Property Purchase Option Agreement

Hi Scott

Quite a bit of information on Lease/Options is available at:  https://www.propertyinvesting.com/strategies/lease-options

Cheers,  Paul

Hi Scott

As Paul & Karen say, a Sandwich Lease/Option (or SLO) is what you are asking about.

You ask "what about…?"

Can you be more specific as to what you actually want to know?  There are plenty here who will be happy to answer your questions once we know what you want.

This is a very powerful strategy to control many properties with minimal outlay (but usually you need some money).  As you can appreciate, powerful tools can be dangerous to the user (and bystanders!) if used inexpertly.  There can be a lot of precise legal paperwork involved, and a slip-up can be costly, so I'd advise you get properly educated before you try it.  Also, find and use a knowledgeable solicitor who's up to speed on SLOs.  I am not at all trying to put you off, this is in your own long-term financial best interests!

Having said that, to whet your appetite, I will answer your original question "can you share the details" by telling you probbaly more than you wanted to know, about one we put together this week (the LO purchasers moved in yesterday).

Divorcing seller has new job and wants to move out of state. Mortgage and other debt servicing is eating him alive.  Owns house in his own name.  It is large, in good position, but in disrepair.  He listed it with RE Agent at 260k.  We made offer through Agent to pay him a little upfront to help with his bills and then to rent it at a high rent for a time until we settle the purchase.  Declined.  Then as he got lots of lookers at that price, but no buyers, he realised that although it will eventually sell at 260k, it was overpriced for a quick sale.  The seller himself rang the agent and said he'd let us take it at 220k (10k below our previous offer) if we acted NOW.  It was Thursday.

We did.  First I spoke that night with some potential clients who were about to L/O another smaller house we own.  I suggested that they might prefer this larger one.  They went to the agent on Friday and he took them through the house.  They loved it.  They are in the building trade, the repairs are a minor thing to them, and they appreciated the opportunity to use some "sweat equity" to help buy their own home.

I met seller Saturday and we signed a Lease with Option to Purchase.  13-month Lease $1900/month, Purchase 220k.  He also signed prepared letters to his providers that gave us total control of his loan, insurance, rates.  Also an agreement that says we will pay all of these out of his lease, and deposit the balance in his account each month.  And that we will hold over any excesses until the following month so he never has to put his hand in his pocket again.  He loves it that he walked out of there a free man, and this house will no longer be a burden in any way.  Welcome news, since debt relief was his big motivator.  I also gave him a cheque for the Option Fee (3,000) and another made out to the agent for half his commission.  This was previously negotiated with the agent: half now, half on settlement.  Both amounts are deducted from the sale price on settlement.  By the way, he bought this house for 185k only about a year ago, so he made a tidy profit of his own even though he decided to sell it under market.

Next day he flew interstate to put his affairs in order there pending the move.  Meantime I insured the property listing both his and our company's names as beneficiaries (Because his previous insurance was only in his name, and in case of a claim we need some control so our client gets their house).  I also submitted the various letters to his bank and council, and arranged for the DDR to come out of one of our accounts.  From next week we are paying his mortgage.

The day after the seller signed, I met with the new purchaser.  They know values in the area, and were happy that we are selling them this house for 265k.  The house they are vacating was sold by their landlord for more, and is not as large/well-positioned, although in better condition cosmetically.   They were going to L/O our smaller house for 450/week (250 rent, 200 credits toward purchase every week the rent is paid on time) but as they only had 2k deposit, I said they would have to pay more per week for the larger house.  They were happy about this, and agreed to pay $550/wk (250 rent, 300 towards house). 

Their intention is to renovate within 6 months, and then get a loan.  We will assist with the loan process, using our contacts with capable mortgage brokers.  They have FHOG eligibility, so at that time will have 2k option fee+ 7k FHOG+ 7,800 rent credits = 16,800 towards the house. They will also have saved other finds to add to this.   The property should value at about 320-350k by then (post renovations, based on current comps) and they will need a loan of only about 245k, or about 76% LVR using the lower val.  A capable broker can find them a lender who will lend based on val instead of purchase price.

So to summarise the figures:
Our outlay:
3,000 Option Fee (non-refundable)
3,272.50 Option Fee (agent's commission, half paid upfront)
 720 (Insurance, refundable by withholding lease payments over the next few months)
660 solicitor (for both ends of the SLO)
-2,000 less Option Fee from purchaser

So now we have total control of this property, income of 2,365 less 1,900 lease, or a cashflow of 465/mo.

When the purchasers complete their purchase we have our payday.  This could be up to 12 months.  Since we are crediting 300/week towards the house, we prefer earlier rather than later, but even at 12 months, our payday is 265-220-15.6= $29.4k. (less solicitors etc.).   You can add the original 6272.50 lease option fee, that we get back at that time as well.  We want our solicitor to manage the transfers to ensure we get our markup.

The "etc" does not include the usual $7260.40 for stamp duty, mortgage duty, transfer, mortgage rego, since our Option Agreement allows us to substitute our purchaser as the buyer.  We never own the property, and do not need to qualify for a loan.  There is a small Stamp Duty payable on the Option.

By the way, the L/O paperwork between us and the seller is quite different to that between us and the buyer.  e.g. we don't allow the buyer to sub-lease, but the seller mandatorily gives us the right to sub-lease. 

So you see Scott, Sandwich Lease Options are very powerful, and the rewards can be very good.  But there are a LOT of traps for young players, so please, please:  get educated first!  

Hope this helps.

If your looking at buying these using lease options, the short answer is yes. Generally though if the Writ of Possession has been issued then its too late.

Dave