lease option question

I really couldn't let that one go!

What documents if any added to the lease option agreement would be needed to complete a lease option where the owner stays in the house until a buyer is found?

We have a lease option property. The rent is stated in one contract and the option to buy is a separate purchase contract. The house price has been set at $ 78,850 and the option consideration was $ 5,520. The monthly rent was set at $ 800 and the agreement indicates that any payment over and above the base rent will be applied to the Balance of the Purchase Option. Everything seems to be going well.

Do I need to keep in the bank the option consideration, or is that money available for me to use in other real estate activities? Does this depend on the State? If so, can anyone let me know if Florida requires the option consideration to be held in deposit, or can it be used?

As long as you have the contract set up so that the option fee goes to you as your fee, you can use the money however you want.

Karen

When signing up a seller on a L/O are you getting the loan information and paying the mortgage holder directly as well as the taxes or are you paying the seller the lease amount?

The most common way is that the seller is getting the pmt and then paying the mortgage. The seller is responsible for the taxes. The majority of the time those are built into his mortgage payment so the mortgage company will actually be paying them.

You can also have the seller sign an Authorization to Release Information form that will be sent to the mortgage company authorizing them to release information regarding the loan to you. That way you can ck to make sure the pmts are being made.

If you feel that the seller may be on shaky ground as far as their finances you can make the contract so that pmts go through an escrow company.

Thanks Karen. That is what I thought and I can see that if you are helping someone out of pre-foreclosure that you might want to put the payments through an escrow company to ensure the mortgage is being paid.

These threads on L/O have been very helpful. I too appreciate the superstars continuing to help all us newbies. I know we ask some of the same questions over and over-but you experienced investors patiently answer us. Thanks for remembering what it is like to be new and fearful.

Hi all,

First off, thanks for all of the great tips on Lease Options. This is the area I want to focus on for my area. I do have a few questions though. If someone has some financial troubles from the past, but if they are upfront with me about it, and have the cash to put down, I would be ok with that. However, I know that it may take some time for them to qualify for a new mortgage (5-7years?). Also, with the new financial reform, does this create any new issues with Lease Options?

Basically, if I have a tenant buyer pay $5000 up front for the option, and an extra $416/month (36months), for a total 'down payment' of $20K on a $100K property, how can I help to ensure that they will be able to qualify? I know that I can show on time payments, and that banks may consider it a refi, but I would like to set up the contract that if they ARE serious about buying and fulfill the terms of the lease, that its just signing paperwork, and they wouldn't have to come up with more down payment monies/closing costs.

I've heard giving tenant/buyers a rental credit towards the purchase can be considered an equitable interest and can become a legal problem if things fall apart. What are your thoughts? Are rental credits a good or bad idea?

Thanks

Dave

A dispute regarding equitable interest can arise with or without rent credits. It is my opinion that there would be more of a problem with the T/B taking care of the maintenance, because that is something a Buyer typically does. But
I don't have a law degree, so it is just my opinion.

An informative post....
http://www.reiclub.com/articles/lease-options-equitable-interest

WOW! Thanks for all of the great wisdom that you are all sharing. I have a question that I have not come across on the threads yet.

My question is, if I am doing a lease option purchase and then finding a tenant buyer, do I negotiate a specific date in which i need to exercise my option to purchase from the seller? And what can I do if my tenant buyer is not able to purchase the home by the date I have negotiated with the seller?

Hopefully my question makes sense. Thanks!

Justin

Since you don't have any information on your bio, it makes it more difficult to help you because we have no clue as to where you are.

It is a good idea to have a mortgage person who is on your team. That way, you can have them look at your T/Bs app to give an opinion as to how long it will take for them to be able to qualify.

You will definitely not be doing your T/B a favor if you have taken a nonrefundable option fee and the extra monthly pmt (which also, is usually nonrefundable) and then they are not able to qualify. You want to make it a win for everyone. If it can't be, no matter how much you want to help them, don't do it!

I do rent credits. I use them as a "seller concession" that goes toward closing costs.

Again,you make no reference to them or anything else regarding the Option to Purchase in the Rental Agreement. Only in the O to P contract. By offering rental credits, it makes a L/O even more lucrative to the T/B. The rent on a L/O is often a little higher than a straight rental, too.

Yes, you need to negotiate a time line with the seller.

First, you will negotiate how long the Seller will give you to find a T/B. (I usually go for three months). Terms will vary as to whether you are doing a sandwich lease or co-op. (I only do co-op-less risk). If doing sandwich, negotiate that your first pmt will not be due until you find a T/B.

