Hi All
Advice would be greatly appreciated.
I have a 3 BR house in Country Victoria (Morwell) which I bought 18 months ago for $103K. I could realistically sell it today for between $125K and $130 by the standard way using a realestate agent.
The property has 82K debt and currently rents for $160 per week but could rent for up to $170.
Using Rick Otton's manual, this is the deal I am going to offer to the market. (Have only known that lease options exsist for 3 weeks)
2 year lease option
Deposit: 3 to 5K
Rent: $160 per week
Ongoing Option fee: $50 per week.
Total Income 160 plus 50 is $210 per week and credit the $50 per week of the total purchase price over the 2 year period if they decide to buy
Purchase price: 150K
So lets just say after a 2 year period they decide to buy, then I would minus the deposit ($3 – $5K) and the $50 per week ($5200) off the purchase price of $150K
Is this a fair deal? IS the rent and the pruchase price fair to me and the buyers?
Would be very keen to hear from anyone who has lease option experience or knowledge.
Thanks
Hi Rhenry
We have done a lot of Lease/Options in our Vendor Finance business but, over time, have drifted back to Instalment Contracts as our favoured vendor finance technique. This preference mainly revolves around the extra security an Instalment Contract gives a buyer, e.g. the government regard it as a real sale because they pay the FHOG to eligible first home buyers, buying their home this way. Land Tax also disappears when you use an Instalment Contract, as the Government regard you as having disposed of the property.
For the property you mentioned, I'd probably sell it with an Instalment Contract, along the following lines:
Sell Price – $150,000
Minimum Deposit – $15,000 (FHOG may be used as part payment)
Term – 30 years
Interest Rate – 7.5% variable (initially)Resulting Buyers Payment – $217.83 plus approximately $40 per week for Rates & Insurance.
This would mean that your cash flow would be $943.94 per month. Plus approximately $173.33 to pay the Rates & Insurance on the Buyers behalf (they are responsible for these costs and all maintenance costs).
I'm guessing that you're paying approximately $534 per month for your existing mortgage so, in this scenario you could expect positive cash flow of approximately $409 per month.
This transaction would give you three point of income. The $15,000 deposit up front. The $409 monthly positive cash flow. The back-end profit, i.e. the difference between what you bought it for and what you sold it for, less what the buyer has paid off, between when they moved in and when they sell it or refinance it.
We have found that buyers feel more secure knowing that a real Contract of Sale is being used. We also like the fact that, because no Lease is involved, we are not bound by the Residential Tenancy Act. Also, with an Instalment Contract we tend to get purchasers with a "buyer's mentality", whereas with Lease/Options we're still confronted with a "tenant's mentality". Vastly different in our experience.Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hi Paul,
How much does it cost to set up an installment contract, and can this be done if there is conventional finance (a mortgage) attached to the property?
Christian.
Hi Christian
We charge our new buyers $980 to have the Instalment Contract drawn up and sent to their solicitor. Yes an Instalment Contract can be exchanged with an existing mortgage in place on the property.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Thanks Paul, you've piqued my curiosity. Where are you based?
Hi Paul,
Very interest information there. I just had a look at your website and might get in touch about some more information. Just have another question though. If you take on this type of vendor financing role in a business structure does that give you access to business lending facilities from institutions instead of convention retail lending? And if so, what are the advantages with that?
Regards,
GrantHi Christian & Grant
Christian, we are based in Port Stephens, NSW. However, at the moment we are working on transactions in Nambucca Heads, NSW and Morwell in Vic. We're also just been asked about Townsville, Qld and the ACT. We don't limit ourselves to a specific area.
Grant, from a risk mininisation point of view, we believe it's important for our JV Partners to have their names on the title of the property. Therefore our JV Partners need to qualify for their own loan, i.e. they borrow through the traditional residential lending market.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
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