Just after a general feeling from the people that are out there – doing it.
Just wondering whether lease options have lost their effectiveness; either to prospective tenants, and / or to the investor’s profits in a static market.
Are there ways in the deal, to counteract a static market?
Your comments would be greatly appreciated.
Regards
Investor1313Not sure where you are coming from, but from my understanding, they loose their effectiveness in a hot market, work best in a static market!
cheers!
Xenia Ioannou-Mena
Property Manager
Cash Flow Solution specialist
E: [email protected]
M. 0412 437 582Interesting!
Is this from the investor’s point of view, or from the tenant/purchaser’s perspective?
Regards
Investor1313investors! [biggrin]
There would always be people that need an option to purchase a property in any market. Normally due to personal financial reasons and not much to do with the market.
The popularity of LO are controlled by investors, why would anyone grant an option to purchase to a buyer and truncate the capital growth in a property when the market is hot? Makes no sense!
Xenia Ioannou-Mena
Property Manager
Cash Flow Solution specialist
E: [email protected]
M. 0412 437 582Hi Investor,
Might want to remember you are still purchasing a property to make money. If the market cools and prices fall, yes you can guarantee your client won’t exercise the option and you’ll be able to bank their fee for it, but will this cover the capital loss in the property purchased that you still owe?
During the downward trends, it may be more benefical to increase the duration of the option – say between10 and 25 years. It should be easier to sell an option on anything with this duration as the chances the prices will increase within this period are a whole heap better than in a 2 year period (for instance).
If the client can see the light at the end of the tunnel, they will be more inclined to stick with the option. This in turn may continue your cashflow from the property for a longer duration than the first instance and produce one of the win-win situations we are all looking for.
Good luck with it all,
Mark.
That’s what I’m talking about. I don’t know whther I’m barking up the wrong tree – but I thought that a lease option is meant to be a win-win situation.
If you have an option amount that increases at a rate faster than what the market is travelling, how can the “client” end up buying it?? The loan to value ratio for the client is going the wrong way. The client loses.
I was working my figures on a period of 5 years.
Maybe I’m missing something fundamental?? Help!?!
[confused2]
Regards
Investor1313Hi Investor1313!
Perhaps an example will help clear your fog.
Say you buy a property for $180,000 and have a client that will lease / option from you on a 12 month contract at a purchase price of $200,000.
They pay you $2000 to take up the option and will pay rent of $200 / week of which you will credit $20 as an option fee. The two scenarios are- After the 12 months, the property is valued at $220,000. The client exercises their option and they get a $220,000 property with only $196,960 to pay ($200,000 – 2000 – 20*52). You get your option fee as the contract unfolds and then the lump sum at the end.
- After the 12 months, the property is valued at $160,000. The client doesn’t exercise their option and walks away from the deal. You still have the property and the 2000 + 20*52. While the client may not really win, they had the opportunity to make a gain but things didn’t go their way. You then have to decide what to do with the property and one avenue may be to renegotiate the lease/option if the buyer is interested.
or
And so it goes…
Does it make any more sense to you now?Cheers,
JoanHi Joan
Thanks for the reply. Your example doesn’t clear the fog. [eh]I know how the Lease Option works in theory.
I invite you (or anyone) to write back regarding the following questions.
a) Lets make this example cash flow positive…Assume 7.5% loan IO, expenses of $700 and profit of $10 p.w. Rent $240 per week.b) Lets look at it for more than one year. This is the crux of what I’m trying to find out. The annual rental increases are OK at CPI, but what happens with option price????? Is it fixed at $200,000? Is it increased at CPI, or any other percentage? Or is it by valuation?
I know in theory it is a set % increase. To which I want to know, how this goes down with the client, in a market that is not increasing or decreasing.c) What happens if the property is still worth $180,000, and you could guess that this wasn’t going to change in the next few years. Then you would have a client trying to buy a $180K property for $200K.
Now I couldn’t morally go into situation that is structured like this i.e. win/ lose. Comments?? What am I missing?
C’mon guys, throw me some solution bones here![blush2]
Regards
Investor1313
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