Forums / Property Investing / Creative Investing / Lease options – increasing sale price for long option period

Viewing 13 posts - 1 through 13 (of 13 total)
  • Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    Hello,

    Does anyone have experience in setting up lease options with a long option period? What’s the longest period you would recommend? Is 5 years ok? I understand that the longer the period, the more likely there will be fluctuations in market value, so I guess the longer the period the higher the sale price would have to be.

    On a similar note, has anyone ever set one up with an agreed sale price that increases with time? For example, if the option is exercised within 2 years, the price is $240,000, if exercised within 3 years, $250,000, if exercised within 4 years, $260,000.

    Thanks in advance.

    Profile photo of JTJT
    Participant
    @johnthomas
    Join Date: 2015
    Post Count: 2

    Hi there,

    I have just put a Lease with Option together last week and its funny you ask if 5 years is ok, as the Option I have just completed was a 5 year Lease Option.

    Generally I would aim for a 2-3 year Option period although I find up to 5 years is still quite ok.

    As for setting up a lease Option with the purchase price increasing with the Option period you will find that this is quite achievable and could be completed in a number of ways.

    Profile photo of Property TraderProperty Trader
    Participant
    @property-trader
    Join Date: 2002
    Post Count: 111

    Hello JBC,

    in relation to a lease option and from my experience the following is worth considering:

    1. You really don’t make money until the lease options exercised and therefore I would go for a shorter period rather than longer period.

    2. The longer you have the lease option goes for the longer the management of the deal and your risk profile increases from the point of view of the ability of the person to exercise the lease option as they may lose their job etc. If a person can’t financial profile in order so that they can refinance and exercise the option within an 18 to 24 month period, then the problem is that they might not be able to re-finance and will have to rely on the growth in the property market for them to cash you out on the lease option.

    3. Also if you’re looking at a price manipulation of the lease option agreement, then the it is better from how the government and consumer groups interpreted it from my experience to reward somebody than to punish them. For illustration purposes only, set your price at $260,000, then offer a 10% discount if the option is exercised in the 1st year a 7.5% discount if the option is exercised in the 2nd year and a 5% discount if the option is exercised in the 3rd year and no further discounts after that time period.

    Happy property dealing,

    Jason Moore

    Property Trader | Boston West Pty Ltd
    http://bostonwest.com.au
    Email Me | Phone Me

    Private money lending opportunities available paying upto 12%, secured by bricks and mortar!

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    Thanks guys – both very helpful posts (I gave you thumbs ups too).

    To add to this, do you guys use any type of formula when working out what the relevant figures will be? My property is in a pretty low growth but high cashflow area. I was planning to price it at about 25% above its current value for a 3 year option (or a bit higher for 4 or 5 years). However this would still be a pretty reasonable price for the area I think. The option fees would be calculated so that they amount to a 20% deposit, spread over that option period. Therefore, if the purchaser exercises the option at the end of the option period, they have a full deposit ready to go. Is that all you guys do or are there other things I should be considering?

    Cheers,

    Jeremy.

    Profile photo of JTJT
    Participant
    @johnthomas
    Join Date: 2015
    Post Count: 2

    Hey Jeremy,

    Your very welcome and thanks for the thumbs up :)

    I think you will find there is no real hard and fast rule or formula when pricing a property. I believe a property is worth what someone is willing to pay. Having said this 25% above its current market value seems to be quite high (in my opinion), although if you think this is achievable then the only concerns that you may have is the valuation stacking up when your buyer obtains bank financing.
    As for your buyer building up a 20% deposit, this will defiantly make it easier for the buyer to obtain bank financing at the end of the option period.

    John

    Profile photo of Property TraderProperty Trader
    Participant
    @property-trader
    Join Date: 2002
    Post Count: 111

    JBC,

    That all sounds good in theory, however the real world I would see that you have a few problems with what you are proposing and I will poke holes in your thought process.

    Firstly, to mark out a property by 25% over its retail price point for three-year option is way too ambitious from my experience and I have seen people end up in court having to reimburse the buyers for selling properties way over the market. Case in point, I heard through the traps that a guy and his brother who had a property in Regents Park on sold a property through a lease option that was worth $400,000 for $500,000 and it was rumoured that they did an out-of-court settlement for I think $60,000 as a buyer to come to court for unconscionable conduct.

    Secondly, as you have stated, the property is a low growth area, from my experience, the likelihood that 3 years that the person would be able to refinance out of the deal would be unlikely because it would not bank value up and therefore you might end up in court again based on the premise that the property deal was set to the failure in the 1st place and that the buyer never had a chance to purchase is property in the 1st place due to an over inflated price point setup at the start and by the general public opinion or if you are totally caught you be viewed as a scammer. There too many consumer action groups these days that would love to hang you out to dry based on the deal scenario that you are proposing. Also, in most cases you look at making money unless the person refinance is you out and therefore the likelihood of a person they do that is near non-existent based on the scenario that you propose.

    Thirdly, most people selling of these types of deals go in charging a premium price for a property is 5% – 10% from my experience. You need to purchase a property at a discount so that in the deal if you want to make say 20% margin then you need to purchase the property at 10% – 15% below the market and then charge 5% to 10% over the market. That is how we use to run in when we did about 50 instalment contracts and rent buys back 10 years ago, however the difference was we would only on-sell the property for the maximum listed price in an area for the property specifications that will selling.

