the highly acclaimed e-book about How to Makes Tons of Money in REOs http://www.crushingthereomarket.com/
If you would like to have a huge buyers list to sell your properties to take a look at - Creating a Massive Buyers List in Days not Months http://www.makingabuyerslist.com/
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