Lease Options Gurus - how do you...

[Ivanhoe]

I've been looking into lease options and the concept is simple but great!
Have couple of questions, more advanced stuff I cannot figure out myself. Let's say we have a property worth $200.000 (registered valuation), that we bought it for $190k and it would rent for $270 p.w.

1. What would be minimal/resonable option fee?
2. Would you charge same lease as rent should be or higher?
3. What will be weekly ongoing option fee??
4. Will you offer incentives like matching option fee dollar-to-dollar when option exercised or else?
5. Base price - any particular %% above current market price? Why bother with "base fee or RV, whichever is higher" - not very fair for option holder or am I missing something?
6. GST - you claim GST and pay GST on sale price, but not on lease (by the way, is it rent or not after all?) What about option fee and ongoing option fee? Rates, insurance etc?
7. Finance - LO may be be out of bank's comfort zone I guess. Any problems with your structure (trading trust) being GST-registered? Will banks take lease+option payments into account as rent? How do you recycle equity?
Hope these questions make sense and looking forward to hear from you!

[Heg]

Hi Ivanhoe,
You need to do The Sandwich Lease Options course that is run by Dorien and Rineke Forster.www.globalbusinessideas.com

My hubby and I attended this course a few weeks ago and it is fantastic. Everything you will ever need to know abour Lease options and sandwich lease options, including all of the paperwork and forms that you will need to get going. Once you have done the course you can join the members forum (part of Property Talk) which deals exclusively with Lease Options.

Worth every penny. The course will pay for itself on your first deal. Go along and learn from the people who are doing this for a living.
Cheers
Heg

[Oopsick]

I've been to that course too and can join Heg in her reccommendations. It is amazing and absolutely worth it!
Good luck

[whitt]

I agree.
All your questions are covered in the course.
However the to answer your questions generally is dependant on each deal.
What you have is various parts of the deal you could make money in and you adjust each untill final outcome is the profit you want.

eg. Deposit, rental spread, purchase to sale price etc.

[Cliffy]

Hi Ivan, I'll see if I can answer some of your questions:

1. What would be minimal/resonable option fee?

Usually 3%-5% of purchase price so there's some 'hurt' money there, but it's your game - you make the rules.
I have had a house advertised in West Auckland for Rent to Buy where most prospects had no deposit, so I am signing up tenant/buyer today with no deposit but higher weekly payments (= more cashflow).

2. Would you charge same lease as rent should be or higher?

For me, definitely higher. I'm after cashflow.
Some make the payments equivalent to what they would be paying for the mortgage when they exercise their option to buy.
For this example, I'd make it maybe $350 pw.

3. What will be weekly ongoing option fee??

You make the rules. Maybe here $350 rent with $80 credit, or $300pw rent with $50 credit - you decide.

4. Will you offer incentives like matching option fee dollar-to-dollar when option exercised or else?

I don't.

5. Base price - any particular %% above current market price?

I don't mark up - purchase price = RV but I try to buy more below RV then this example. Purchase price is set by independent Registered Valuer so you can't be accused of 'jacking up the price'

Why bother with "base fee or RV, whichever is higher" - not very fair for option holder or am I missing something?

This is a way for the investor to keep any capital gain during L/O term.

6. GST - you claim GST and pay GST on sale price, but not on lease (by the way, is it rent or not after all?) What about option fee and ongoing option fee? Rates, insurance etc?

Yes claim and pay GST on purchase & sale. Not on weekly payments - you pay GST on the credits when option exercised (Purchase price).

7. Finance - LO may be be out of bank's comfort zone I guess. Any problems with your structure (trading trust) being GST-registered? Will banks take lease+option payments into account as rent? How do you recycle equity?

I haven't had any problems so far. You just need good relationships or a good mortgage broker.

You can recycle equity the same as with buy & holds.

Just do the course! One deal will more than pay for the cost.

[Ivanhoe]

Thanks Grant, really appreciate your help!
I'm planning to do SLO course in August (next planned event), but don't really want to wait untill August - hence asking questions here.

[Oopsick]

Good on you, Ivanhoe for wanting to take action so soon. Be careful though because you do not have the right documentation in place and probably no special structures either.
Good luck!

