Lease Option Email - Appalling

[Glenis]

I must be missing something here. If the TB decides at the 2 year point not to go ahead with the deal he has paid ~$30,000 over the usual rent to live in an average house? You say the investor has only made $30k over 2 years but didn't the tenant also pay the mortgage for him as well? Has the property gone up in value over the 2 years? You say it has (even by just 2%) it's worth an additional $13k.

Yet you are crying for the poor investor because the deal is hardly worth the effort? Seems to me he's had the property expenses met for 2 years, made a handsome $30k cash and $12k improved value.

Obviously I'm not smart enough to figure out why the nvestor is so hard done by and the tenant so fortunate.

[typhoon]

I must be missing something here. If the TB decides at the 2 year point not to go ahead with the deal he has paid ~$30,000 over the usual rent to live in an average house? You say the investor has only made $30k over 2 years but didn't the tenant also pay the mortgage for him as well? Has the property gone up in value over the 2 years? You say it has (even by just 2&#37 it's worth an additional $13k.


"Obviously I'm not smart enough to figure out why the nvestor is so hard done by and the tenant so fortunate.

Yes thats right. Capital Gain is why we invest in property.

"Yet you are crying for the poor investor because the deal is hardly worth the effort? "

No you are crying. i asked a whole lot of questions. in case you still dont get it - what rewards would you get by investing your money in a bank right now.
that is relatively risk free. investing is not - making a judgement call on someone to live in your property, and enter a large financial contract with is also risky - especially someone who cant even get their own deposit together for whatever reason. the fact is that they are a higher financial risk.

this is about investing - dollars and cents -

"Seems to me he's had the property expenses met for 2 years, made a handsome $30k cash and $12k improved value."

And? your problem is? why would you bother buying the property to do (what amounts to) a trade otherwise?
See above

[Glenis]

I get it, but he didn't invest his money - he used the bank's money.

making a judgement call on someone to live in your property, and enter a large financial contract with is also risky

But you still own the house and can find another tenant the risk is pretty minimal.

I don't have a problem with anyone making a profit but it doesn't matter how much you defend it - from the tenats point of view it's a royal rip off. I can't see you getting much sympathy around here.

[typhoon]

I get it, but he didn't invest his money - he used the bank's money.


Quote:
making a judgement call on someone to live in your property, and enter a large financial contract with is also risky
But you still own the house and can find another tenant the risk is pretty minimal.

I don't have a problem with anyone making a profit but it doesn't matter how much you defend it - from the tenats point of view it's a royal rip off. I can't see you getting much sympathy around here.


hi glenis i think i have explained the dollars and cents of it pretty clearly and emotional judgements about that and what level of profit etc is an individual decision.

what i have shown is strong explainable market positioning & financial logic in the deal for the investor.

if the investor could have bought the property and passed on discount while retaining the same markup the reactions would no doubt be different. but it beats me why. if the buyer likes the property and wants to own it after having had the choice to buy or not to buy, and understands the deal - market is in play - good luck to them all. Good luck in your investing.

PS i am still learning how t use this system so please forgive the edits as i am sometimes not quoting the right bits and having to correct thanks

[Glenis]

Yep, each to his own. You'll make much more money than I ever will. I think life is about being happy you seem to think life is about being rich and not the morals behind how you get there. I'll take my happy over your rich any day. :-) Good luck with your investing too.

[Gatekeeper]

2) a property bought today worth 320,000 is worth the following values at end of each of the following periods on an inflation rate of 2% which you would likely agree is extremely conservative inflation figure:

A lot of economists are predicting tough times ahead. Stagflation in fact.
And it is widely predicted that house prices will be deflating for a period, whilst everyday costs inflate.
How would that change the figures, and was this explained to the tenant/buyer?

[SuperDad]

Let's work with the figures typhoon has supplied, together with the figures supplied in the original email.

First, let's make two reasonable assumptions:
(i) The TB is not able to put aside any extra cash during the term of the lease, due to the high cost of the lease payments together with his being financially responsible for repairs and maintenance, and
(b)no lender will provide funds sufficient for purchase until the registered valuation = option price.

The first thing to note, using typhoon's figures, is that the TB won't be able to exercise their option to purchase until the end of year 9, due to banks not willing to finance the buyout until the property is worth $385K. So all of this talk about purchasing after year 2 is off the mark.

The next thing to get clear about is how much of a deposit the TB has built up over these 9 years.

The original email cites the following figures:
*market rent = $365pw
*holding costs = $475pw
*TB's weekly payment = $650pw
*cashflow to investor = $175pw

Astute readers will notice one problem here - in deducting the holding costs ($475) from the weekly payment ($650) to get the cashflow figure ($175), no mention has been made of how much of that $175 is apportioned to the deposit, and how much to the investor's "spread". There is no way that the investor is not taking a spread here, so the TB is NOT building up a deposit at a rate of $175pw.