    Fourthly, from my experience finding people who have a 20% deposit is yellow be extremely difficult for the following reasons. Most people live anywhere between $5,000-$10,000 to their name and if they have any more they will not really want to part with it and if the deal goes sour you don’t have to pay them back a large portion of their deposit/option fee. That hasn’t happened to me but it has happened to a lot of people who have taken quite large deposits in the lease option game. One thing you are forgetting, the person has a 20% deposit, they will go get a loan from a bank or worst-case scenario from the second-tier lender like the Liberty or Bluestone purchase ANY (not yours) property at fair market value.

    Your deal seems to be very one sided (all about you and what you want to get) and you really haven’t asked yourself what makes you deal appealing for a buyer to say yes to.

    It may seem a bit confronting one of said I’m just trying to help you. There is food for thought in relation to what you’re proposing, I hope it helps.

    Kind regards,

    Jason Moore

    Property Trader | Boston West Pty Ltd
    http://bostonwest.com.au
    Email Me | Phone Me

    Private money lending opportunities available paying upto 12%, secured by bricks and mortar!

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    @property-trader Jason thanks for your thoughts. I have heard time and again in relation to these structures that they have to be win-win deals and it’s about the people first and foremost. I’m not out to screw anyone over but this is going to be my first lease option deal so I probably do need to make some corrections as I go.

    When I said 25% over market value that was not really accurate. It’s 25% over what I think it’s currently worth but am planning some renos before putting anyone in it. Once the work’s done I don’t think the value will be too far from the proposed sale price. However, you make some good points and I will have it revalued after the work and will put careful consideration into the real value of it before setting a price. Also it’s a cheap area so I think it’s currently worth $200,000 but if I was to mark it at $250,000 after the work is done that 25% would only represent $50k. There are properties in the area at $300,000 or so and they’re not that much different from how mine will be after the work.

    I have already spoken to potential buyers who expressed interest in the setup because as they said they earn enough, but spend their money on holidays unless they have a rigid obligation to deposit the money somewhere else. I think there are people out there who these deals suit because it gives them the structure they need to save a deposit. It also gives them a house they can call their own three years before they have a deposit saved.

    But I really do appreciate your input and am glad to be confronted if my thought process needs adjustment. Much better to hear it from you than end up in court in a few years’ time!

    • This reply was modified 4 years, 6 months ago by Profile photo of JBC JBC.
    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi JBC

    Knowing Jason personally and knowing how long he’s been in the industry I’d suggest you take his advice to heart ;-)

    Back in 2003 when we started in Vendor Finance (VF), marking up a property by 20% over market price was the standard. How things have changed! Our standard way of pricing a VF sale these days is to do an auto-valuation on RP Data. The valuation then comes up with a low estimate, a high estimate and a mid point they call the estimated price. We now use the high estimate as our VF sell price. It’s a price we believe the various courts and tribunals you can end up in, won’t see as excessive. Don’t forget these institutions are ‘all about’ the consumer, as a purchase like this is possibly the biggest purchase your consumer may ever make.

    On another issue, we are now keeping away from Lease/Options (Rent To Buy’s) big time. Being a member of the FBAA’s (Finance Brokers Association of Australia), Vendor Finance Steering Committee, I am seeing just how various regulatory authorities (Fair Trading Dept’s), consumer groups and other important stake holders have really taken aim at residential Lease/Options. For example, have a read of the following article showing how the Financial Ombudsman Service are now involved in the over-sight of Lease/Options. CLICK HERE for the article. A recent VCAT ruling in Vic regarding a L/O cost the VF’er $45,000 and these types of rulings aren’t isolated (see the cases in WA).

    As vendor finance Instalment Contracts are regulated by the NCCP and seem to be quite acceptable to ‘the authorities’ we’re sticking with them. With this major push against L/O’s we have now given them away in our VF business. Your call of course.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    Thanks @pauldobson that’s very helpful. Sounds like some very serious developments regarding lease options so I will have a closer look at vendor finance. Do you buy/sell via VF yourself? It sounds like your organisation does a lot of advising in relation to it?

    Profile photo of Phil44Phil44
    Participant
    @phil44
    Join Date: 2003
    Post Count: 5

    Hi JBC,

    If it helps I posted a contract length calculator here.

    It relies on some broad and slightly outdated assumptions but it will show how critical growth is to contract length and to your margin. The ebook on that page has a whole chapter on contract length that deals with the optimistic assumptions your buyer will be making in relation to LMI, LVR, whether to ask for a carry back in advance, location restrictions, renovations, and the often promised and never delivered lump sum payments that your buyer might be expecting to make during their contract period.

    <moderator – delete advertising>

    Cheers,

    Phil

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi JBC

    Yes we’ve been running our vendor finance business since 2003 and went full time in 2009.It’s been a pretty lazy January ;-) but we’ll start marketing again at the beginning of Feb (have got 4 to sell).

    Vendor Finance has been fighting it’s ‘cowboy’ reputation for some time now but a combination of new legislation (the NCCP Act 2009) and last year being taken under the wing of the FBAA has certainly improved things. One of our businesses has been built to provide services and tools for vendor financiers so, yes, we do consult on vendor finance questions/issues regularly.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    @phil44 thanks, I’ll send you a PM now, would love a copy of the ebook.

    @pauldobson good on you for fighting the good fight for VF! I might get in touch with you soon, wouldn’t mind chatting to you about it at some point if you have time.

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Happy to chat.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

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