When a Flip Flops, Investor
Look to a Lease-Option Plan

By JANE HODGES
January 18, 2007

The Investors: Randy Bither, a schoolteacher, and his wife, Karla, a landscape designer and mortgage loan officer, both from Beaverton, Ore., decided to invest in real estate to help finance their plans to move to the countryside. They considered buying fixer-uppers and renovating them, but realized they didn't have the time or finances required. After talking to other investors and a real-estate agent, they decided to buy a newly constructed home and try to flip it for a higher price.

The property: The 1,450-square-foot bungalow is located in Beaverton, Ore., a suburb of Portland, Ore., and home to many tech companies. The property was built in a Northwest style with Hardiplank siding and a front porch. The house has three bedrooms, two and one-half bathrooms, a living-room fireplace and a single-car garage. The top floor is carpeted and the ground level has bamboo floors.

Purchase price: $241,000 in July 2006

Additional investment: $2,000 (included in the purchase price). The Bithers paid $2,000 more than the home's original price to the builder to get a better grade of kitchen counters and cabinetry and for bamboo flooring throughout the ground floor, Mr. Bither says. His wife tiled the fireplace herself to give the living room more character.

The strategy: Assuming they would sell the home shortly after it was built for 15% to 20% more than they paid, the couple took out a loan with no money down, Mr. Bither says. The 80/20 loan -- in which 20% of the mortgage has a double-digit interest rate and the remaining 80% carries regular market rates in the 6.85% range -- makes the mortgage expensive, close to $2,000 a month, he says. Since they assumed they'd sell the home quickly, they weren't concerned about carrying the pricey loan, he says. But because the house isn't selling, they are hoping to find a renter to purchase the home through a lease-option deal to help offset the high mortgage and guarantee a buyer.

The pitfalls: The slowing housing market, the high-interest loan, and a plethora of other investor owners in the development have stymied his deal, Mr. Bither says. After he made the purchase, the market shifted to favor buyers, he says. At least three other houses in his development were purchased by investors with similar strategies, he says. Two are listed for sale by agents, and the other is, like his home, listed as for-sale-by-owner, he says. Had he and his wife anticipated holding the property, they would have considered something other than the high-interest loan they acquired. A lower-interest loan may have allowed them to rent the house out at market rates and earn about $300 a month in cash flow, he says.

The transaction: He and his wife have listed the home for sale by owner for $250,000, Mr. Bither says. If the buyer has a real-estate agent, the agent's 3% commission of $7,500 (if the home sells for its asking price), will negate any profit, he says. The couple is also offering the property through a lease-option plan, hoping to find a renter who wants to buy the home at the end of 12 months. As part of the deal, the renter would put down $5,000, pay $1,685 per month in rent and have the option to purchase the home for $262,500, or for 5% more than the home's current listing price. If a renter puts down $10,000, he or she could rent for $1,266 a month and buy on the same price terms. "Whichever option comes first and can stop the bleeding, we'll take," Mr. Bither says.

Write to Jane Hodges at rjeditor@dowjones.com