A Lease-Option Flop, Now a Shortie

Posted by Dave Fratello on Tuesday, August 17th, 2010 at 4:26am.

There seemed to be something odd going on with 217 Seaview (3br/2ba, 1400 sq. ft.), even back when it first hit the MBC radar back in August 2007.

The sellers had trouble drawing interest in the then-recently rebuilt/remodeled home at $1.5m+ from regular buyers throughout 2005-06, so they tried to expand the pool in 2007 with what MBC called "The Lease-Option Gambit."

They succeeded in finding someone to take the keys back in '07, rather soon after MBC's story – about 3 years ago now – though it's murky whether they were renters or "buyers." All we're sure of is that the property didn't formally change hands then, even though a "sale" was recorded on the MLS in Sept. 2007.

In May 2009, 19 months later, the same sellers were back trying again on the open market. It's been offered pretty much constantly for 15 months since, often with seller financing offered.

It's worth noting here that lease-options and seller financing are both tactics that have superficial appeal for buyers, but those sweeteners may also be hallmarks of a hail-mary attempt by sellers to get their price, market value notwithstanding.

Since acquiring the home as a major-fixer duplex in late 2004 for $945k, the current owners have asked $1.3m-$1.6m after totally rebuilding it as an SFR. (Higher asking initially, lower recently.)

On Friday, after almost 5 years of on-and-off attempts to sell, 217 Seaview hit the market for $849k as a short sale, fully $476k (-36%) below its last asking price.

Let's quickly review some of the list price history, starting with the last sale in 2004:
  • Nov. 2004: $ 945k (sold)
  • July 2005: $1.495m, as remodel/rebuild got under way
  • Oct. 2005: $1,502,500, as remodel neared completion
  • Jan. 2006: $1.595m, remodel complete
  • Nov. 2006: listing canceled
  • Aug. 2007: $1.520m with lease option; "sold"
  • May 2009: $1,312,500 after the lease-option "buyers" skipped
  • Nov. 2009: $1.325m
  • Aug. 2010: $ 849k, short sale, as-is
That's right, the current offering price is a rewind of 10% beyond the Nov. 2004 acquisition price – before considering any of the very substantial rebuild/remodeling costs.

Not a happy story for the sellers.

But good news, in a way, for buyers who avoided the El Porto Norte home until now, during all that time when it was plainly overpriced.

Now it's competitive at $849k. There's some risk that price could be just a come-on, since the short sale has to go to the lender for approval. But clearly, in its newest incarnation, this listing is one to watch.

Two quick tangents, in closing...


Old house, current listing pic
Listing pics: The photo up at the top is a new cell phone snapshot courtesy of MBC's author. It's not from the listing.

That was needed because, for the first few days, anyway, the actual listing has had only this pic (right) from the previous version of the home, circa 2003-04. Wait, are those cassette tapes stacked by the fireplace? Maybe it's 1984.

Looking back at the lease-option terms. The "lease-option" tactic did appear to nab a "buyer" fairly quickly back in 2007. And the MLS still has an entry showing a full-price "sale" of $1.520m back in Sept. 2007. (You can see it on Redfin's property display page.) But since the property never changed hands, that "sale" can't be accurate.

Consider what might have drawn in "buyers" 3 years ago. The attraction of a lease-option is that a buyer doesn't need to step up with the whole down payment in hand; you may negotiate a period of time to gather up the necessary 5, 10 or 20% while you're in the house. Meanwhile, it's "rent to own."
The specific terms detailed in the listing, reported in our Aug. 2007 post were:
  • agree to purchase price of $1.52m;
  • $17k down;
  • rent at $5,300/mo.;
  • $530/mo. (10%) credited toward down payment; and
  • 12-18 months before option to purchase kicks in.
As MBC observed back then, if you took the full 18 months with the $17k deposit and credit of $530/mo. toward your down payment, you'd have about 1.5% down when the option needed to be exercised. So you'd better be getting the rest of the money from somewhere else, and quick.

Alas, the house certainly wasn't worth $1.5m by early 2009 – if it ever was – so shirking that contract would have made sense. 
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