[Ivanhoe]

Thanks for support, Elena! I do not believe in taking risk, I beilive in risk management, so I would not try to do LO without thorough investigation first.
As a matter of fact have a trading trust with corporate trustee that will have sufficient turnover so it will not have to pay gst on rents (I guess it covers special structures enough) and accountant who happens to know this stuff (initials LH - you should know who he is)... All I DO NOT have is answers for SOME questions...
Wanna give it a go?

[Niall]

Hey there Ivanhoe,

I am in the same boat as yourself so to speak. I have contacted GBI and exchanged emails. They are in the States at the moment for the next few weeks.

I will be looking at doing their course in August and am only annoyed I didnt look into this earlier and I could have done the last course.

Anyhow, its all very interesting and the feedback from this forum is very positive regarding GBI so looking forward to starting.

Rgds,

Niall

[Oopsick]

Ivanhoe, no unfotunately, I do not know the accountant you are talking about. I use Company Solutions for my affairs.
I see you are very much into having things sorted and organized. Where did you the contracts from?

[whitt]

I use Company Solutions for my affairs.

Makes you think doesn't it.

[Ivanhoe]

Funny I have to answer questions in my own thread... If I naswer your's will you answer mine?
OK, I'll answer but indirectly: You have a file on your hard drive called "oopsick_clauses". I've got contracts - like S&P agreement in Word etc. from same person.
Did I answer your question?

[Dean@Massiveaction]

HiIvan. My only internet access at the moment is via PDA so too slow to be in PT regularly, but my comments here

1. What would be minimal/resonable option fee?

Ideally 5K plus, 10K is better

2. Would you charge same lease as rent should be or higher?

This indicates you don't realy understand the lease option strategy. On a 200K property your weekly income should be TA LEAST $400 a week, more if possible. 10% return is absolute minimum.

3. What will be weekly ongoing option fee??

That's up to you depending on what they can afford to pay. If paying $400 a week I would make their rent credit no more than $50.

4. Will you offer incentives like matching option fee dollar-to-dollar when option exercised or else?

No this is not a charity You are offering someone the opportunity to get into their own home.

5. Base price - any particular %% above current market price? Why bother with "base fee or RV, whichever is higher" - not very fair for option holder or am I missing something?

Your initial sale price would normally be current RV. Final sale price RV when they are ready to settle.

6. GST - you claim GST and pay GST on sale price, but not on lease (by the way, is it rent or not after all?) What about option fee and ongoing option fee? Rates, insurance etc?

Talk to your accountnant. We now apply "Lundy" rules to lease options. Garth is the man in this area.

7. Finance - LO may be be out of bank's comfort zone I guess. Any problems with your structure (trading trust) being GST-registered? Will banks take lease+option payments into account as rent? How do you recycle equity?

You finance it like any other IP. Of course the banks take rent into account. You typically don't recycle your equity. This is a high cashflow strategy. You must ensure your debt on the property is less than the tenant buyers option amount.
I'm back on internet from friday. Email me if you'd like more detailed info. I can reply then

[Ivanhoe]

Dean, you are legend!
many thanks!

Lundy family trust and Behemoth Corp case:

http://www.nzherald.co.nz/organisation/story.cfm?o_id=89&ObjectID=10357632

[Cliffy]

I do it differently to Dean (but hey it's my game, I make my rules):

On a 200K property your weekly income should be TA LEAST $400 a week, more if possible. 10% return is absolute minimum.

I think minimum payment should be whatever will cover the minimum a bank will consider when calculating DSR, so your future purchasing is not limited. So more related to mortgage amount than purchase price.
e.g. 80% mortgage on $200K property @8% with 75% of rents used for DSR = $330pw. So maybe $350pw.

If you price it too high, you would limit your market. I find a lot of people enquiring don't have sufficient deposit so try to have a wider market - depends on your target market.

If paying $400 a week I would make their rent credit no more than $50.

I think this is bit stingy when market rent is $270. Depends on the profit in the deal.

Final sale price RV when they are ready to settle.

If doing this I suggest a ratchet clause so final purchase price can't be less if RV goes down.

We now apply "Lundy" rules to lease options. Garth is the man in this area.

Yes more info here: http://www.propertytalk.com/forum/showthread.php?t=5317

You typically don't recycle your equity.

This depends how you purchase. I currently use a lender that gives me 80% of RV straight way. If I didn't have this, I would either temporarily secure against other equity or use 20% deposit and re-finance out later.