Funding somebody's option fee for half the spread. What am I holding?
An operator I've met twice at a local meetup asked me for $15,000. He wants to take a lease option on a 4 bed in an inner-ring suburb, strike $295,000, 36 month option, $15,000 fee. His plan is to sublet it at above his lease payment for a while and then either exercise and refinance or sell the option to a retail buyer for whatever the spread is. He's offering me half of whatever the option produces, and my $15,000 back first.
The money would be coming out of my pocket and I'm still working out where it should go, so I'm treating this as a lesson either way. What I can see:
- his lease payment to the owner would be $1,750
- he thinks he can sublet at $2,300, so $550 a month before anything breaks
- he says similar houses have gone for $315,000 to $325,000, so he's projecting $20,000 to $30,000 on the option
- he has no money in it if I put up the fee
What I can't see, and this is most of it:
- What secures my $15,000. The option is an asset, but it's his asset, in his name. If he stops answering the phone, what do I actually own? He mentioned "we can put it in an LLC" like that answers it.
- Whether the owner's agreement even allows him to sublet or to assign the option. He hasn't shown me the draft. He said the owner is "cool about it."
- Whether me handing money to a guy for a share of profits on a deal I don't control is the kind of arrangement that has securities implications. That one I know needs a securities attorney and I'm not going to guess at it here.
- The exit assumes a retail buyer wants to pay $315k+ for a house they could just buy on the market. Why would they buy his option instead?
The piece that bothers me most is that his downside is zero and mine is $15,000. He loses time. I lose the fee. Nothing in what he's described changes that.
So the decision in front of me is whether there's a version of this I'd do, maybe funding it as a loan with the option collateralized and a much smaller upside share, or whether the right move is to pass and spend the next month reading option agreements until I understand what I was almost buying.