How did this go?
You often recommend lease-option & @Karpro also in a recent thread suggested it.
I can see two scenarios for lease-option. (1) I want to do a 1031 but I’m not ready with a buyer for my own half, or (2) I want to buy but I have financial problems so you will seller-finance it, but first I’ll run it first for a while while paying you a monthly lump sum for NNN (is that right?).
Let’s assume the first case. I want a park but not for 6-10 months – less than a year, but way more than the amount of time set up for due diligence. Presumably there are two contracts here; one is the contract for the option and the other is the contract for the park purchase, which may or may not happen since I have the “option.”
(1) When do I set aside time for DD? Clearly I don’t even want to pay anything if I do the DD and decide [Expected Return] < [Expected Risk + Expected Hassle]. This is something I think a lot of newcomers forget – the Expected Return is not actually always there, in fact the Cap rates quoted here and elsewhere are the “Optimistic” or “if you’re lucky” return. In real life there is variance, which can be large and don’t forget capital improvements. So I want to evaluate the [Expected Risk + Expected Hassle] during my DD. And verify my Expected Return.
Do you / would you put this in the Option Contract?
I would also assume that I want to pay a relatively small “down payment” or “earnest money” for the option and then at closing pay the majority of the purchase price.
(1) As a percentage of purchase price, what is a typical option price? I think 1% earnest money is typical, and 10% is a (small) down payment; I certainly wouldn’t want to walk away from 10% down.
(2) I assume it would be NOT typical to pay money monthly to keep the option “open.” This is in contrast to a mobile home lease-option, which ties the right to exercise the option to the agreement to keep paying monthly. Or, equivalently, NNN lease leading to Seller-Financing.
If this is right, let’s say I spend money and secure the option to buy your park at some point in the future.
Then, at that point in the future, performance is impossible because, . . . any number of reasons. Let’s say you sold the park I wanted to buy.
What recourse do I have? I can sue you for breach of contract, but what are the damages? I’m out the option contract money, which may be less than the cost of a lawsuit. And the “opportunity” and “work I put into the deal” which is probably non-recoverable.
So what I want to know, is, how much can I rely on an option contract protecting my right to acquire the thing that I’m paying for the option on? On a small purchase, the cost of securing performance in event of a breach is more than the cost of just waiting and trusting the seller to continue to have the same motivation in 6-10 months.
So, what are these options really worth? Is it really more like earnest money or really more like a d/p?