The co-operative strategy is like a Sandwich Lease Option, but we ASSIGN the deal for a fee instead of being a Master Tenant-Buyer (Sandwich)
It is the easiest and quickest for the beginner to start with.
With this strategy,
- you are not making yourself liable for any payments to the seller;
- you also don't have to put down any large sums of money for option consideration.
- you can put down one dollar of option consideration. Some states require more. This is something you can check on with your local real estate group or real estate board.
The co-operative is used when the seller may not want to give over total control of his/her property.
The seller wants some say as to who goes into the property. The seller
may also want some of the assignment fee, which is why we put down one
dollar. Once we assign the contract to a tenant/buyer, then
the seller receives half of the assignment fee, and we receive the
remaining half, or whatever monetary distribution we have decided on.
In a co-operative,
- we set the strike price (contract selling price) at or a bit above market.
- We try to structure the rent to obtain positive cash flow.
- We also adjust the property price to reflect the amount of rent credit we want.
- For example, if we want to offer $500 per month rent credit, that equals $6,000 at the end of the first year.
- We will suggest raising the price of the house by the same amount.
Therefore, if the house had a price of $110,000, we would make the price $116,000.
- This is a selling point, the rent credit is
not costing the seller any money out of pocket. Be sure that the market
in your area will allow you to adjust the price in this fashion.
In addition, by structuring the rent to yield positive cash flow, you are also making the seller money; another sales point.
- Also,
remember this can also be an additional income stream for you, if
during your initial negotiations with the seller you negotiate for a
portion of the positive cash flow.
- Remember, this is one of the options we give sellers when working with us.
Always remember your goal is to get the
property under contract and assign the contract to a qualified
tenant-buyer. By making it more attractive to the seller, your job
becomes easier. When you assign the contract, with the seller's
approval, you will collect an assignment fee.
- This
assignment fee is typically applied to the purchase price, if there is
enough equity in the property to cover it. If not, the strike price of
the house can be raised.
- Please note, however, do not
raise the price more than 5% or so over market, otherwise you are doing
a disservice to the tenant-buyer. Remember, this should be a win- win
situation for everyone.
The co-operative strategy can be utilized for all types of property:
- single family;
- mobile homes,
- townhouses,
- condos.
It also works well with sellers who
- are semi-motivated;
- with investors who have rental property and
- for those sellers not in a rush to move their property.
We explain to the seller this is how we work
with you. You (the seller) receive the positive cash flow and we keep
the assignment fee.
If they do need some money up front, which they usually have told you already in the interview, we then say;
- “we will split the assignment fee, and we will split the positive cash flow”.
There are three ways we work with sellers:
1) The seller receives the positive cash flow and we get the assignment fee;
2) We split the cash flow and the assignment fee; or
3)
The seller pays us a $500 to $1000 non- refundable consultation fee,
and they receive all the positive cash flow and we split the assignment
fee.
We explain the third option by telling the seller, since
we will have time and effort into the property and you want to keep all
the positive cash flow and you want half of the assignment fee, we want
to be compensated for our time, knowledge and energy we will have put
into the property. We will credit it to the assignment fee when we assign the property. This is for our protection.
Since
we are making less profit, with the same risk, we want to be sure our
expenses are covered in case the property doesn't move or the seller
turns out to be unreasonable.
