Help with lease option on MHP


#1

hi guys-

i’m a grad of steve and corey’s bootcamp and have been browsing this board for a bit. i think i may have finally found a deal.

i am looking at a MHP with:

-70 spaces 59 (4 vacant) MH’s and 11 (4 vacant) RV’s (supposedly the Rv’s are long term tenants)

-city util’s (sepr metered)

-17 park owned homes (seller agrees to keep all POHs and all the notes and will continue leasing to the tenants)

-the NOI is $102,000/yr. (lot rent only)

lenders are requiring at least 25% down in this environment. i dont have that kind of money and the seller has agreed to carry.

it was initially priced at a 13% cap including the note income from the park owned homes. i told him to keep the POHs and notes which brought the NOI to $102k. i offered a 13 cap on lot rent only and “mentioned” $775k price, 10% down, 5 yr balloon to his agent. i plan to refi in a yr or two.

the agent runs this by him, and we find out the seller has a mort payment of $6k/mo. the agent said he is afraid of triggering the due on sale clause and has proposed a lease option ($825k price, $50k option payment…it was originally going to be a $ 80k down payment, 7.5% rate). he wants at least $6k/mo to cover his mortg payment.

i see a lot of upside to this deal because the rent is ridiculously low (lot rent avgs $225/mo and the market rent is $350). i plan on raising rent $25/mo day one and another $25/mo after one yr. there are also 5 spaces to fill. i will then refi and take cash out after raising the two rent raises and filling the vacancies.

i know that this is a good deal at a 12 cap on a straight purchase on contract (even without raising the rent). what im not so sure about are the lease/option terms (im not really familiar with L/O’s)

my questions are:

  1. what do you think of the seller’s lease option terms ($825k, $50k option payment, 7.5% int rate)? are they good, bad, fair? the seller wants to keep the interest rate at 7.5% because his mortg is at 7.75%. he also needs $6k/mo to cover his own mortg payments.

  2. how would you counter? keep in mind he needs $6k/mo to cover his own mortg.

  3. is the $50k down payment too high?

  4. what pitfalls should i be concerned about w/ L/O’s (should i record if im worried about him backing out, dying, etc)?

since $6k/mo and 7.5% are what he is requiring, i think the only terms i can negotiate are the price and down payment…correct?

im not sure if im leaving out any important info or not, but can provide more if needed.

thanks in advance.

brian


#2

Hi Brian,

This sounds like a nice potential deal! I am not an expert in L/O like several of members here, but I do have a few thoughts and question.

  1. One very important variable you haven’t mentioned is the length of the L/O. The longer you can secure this L/O the better. Since your main exist strategy is to refi, it would be good to have more time, especially considering the current credit situation. Given the room for rent increases you mentioned, I would give the seller his price if they were to give me my terms.

  2. Pitfalls - I presume you’ll want a Memorandum of Option to protect you against the seller from further encumbering the property, death, foreclosure, etc. This should definitely be recorded.

  3. Rent credits - you could negotiate rent credits, based on timely payment, to be applied to your final purchase price.

  4. Option payment - The 50k isn’t much lower than your original down. Considering the owner will still retain the benefits of depreciation and mortgage interest write-offs, you could show him how he still benefits each year even with a lower option. He wouldn’t retain these benefits if he were to sell outright.

  5. Lastly, I’m not clear about why the 7.5% interest matters if you negotiate a fixed monthly lease payment, say $6k. The interest is not applicable in this case as its not pegged against any principle, as in the case of a mortgage. If he’s ok with 6k/mo then that’s all that should matter.

I’m not very experienced in L/O and would love to hear from others. I think L/O is a great strategy.

Cheers


#3

thanks for the reply howard

  1. the proposed length of the L/O is 3 years. (it was originally a 5yr balloon note when we were talking about him carrying a note)

  2. i was thinking of recording it, but will that trigger the due on sale somehow (not sure how that works)?

  3. i will consider the rent deposits in the negotiations…thanks!

  4. the 7.5% interest issue: like i said in my original post, im not really familiar with L/O’s, so please forgive me for being ignorant. the agent said that my $6k monthly payment would go towards paying off the $825k. so i guess that is essentially some sort of “mortgage payment” …right? the rate on the seller’s underlying mortg is 7.75%. he said that he doesnt want to lose money by going too far below the 7.75%. i hope that makes sense!

brian


#4

a lot. Interest has no place in your L/O as howard states. I would record a Memorandum of Option. Check your State to see if a M.O.O would triger a D.O.S clause.

Why 50K as Option? Why not 5K? Or less?

I had Karl Warner write out my Lease and my Option and i recorded the M.O.O for $12 at my county.

I would want more than 3 years to pull trigger on Option with 50K O.C. With 5K O.C. I would not mind 3 years or less as I would have recouped this 5K many times over by then. I am looking at a deal right now where I put nothing down for Option consideration and I want the present Owner TO PAY ME for this O.C. I am having an attorney see if this is legal right now. In this new environment I wish to buy 5 Parks in 09 and since I have very little liquidity I will try some new things. I aquired one 580K Park for 1K 15 months ago. Have netted over 80K since then from the L/O.

This new business environment throws all the old ideas out the window…why not be paid to solve anothers problems?

This sounds crazy, but I think it is going to actually happen. The present owner is burnt out and desperately wants out of his Park (health problems). Owns it free and clear (401K money) and is in the ugly spot of no more cash (they froze his commercial line of credit) to bring in newer homes, etc. etc. I want to cash flow from day one and want 35K to to redo water lines in a 44 space Park. So rather than paying him for an Option, I want him to pay legal and stroke me a 35K check to sign the Option Consideration.

I’ve never heard of this happening, but that does NOT mean it can’t be done, eh?

Greg


#5

"I want to cash flow from day one and want 35K to to redo water lines in a 44 space Park. So rather than paying him for an Option, I want him to pay legal and stroke me a 35K check to sign the Option Consideration.

I’ve never heard of this happening, but that does NOT mean it can’t be done, eh?"

Now that take’s some big ones! I have never heard of it at the park level but it