how to set up escrow for lease options

I had this taught about this exact question last night before I went to sleep. I can't wait to here someone answer this.
I know you don't want to pay the owner and sit there and hope their are still paying the mortgage; so it must be done by a outside party or you I would think. Right?
Stan

I would like to know the answer as well...I haven't found much while researching, although it is probably here on this site, somewhere.

Brian: I was told you definitely need to open an Escrow Account and they pay the mortgage. You do not want the homeowner any where near that money!

Andrew

The Title company should establish the account and the owner gets paid through the Escrow account. That way the mortgage still gets paid and there is no doubting anyone in the transaction. I just had this conversation with the Success Academy today. I am trying to set up an Owner Finance Option with a potential 2 Family Home that is being sold FSBO that will cash flow nicely. I asked this exact question and they stated that the escrow is set up, the title is in your name with them (original owner) having a lien on the note (in case you default or stop paying)and any difference between what they pay for the mortgage and what your agreed upon monthly payment is, will be routed directly to them. Win - Win (in the FSBO case)
-Marc

I posted this comment a couple months ago and have done several lease options since then.It wasnt easy to start this business since i jumped in with absolutely no knowledge at all,i didnt even really know what a mortgage was at first and was flat broke literately.If you are new to investing and havnt figured out how to set up an escrow account its simple,alot simpler than i thought originally.Just tell your escrow agent that you need to set up a direct payment account to the mortgage holder.I have had to reinstate several loans in default using escrow accounts.Its costs more than finding a deal advertised as a rental but the owners are easy to work with when their going to lose the house.I also figured out how to do lease options on homes underwater since i live in california where everyone is underwater i crafted my own system for lease options that work in my market.Lease options are pretty simple and i think everyone starting with no money and no credit should start with them.So go make it happen!!

I like lease options too. Was wondering how are you leasing to tenant/buyer giving them an option to buy when the property is upside down. Chances are it is not going to be worth what is owed on the property when they exercise their option. How are you making it work?

Cathyb

I CALL THIS MY SUPERMAN STRATEGY,YOU'LL SEE HOW I CUSTOMIZED THE LEASE OPTION STRATEGY FOR MY UNDERWATER MARKET. YOU CAN BE CREATIVE WITH YOUR CONTRACTS AND MARKETING METHODS,ONCE YOU UNDERSTAND HOW TO STRUCTURE THE DEALS,FIND THE SELLERS WHICH IS EASY AND BUILD YOUR BUYERS LIST WHICH IS ALSO EASY,YOU'LL SEE HOW EVERYTHING PULLS TOGETHER.

USING DEANS MARKETING METHODS LIKE ROAD SIGNS BECAUSE THOSE HAVE WORKED THE BEST FOR ME,ALSO USE CRAIGSLIST,FLIERS AND PUT ADS IN YOUR LOCAL PAPER. START BUILDING YOUR BUYERS LIST,BUT UNLIKE THE GREG MURPHY STORY IN THE BOOK DONT LOOK FOR TENANT BUYERS THAT ONLY HAVE 2-5,000 DOLLARS TO PUT DOWN,I'VE BEEN FINDING BUYERS WITH 10,000-25,000 DOLLARS TO PUT DOWN ON A LEASE OPTION.IN CALIFORNIA WE NEED ALOT MORE MONEY FOR LEASE OPTIONS AND PEOPLE WHO ARE RENTING THAT HAVE MONEY AND BAD CREDIT WILL JUMP ON THESE DEALS AND THEIR IS ALOT OF PEOPLE IN THIS CATEGORY.

