Hello everyone!,
I’m about to invest in property and I think I am going to start in the deep end initially: using Wraps and Lease-Optioning to source positive cashflow deals. I am curious as to whether you can use a First home buyer’s grant as an incentive to entice tenants to lease-option, and also whether it is possible to redraw on accumulated equity during the contract term since the title is not yet transferred until the call option is exercised. Also are there any experienced lease-option investors out there who have found a particular demographic to be favorable over another? and which states must attach rates and other maintenance costs to the rental as opposed to allowing the tenant to pay for them separately from the rental you charge. Also could anyone inform me what the usual mark-up on rental rates usually is for a mid to high income earner tenant? or is that too subjective a question? …your input on these questions or any other additional info about Wraps, Flips or Lease-otions would be invaluable to me and greatly appreciated!
kind regards
Yidn_shalom24
Hi Yidn
1. The FHOG cannot be utilised in any state of OZ when using a lease/option.
2. As long as you have the correct mortgage facility, yes it is possible to redraw the accumulated equity after you have entered into a lease/option agreement.
3. I’m sure someone will correct me if I’m wrong but I believe all States residential tenacy laws insist that the landlord is liable for all “upkeep” of the property, i.e. rates, insurance, maintenace,etc. To be in contravention of these residential tenancy laws can carry substantial penalties.Good luck.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Paul is correct with regards to Qlds residential tennacy laws.
This is the reason in Qld you would not use a Lease Option which falls under RTA but a License to Occupy where variations can be made.
Cheers Richard
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I am pretty sure there are all kinds of tricks or loops that will enable you to make the tenant responsible for all the repairs/maintenance of the property.
But really, even if you use the standard tenancy agreement to stay out of trouble with the law, but outside the agreement make it the responsibility of the ‘option holder’ instead of the tenant for the upkeep of the property, I still think that you, the owner, remains (and so you should be) responsible for the upkeep of YOUR property.
E.g. the roof needs repairing and before the tenant gets around to it, it blows off, and oh btw the tenant also didn’t get around to paying insurance. What a mess!Isn’t that why the tenant (who remains a tenant and not just an option holder) is paying rent- to not have to worry about things like maintenance? Am I missing something?[blink]
I just don’t see the win/win here: tenant pays a premium plus extra credits on top of the rent every week, all of which you can keep if the tenant is not able to exercise the option on the expiry date; the tenant, even though he/she’s paying rent plus weekly credits is responsible for the maintenance, rates etc; you (not the tenant) can draw out the tenant’s equity to use as you please while the tenant does not have a guarantee that the equity still exists on the expiry date. [ohno]
Would you inform the tenant/option holder that you are planning to use his/her equity before any agreements are signed?
Celivia
Hi Celivia,
I just read your post with great interest as i am considering the pros and cons of Lease Option strategy.
I have also read that it is possible to attach specific conditions to the “Options” contract as oppossed to the “lease” contract.
I am however a little confused with the issue you raise about using the “tenants equity”.
As far as I understand it you own the property, and therefor any equity in the property until the time the tenant decides to exercise and purchase the property. I understand that the tenant is only that, a tenant, until the day they decide that they do want to buy the property and purchase.
That being the case I dont understand how you are drawing out the tenants equity??
I am a complete novice, so if I am way off track please let me know. Its a steep learning curve.
Cheers,
batts
you are correct, any equity available in the property belongs to the home owner until such time that the tenant/buyers exercise their rights to buy. The seller of the property has the right to use equity and claim depreciation before the option has been exercised and the propery according to tax laws is treated as a rental property.Equity in a house is not available for use if the tenant/buyers have placed a caveat on the property to protect their interest.
hope this helps
Xenia
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phone 0412 437 582Thankyou everyone for you comments!
