If you’ve done a lease option deal in the last 3 years, I bet you’re having the problem I’m about to share with you. More importantly, I’m going to show you how to solve that problem so you can still make some money on the deal.
So what is the problem I’m talking about? Well, let’s say in 2008 you did a lease option and gave the tenants the option to buy the house for $300,000. And that your option to buy from the seller was for $250,000 so you had a nice $50,000 spread.
However, when your tenants went to purchase the house, the appraisal came in at $260,000. They’ve been wonderful tenants, but obviously they can’t bring cash to the table and the most they can pay for the house is now $260,000.
This type of problem has been happening to almost every investor I know, myself included. When this happens, the last thing I would do is let the tenants walk away and just go to another house. (Unless they’re terrible tenants and you want to get rid of them).
Personally, most of the tenants I have are great and I never want to see them go.
That’s why when an appraisal comes in low I tell the tenant\buyers that I will do everything to work with them.
The first step is to go to the seller and start negotiating. Do not be afraid to do this. Most sellers will want to get rid of the property versus having you not exercise your option (because the tenants don’t exercise theirs.)
One of the things you need to find out is what is the balance on the mortgage? For the above example, if the sellers owe $300,000 on the mortgage, then the deal is probably not going to happen since it appraised for $260,000. (Most people don’t have $40,000 to bring to the table).
If the mortgage balance was $150,000 then there is plenty of equity to negotiate. Also, don’t forget to make sure and include a nice payday for yourself. Again, using the above example: If you originally planned to get a $50,000 spread, then maybe you won’t get that much, but at least try and get $30,000.
If the tenant\buyers are now going to buy the house for $260,000 then you can tell the seller that you will buy it from them for $230,000 (instead of the $250,000 from the original agreement).
All a seller can do is say “no”. And then you can just tell them the deal won’t work and many times they’ll quickly come back and want to do the deal.
You may have to go back and forth a few times, but don’t give up on the deal. I’ve had several tenants who were about to walk away from a property, but I was able to negotiate between everyone and close the deal and still make good money for myself.