A likely scenario is that the investor is taking a $100 spread - but let's be charitable. Suppose that the investor is taking a $75 spread, and the TB is building up a deposit at the rate of $100 per week. If this is the case, then after 9 years the TB will have a deposit of $46,800.

This is a far cry from the $133,380 that typhoon supposes in the example s/he provides in post #45 on this thread. Typhoon mistakenly assumes in his/her calculations that the TB's deposit increases by $285 per week - the difference between the $650 the TB is paying and the market rent of $365. Of course the deposit is not building up at this rate - the holding costs are $475pw, not to mention the "spread".

So here is the true financial situation for the TB.

They have paid $650pw for 9 years to live in a house the market rent of which is $365pw. So they have paid $285pw more than had they rented. Of that, $100pw was credited towards the purchase price. In effect, they have paid $185 per week for 9 years to live in a house that they will eventually purchase. This is money that they will never see again - a whopping $86,580.

Of course, the investor does not pocket all of that - as allowed above, the spread is only $75pw, with the rest covering the holding costs. But that is irrelevant, from the tenant's point of view.


i'm going to post this now, so that I don't lose it. I might tinker a bit if the calculations are incorrect. Please point out errors in my working.

typhoon - your comments will be especially welcome.

Paul.

[SuperDad]

The point I am making is that this is not a win-win situation.

The investor receives a weekly spread of $75pw for 9 years, plus the $65K margin on the property. The TB pays $86,580 over the 9 years for the priviledge of living in and maintaining the investor's property, while being able to save a $46,800 property.

Win-win? Only if the TB is a complete financial illiterate.

Paul.

[typhoon]

A lot of economists are predicting tough times ahead. Stagflation in fact.
And it is widely predicted that house prices will be deflating for a period, whilst everyday costs inflate.
How would that change the figures, and was this explained to the tenant/buyer?

stagflation. sure. doesnt mean your money isnt getting worth less every day. dont forget opportunity costs also.

house prices deflating. yup sure. over 10years in NZ history says consistently house prices likely to double. so what if they end up at 385 instead of 320 x 2 = 640k at day 1 of year 11. cant control everything. but odds are hugely in favour of them being ahead of eight ball.

if house prices fall, yet costs inflate. yup sure that could happen. but quite frankly i am far from convinced that any property commentator has accurately called the next ten years right to date. why - because we are too small an economy on a very large system for us to be so arrogant as to think we can do that accurately. world systems are very unstable right now and nobody can call the end of Iraq war yet etc etc etc. periods of stability/instability = cycle

let's say construction costs halve and the property market evens out i,.e. a GJ gardner home is the same to build as a present 1950s property is to buy now. market forces mean the 1950s house will therefore halve again in price.

not gonna happen unless we have a repeat of the great depression. why -because people will not sell at that level unless buying power is similarly depressed. if people were selling at that level banks not recovering money either on typical lending - so - depression. ( i know rude and crude example but you get the idea)

could another great depression happen - yes - if it does there is very likely to be a third world war on at the time as well or on the way - and then we are all screwed - or we certainly wont be worrying about this

your last point - numbers will change - deal will be reconfigured when investor can see its not working for him and buyer will be same. if investor wanting word of mouth sales he will keep writing deals that work for buyer - and will be flexible on the terms that continue to keep buyer in deal which is how investor justified his 10 year property purchase to bank in first place.

as to changes being explained to buyer - well - buyer needs to get their own advice. disclosure rules mean you cant be financial advisor and not display all fees etc. some readers may want to be mindful of that. so long as anybody buying any property product off anybody is advised to get independent advice even if in the end they use people who investor genuinely recomends as being good - cant go too far wrong. solicitors wont act for two arms length parties in transaction anyway.

hope this helps

ciao!

[typhoon]

(b)no lender will provide funds sufficient for purchase until the registered valuation = option price. cant agree - arms length transaction two parties establishes market value

The first thing to note, using typhoon's figures, is that the TB won't be able to exercise their option to purchase until the end of year 9, see above due to banks not willing to finance the buyout until the property is worth $385K. So all of this talk about purchasing after year 2 is off the mark.

The next thing to get clear about is how much of a deposit the TB has built up over these 9 years.

