I've got a few Nomad clients that have more down payment than they need to complete the traditional Nomad process. They're considering buying an additional lease option property to rent out and then sell to a tenant buyer.
There was an entry-level priced builder about to start a brand new subdivision and I wanted to put together a checklist for my clients (and other Nomads) to use as a starting point for evaluating a new lease option purchase.
The follow is my first pass attempt. I suspect, over time, I will revisit this page and update/enhance this checklist to make it better. Local Nomad clients in Northern Colorado can call me to discuss questions or anyone, including local clients, can post questions as comments below to get clarification.
So, here goes…
Evaluate Your Resources Checklist
Use this checklist to evaluate your personal resources, willingness and resolve for doing a lease option right now.
- Do you have the money to invest as down payment in this project right now?
- Do you have the money to invest in rent ready costs and capital expenses for this project right now?
- Do you have the knowledge and expertise or the time, energy and money to acquire the knowledge and expertise or the money to hire the expertise to complete a lease option right now?
- Do you have the time to search for and buy a home right now?
- Do you have the time to find and screen a tenant buyer right now?
- Do you have the time manage a lease option tenant buyer and your property over the next couple years?
- Are you ready to commit to being successful, taking responsibility for your results and seeking help from your dream team when needed?
See also Evaluate Your Resources Checklist for additional details.
Check Market Stats Checklist
- Months of Inventory
- Sales Volume
- Sold Price
- Days On Market
- Sold to List Price
- Rent Comparables
See also Check Market Stats Checklist for additional details.
Evaluate Subdivision Checklist
Use this checklist to determine if the subdivision itself would be a good area to invest in.
- Is the subdivision close to shopping?
- Is there an excessive number of other investors that will be advertising similar properties to yours with similar terms at the same time as you?
See also Evaluate Subdivision Checklist for additional details.
Evaluate Lot Checklist
Use the following to help determine if the lot is acceptable. This checklist is especially helpful if considering new construction and selecting a lot a large selection.
Possible Positive Attributes
- Does the lot side or back to open space?
- Is the lot close to a park?
- Is the lot close to a recreational body of water like a lake or canal that would be considered a plus?
- Does the lot have views?
Possible Negative Attributes
Having some negative attributes does not automatically make a lot unacceptable. Often we're making a tradeoffs… for example we might be willing to accept a lot with a north facing driveway to have it back to a park. That's an acceptable trade off for many clients.
- Is the lot near power lines or something similar?
- Does the lot have a north facing driveway?
- Is it a corner lot that will have pedestrian and car traffic on two sides? Some folks don't like that. Some prefer that to having a neighbor on that side.
- Is the lot located near the entrance or exit to the subdivision and will have higher than normal traffic going by it?
- Is the lot located at the end of a road where it will have lots of car headlights shining directly onit as they approach?
- Is the lot close to a property that is run down or is an eye sore that may adversely affect the value or desirability?
- Does the large have an odd shape that would make it less desirable?
- Does the lot have a very large backyard that you'll need to pay to landscape?
- Does the lot have a very small yard that would make it undesirable to some buyers?
For new construction you may want to print out a plot map and mark the lots with negatives with a minus sign for each negative and a plus for each positive. If you can eliminate it completedly put a big x through the lot to show that you wouldn't consider it at all.
See also Evaluate Lot Checklist for additional details.
Evaluate Capital Expense Costs Checklist
Are any of these major systems or components of the house nearing end of life such that you'll probably need to set aside and/or budget money to replace them soon.
Again, this does not automatically mean a property is not a good investment, but it is something to consider, know it is coming and evaluate it in your spreadsheet.
- Siding repair/replacement
- Driving repair/replacement
- Concrete/flatwork repair/replacement
- Air Conditioner
- Kitchen update/remodel
- Bathroom(s) update/remodel
- Exterior paint
- Interior paint
- Radon mitigation
- Mold mitigation
- Poorly done basement repair/remodel/tear out
See also Evaluate Capital Expense Costs Checklist for additional details.
Evaluate Rent Ready Costs Checklist
- Does the property require new flooring to get it occupied?
New Construction Rent Ready Costs
You may want to consider rolling these into the purchase so you can finance them instead of paying for them outside of closing. You will often pay a premium for the items, but having to come up with less cash beyond your (now slightly higher down payment with them rolled into the purchase) may prove to be worthwhile.
- Air Conditioning
- Garade Door Opener
- Window Blinds
See also Evaluate Rent Ready Costs Checklist for additional details.
Evaluate Cash on Cash Return On Investment Checklist
- Use the spreadsheet to evaluate the cash on cash return on investment for the property.
See also Evaluate Cash on Cash Return On Investment Checklist for additional details.
Evaluate Lease Option Profitability Checklist
- Use the spreadsheet to evaluate the lease option profitability for the property including cash flow, appreciation on the sale price and debt paydown.
- Is the ROI acceptable to you?
- Is the gross dollar amount acceptable to you?
See also Evaluate Lease Option Profitability Checklist for additional details.
Evaluate Seasonality Checklist
- Will you be closing on the property during a good or bad time to rent?
- Will you need to use an usual rental period to have the first lease end at a more optimal time?
- Especially with new construction, will you have enough time to market the property before you buy it?
See also Evaluate Seasonality Checklist for additional details.
Evaluate Comparables with Buyer's Eyes Checklist
Use this checklist to see if you're a buyer with a similar budget to buy the property you're considering what your other options are. If you're very familiar with the market, you may opt to skip this step.
- Ask me to pull a list of properties that buyers with a similar budget might also consider that are also for sale or recently under contract and not yet closed.
- Ask me to schedule an afternoon of showings to look at these properties to see what someone with that budget could buy as an alternative to your property that you'll be offering as lease option. Remember, that by offering a lease option, you are likely not competing directly with these properties that often require a buyer than can immediately get a loan or has cash to purchase the property without financing.
- Look on CraigsList to see what other Lease Option properties are available that your potential tenant buyers might be able to buy.
See also Evaluate Comparables with Buyer's Eyes Checklist for additional details.