Negotiate the length of time that you think it will take to get credit reestablished, etc. (usually 24-36 months). If the T/B cannot purchase by that date, you can ask the seller for an extension, but if he does not agree to that, the T/B will have to vacate and forfeit any monies paid to that point.

If you do offer rent credits, tie them to prompt payment for the rent. in other words if the payment is due on the first, if they don't pay the rent on the first, they lose the rent credit for that month. it gives them an incentive to pay on time.

I totally agree.

Can you consider "Rent Credit"? Let's say you use the area rent is $1k, and the payment they give you is $1,500 every month. Can you count the entire payment they give you as rent credit, or just the extra amount over what your payment to the seller is?

Rent credit is what ever the seller wants it to be. All or part it is up to negotiation.

If the seller is giving credit of 50% of the payment as rent credit the other 50% is rent or the seller profit that month. It is entirely up the the terms needed to make or break the deal.

Brian

Thanks for your help Kathy! Where can I find more info on co-op's? Wendy Patton's book?

Thanks again!

Justin

Brian is correct in the fact that it can be whatever you negotiate BUT you need to keep some things in mind in the negotiating. You cannot offer more rent credits that will put the seller in a negative situation at closing.

Just a loose example: You sell the house @ $105K. Seller owes $100K @ closing. Your Option Fee was $4K and rent credits were $3K. Now you are in a negative situation where the seller has to bring not only his closing costs to the table but another $2K. (Keep in mind I just made up some numbers here to illustrate my above statement)

Also, it needs to be a little realistic to the mortgage company when T/B go to get financing. Every mortgage company does not know how to do L/Os. Usually, they will not want to credit much more of the pmt as rent credits than what they have paid over and above (or fairly close to) regular rents for the area.

I offer 20% and raise the monthly rent a little higher than regular rents for the area.

Check out this thread for more info: http://www.deangraziosi.com/real-estate-forums/everything-else/71370/lea...

You are welcome for the help, but my name is Karen.

Hi everybody Justin, you can find more information from Joe McCall just Google him. He is a great system that I've been using it works for me, good luck

I use rent credits to help get the seller on board. I explained to the seller by giving $100 rent credit every month and only the payments on time, this is an incentive for the buyer to pay his payments on time also helps save money for the down payment or closing costs. Since the object here is to get the buyer to purchase the house.

Reuben

I appreciate your willingness to share your knowledge, despite my clumsy attempt at your name! Thank you again for you help, Karen.

Justin

ok, with all that said....i understood a Sandwich L/O meant you got to keep a portion of the monthly rent the T/B was paying as 'monthly cash flow'....if that's true how is there anything left over in the monthly payment the T/B is paying to use as 'credit towards his purchase' and will he be paying enough to pay the current owners mortgage payment? As well as you kept the option $$ and then got a bigger payoff when the option was exercised.

am i totally confused?

Thanks,

Linda

Thanks, Karen. There's a $5k spread between your selling price and what the seller owes. You have $7k in non-refundable option consideration & rent credits, but the seller has his closing costs +$2k extra to bring? With the option consideration & credits of $7k, it brings the amount you owe down to $98k. I'm missing something here, but I can't put a finger on it.

My point being you have to be careful in working your numbers and the amount of credits you end up with. You need to make sure everyone is in a position that will work for them. A win-win-win.

In most any deal, the buyer and the seller both pay part of the closing costs. The rents credits count as credit toward the buyer's closing costs and will have to come out of the seller's part of the house. So if too large of credits are given, the buyer can end up in a negative situation were he will owe more on his mortgage than you owe to him for the house. This is not a good situation for the seller.

In this example, seller owes $100K on his mtg. You owe him $98K. So he has to come out of pocket the $2K to the mortg co + his closing costs + the amount that is credited for the buyers closing costs in the form of rent credits. You might be putting him (seller) into a bad situation.

He is trusting you, too, as the expert, so just be careful not to get him into a jam, either.

Karen

This can all get very confusing-especially at first. That is why I recommend just doing co-op L/Os until you get a real handle on it all. It is simpler and less risk of screwing something up in your numbers. (meaning simply, less risk) Then, once you get that down, you can expand into sandwich deals if the numbers work.

Sandwich L/Os will not always work with your numbers, so you have to know what you are doing first.

Another big thing with sandwich L/Os-if the T/B quits making the monthly pmts, you could be responsible for them. In a co-op, you aren't.

I'm doing more research on the co-ops.

Great stuff.

Take care.

Linda

When writing up the Lease Option Agreement with the homeowner, how can I guarantee the tenant/buyer that the mortgage is being paid each month, and will not go into default. Even though I have a signed "Release of Information" from the homeowner, the lender just gives me the current balance and monthly amount due. Will I have to contact the lender every month?

Thanks everyone!
SuzyB