In response to Celivia’s doubting the win-win nature of the lease-optioning strategy I propose to undertake, I respond by saying that I would discourage any client to be entering an agreement they do not understand fully, and which does not benefit them after I have disclosed my profit intentions, the reasons for the risk-management nature of the rental mark-up, and the great benefits they will ascertain from the deal; namely the capped sale price held under the call option, regardless of capital appreciation over the term of the option. And regarding redrawing equity- that will be under my title and will be refinanced under my mortgage I assume, & not the title that is transferred after a presupposed call option is exercised. I think this will thereby not affect the worth of their property if they wish to transfer title after my redraws. Furthermore, their greatest *WIN* is that they have found a property which is not merely a transitional premisis to rent out, but a place they ultimately will like to buy and live in permanently for whatever reason, aesthetically appealing; cannot be financed under conventional means, age etc.; I am hoping to negotiate a balanced outcome for the client by fully dislosing my intentions in regards to the benefits I am seeking as an investor; namely the ability to duplicate my property investments through redraws of equity within the property I still have under my title, and to increase my DSR for this purpose through the rental mark-up, all in exchange for an affordable and desirable property they may own at their leisure and at an affordable rental level that they would otherswise be unable to own under conventional means. BTW, I thankyou for your pertinent questions Celivia, Dr X , Paul and Richard, you have been most helpful!
thankyou
Yidn
Hi All
Just a quick comment on the idea of writing maintenance, etc responsibilities into the option document, in an effort to try to get around a landlords responsibilities under the Residential Tenancies Act.
I too had this idea. However when I put this idea to arguably the most experienced vendor finance lawyer in Australia (in NSW) he let me know very clearly that a court would most likely judge these actions as an attempt to avoid the provisions of the Residential Tenancies Act and that the penalties for these actions can be substantial.
As I mentioned previously, just estimate your maintenance, rates and insurance costs per week and add it to the rent. It not perfect but it is legal
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
thanks for your advice paul, greatly appreciated
regardsyidn
Batts, I think I am more of a novice than you are, and I am confused, too, when it comes to lease-options.
I am asking questions because I am mainly puzzled about the ambiguity/ethicality of using a lease option.
What I mean, for example, is:
How can the option seller (writer) say:
“The tenant should be made responsible for maintenance, rates and insurance etc because this property may be in his possession (one day)”, while on the other hand the option seller can say: “The title is still in MY name, so I can draw the equity, claim depreciation.” (Even on improvements the tenants might have made and paid for???)Dr X, I am glad that the tenants at least can protect themselves by placing a caveat on the property. I think they will be able to sleep better!
You actually brought up one of my other concerns in your other post about lease-optioning in a down market. Saves me a question on here)Yidn Shalom,
You said:”…all in exchange for an affordable and desirable property they may own at their leisure…”
My concern was about the word “may”.
If the option buyers are not able to own a property under conventional means, doesn’t that mean that the risk for the option buyer is big- e.g. how do you make sure they are taking a managable risk. If you are not a financial advisor, would you have to arrange to sit down with the option buyer and a financial adviser to look at the risk-rate?Paul,
Thanks for the very useful info on the idea of: “…writing maintenance, etc responsibilities into the option document, in an effort to try to get around a landlords responsibilities under the Residential Tenancies Act…”you said: “…just estimate your maintenance, rates and insurance costs per week and add it to the rent. It not perfect but it is legal
“I agree; it is not perfect!
I am aware that I sound like a lease-option rookie, but I am still struggling to understand the ethicality and ambiguity of using either wrapping or lease-optioning as investment tools.
Celivia
Celivia, thanks for asking;
Yes it does mean the risk is larger than usual for the option *buyer*…..but that risk is manageable to the extent that you both work meticulously with them to make it both affordable, sop they don’t rescind on the option early, and a very real possibility that they will one day own the property they intend to purchase at a later date from you. This is not a widely used strategy and is thereby very under-regulated which from an investors’ standpoint is favourable, but I do think you bring up a great point about the risk managability of the whole thing. It concerns me also
kind regards, Yidn
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