Twist on L/O. Anyone know this one??

Hi Wendy,

Thanks for your post… although it seems to bit hard to read.

But let’s break it down into components…

quote:

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Basically an investor would L/O a prop from selling party, request a delayed down, (if any)with a SPM in 5-10 years or small payments plus a balloon at the end, and then L/O the house to another party and then turn around and sell the mortgage payments at a discount to generate the down payment plus pocket cash.

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Step One

In your model above you would act as a lease option client. That is, instead of being the investor at this point you’d be the client. You need to find someone who offers a lease option system within the parameters that you’d make money. This may or may not be easy depending on the market in your area.

I understand that things in the US will be more advanced than here in Australia, so you’ll need to decide how viable this would be.

Step Two

Once you’ve found an investor who’ll provide you with the lease option service then you need to negotiate the terms. Getting a low-down deal and asking for small payments (SPM = single payment mortgage but I’m not sure how these work) protects your cash / equity input which will allow you to do multiple deals or get started without a lot of money to begin with.

Step Three

The next step is to onsell your lease option to another party on more profitable terms to what you have negotiated. By doing this you create your profit margin for acting as a broker in the deal. This is very similar to a wrap situation in that you effectively leverage from your reputation. That is, you will have to make the repayment even if your client does not… so by underwriting their risk you make a profit.

So far so good, although it is a little complicated and you’ll need to find a market of people who will buy at inflated terms rather than deal with the original investor to begin with.

Step Four

OK, here’s where it gets a bit tricky. Once you’ve got the deal to this point you look to sell the mortgage payments at a discount. Well, my first question is that in a lease option here in Australia there is no mortgage… just a residential lease with an option to buy. Perhaps things are different in the US?

But let’s assume that with the lease option model you’re talking about there is a mortgage. In fact ther would need to be two mortgages… one for you (in the original lease option) and one for the person you onsell to.

In step four you look to sell your interest in the deal for a profit. This is essentially being cashed out and given that the notes market in the US is well developed I’m sure there are people out there whop would buy such a thing.

The discount relates to the difference between the price you receive now and the present value of the future interest payments in the mortgage.

Other Questions…

Is this right and can you do it? I don’t know as I don’t know the market. But if I can understand it then I’m sure that it can be done (subject to legal restrictions).

I don’t want to discourage you from trying, but to me it sounds a little complicated so unless I could source and buy a pre-existing system for this, then I’d be reluctant to pioneer it.

Still, you must have heard of the concept from somewhere so it would be sensible to follow through and see where you end up.

If you can I’d like you to outline two things for me…

1. How a single payment mortgage works; and
2. Why you need a mortgage (other than what the investor would need to acquire the property to begin with) in the lease option model you mention here.

Finding out these two bits of information will be critical to analysing the proposal further.

Please make a reply post with this information so we can discuss it further.

Thanks

Steve McKnight