The original email cites the following figures:
*market rent = $365pw
*holding costs = $475pw
*TB's weekly payment = $650pw
*cashflow to investor = $175pw

Astute readers will notice one problem here - in deducting the holding costs ($475) from the weekly payment ($650) to get the cashflow figure ($175), no mention has been made of how much of that $175 is apportioned to the deposit, and how much to the investor's "spread". There is no way that the investor is not taking a spread here, so the TB is NOT building up a deposit at a rate of $175pw. OK i hadnt thought of that - i have no idea if spread is being taken i am assuming 100% is deposit funding. if that is comon practice then there is room to lower margin - but no obligation.

A likely scenario is that the investor is taking a $100 spread - but let's be charitable. Suppose that the investor is taking a $75 spread, and the TB is building up a deposit at the rate of $100 per week. If this is the case, then after 9 years the TB will have a deposit of $46,800.

This is a far cry from the $133,380 that typhoon supposes in the example s/he provides in post #45 on this thread. Typhoon mistakenly assumes in his/her calculations that the TB's deposit increases by $285 per week - the difference between the $650 the TB is paying and the market rent of $365. Of course the deposit is not building up at this rate - the holding costs are $475pw, not to mention the "spread". fair call i did it longhand for Ha ha simplicity of display to others. but on my premise of no spread then gain is 175*52 for 10 years or 91000. OK - yes i agree now i see spread is likely that this likely to be lower

So here is the true financial situation for the TB.

They have paid $650pw for 9 years to live in a house the market rent of which is $365pw. So they have paid $285pw more than had they rented. Of that, $100pw was credited towards the purchase price. In effect, they have paid $185 per week for 9 years to live in a house that they will eventually purchase. This is money that they will never see again - a whopping $86,580.

Of course, the investor does not pocket all of that - as allowed above, the spread is only $75pw, with the rest covering the holding costs. But that is irrelevant, from the tenant's point of view. as mentioned previously - go and check out your interest cost on an 80% loan for 25 years this deal - and then see what joy can be had railing at the bank


i'm going to post this now, so that I don't lose it. I might tinker a bit if the calculations are incorrect. Please point out errors in my working.

typhoon - your comments will be especially welcome.
Paul.

final comment on this ( to all not you in particular Paul) - if this scenario doesnt work then lets see some proposals on win win .

so - you have a house with market value of 320,000
- a party who doesnt have deposit but wants you to buy it so they can live in it for up to 10 years as legal contracted right
- you carry all financial risk in reality
- they may or may not be able to buy the property at the time of maturity
- they could look after the property or they could wreck it
- in theory you are maintaining the existing chattels and services to standard provided on "purchase"

what Specifically is a win win on this deal

thanks to all for comment

[SuperDad]

typhoon,

I was not firing "emotional and defamatory" bullets.

I am trying to get clear on the numbers. The simple, and yet massive errors in your calculations (e.g., not taking spread into account) reveal that you have absolutely no idea of how a LO works. So you couldn't spot a good one (if there is such a thing) from a dodgy one.

Sure, one could rework the numbers to make the deal a win-win, but then it would not be the deal advertised in the email, would it?

OK, fun and games over. Why don't you reveal your identity typhoon. I'm picking that you won't, because you are somehow associated with RM, and your postings here show that you lack basic understanding of relatively simple concepts related to property investing.

For example, your claim that "arms length transaction two parties establishes market value" is entirely irrelevant to the question of whether a bank will finance a transaction, ESPECIALLY when borrowing over 80%, as the TB would be in the case under consideration. They will want a valuation. In the growth figures you yourself give, valuation will not equal option price until end of year 9.

So come on, tell us who you are. I feel like a good laugh before I nod off.

Paul.

[typhoon]

PS any hints on getting this multi quoting thing to work are appreciated

[SuperDad]

You don't have to quote your name typhoon, just type it and hit "post quick reply".

[typhoon]

[quote=SuperDad;114045]typhoon,

I was not firing "emotional and defamatory" bullets.

Well i tried

I took care to note i was not directing comments specifically to you Paul

i was looking forward to your reply. but clearly i will not get anywhere with you.

you have no right whatsover to demand my identity.
richmastery has nothing to do with the information i presented in good faith here.
i was (and yes i slipped a bit in my remark about bullets - and am bitterly regretting it) trying really hard to avoid anything other than discussion around the value of the investment.

happy investing

[SuperDad]

You need to be more precise with your use of language typhoon. While your remarks were not specifically directed at me, they included me in their scope. That is what happens when you address a remark "to all, not you in particular Paul".

Discussion about the investment is valuable. However you have demonstrated a lack of understanding of fundamental, basic elements of a LO. So how can you make any meaningful contribution to this discussion?

You won't get anywhere with me for the simple fact that you have no idea where you are going.

Finally, my "demand" for your identity was tongue-in-cheek. No one here is under any obligation to reveal their identity, unless they want to post negative remarks about a person or company (as per the site rules).

Paul.