LOOK IN THE LEGAL SECTION OF YOUR LOCAL PAPER FOR NOTICE OF DEFAULTS,THE PERSON IN DEFAULT'S NAME WILL BE IN THE PAPER,LOOK THEM UP IN YOUR PHONE BOOK,ALSO CALL ANY FOR RENT ADS WHERE THE LANDLORD IS TRYING TO RENT THEIR HOME FOR ALOT MORE THAN OTHER RENTALS IN THE AREA,IF THEIR RENT IS ALOT HIGHER THAN OTHER HOMES IN THE AREA I'VE FOUND IT USUALLY MEANS THAT THEY HAVE AN ADJUSTABLE RATE MORTGAGE AND THEIR PAYMENTS RESET,USUALLY THEY'LL END UP IN FORECLOSURE BECAUSE NO ONE WANTS TO RENT A HOME FOR ALOT MORE THAN OTHERS IN THE AREA,BUT IF YOU GET THE HOME AND ADVERTISE IT AS A LEASE OPTION YOU CAN GET MORE FOR MONTHLY PAYMENTS.WHEN YOU GET A HOLD OF SOMEONE WHO'S IN PRE FORECLOSURE TELL THEM YOUR NAME AND THAT YOUR AN INVESTOR,THE REASON I SAY THAT IS THE FIRST LEASE OPTION SELLER I TALKED TO HUNG UP ON ME BECAUSE I SAID I WAS A REAL ESTATE SPECIALIST,I CALLED BACK RIGHT AWAY AND LEFT A MESSAGE SAYING I WAS AN INVESTOR AND WAS INTERESTED IN BUYING HER PROPERTY BEFORE THE AUCTION AND IF SHE WAS INTERESTED SHE COULD CALL ME BACK.ALMOST AS SOON AS I HUNG UP THE PHONE SHE CALLED ME.THAT WAS MY FIRST DEAL.SO TELL ANYONE YOU TALK TO YOUR AN INVESTOR BECAUSE THEY KNOW YOU CAN BUY HOUSES AND WORD OF MOUTH WILL SPREAD THAT YOU BUY HOUSES UNDERWATER OR IN PRE FORECLOSURE THAT CANT SELL,NOT VERY MANY PEOPLE KNOW HOW TO BUY A HOUSE UNDERWATER UNLESS THEY DO A SHORTSALE,THIS WILL SLIM YOUR COMPETITION DRASTICALLY.WHERE I LIVE I HAVN'T SEEN ANYONE ADVERTISING LEASE OPTIONS,SERIOUSLY NONE.
WHAT I DO IS GO LOOK AT THE PROPERTY AND SEE WHAT CONDITION ITS IN, USUALLY IF THERE ON THE MLS THEIR IN GOOD CONDITION,THEN I TELL THE SELLER HOW I DO LEASE OPTIONS TO HELP PEOPLE BUY AND SELL HOMES EVEN IF THEIR UNDERWATER AND I CAN MAKE THEIR PAYMENTS IF THEY AGREE TO SELL ME THEIR HOME FOR WHAT THEY OWE ON IT DOWN THE ROAD,BUT INSTEAD OF USING THE EXACT STRATEGY IN THE BOOK I NEGOTIATE WITH THEM FOR A 15 YEAR LEASE OPTION,THEN EXPLAIN THAT BECAUSE OF THE MARKET CONDITION THE ONLY WAY I CAN GUARANTEE THAT I CAN SELL THEIR HOME IS IF I HAVE ENOUGH TIME TO SELL THE HOME AND FOR THE MARKET TO RECOVER.THE OWNERS DONT CARE ABOUT THIS OR HOW LONG THEY GIVE YOU A LEASE BECAUSE YOUR MAKING THEIR PAYMENTS AND BUILDING THEIR CREDIT IN THE PROCESS, THIS GIVES YOU ROOM TO RELEASE THE HOME TO SOMEONE ELSE AND GET ANOTHER DOWN PAYMENT IF THE FIRST TENANT DOESNT WORK OUT,OR EVEN IF THE SECOND TENANT MOVES OUT AND THE MARKET VALUE OF THE HOME HAS GONE UP WHILE THE TENANTS HAVE BEEN PAYING DOWN THE MORTGAGE,YOU CAN FLIP THE HOME FOR ALOT MORE THAN THE PRICE YOU NEGOTIATED WITH YOUR TENANTS,I'LL TELL YOU HOW I NEGOTIATE LEASE OPTIONS THAT MAKE THE DEAL REALLY ATTRACTIVE TO ANY BUYER LOOKING FOR OWNER FINANCING.

I'LL USE AN EXAMPLE OF A DEAL I COMPLETED A COUPLE WEEKS AGO.
ON MY LIST OF PRE FORECLOSURES I GOT A 3BD/3BA HOME THAT WAS 2400+SQ FT ON 3 ACRES FROM A LADY NAMED DONNA
THE MARKET VALUE IS $210,000,DONNA OWES $309,000,i NEGOTIATED WITH HER (AND PUT THIS IN THE TERMS OF THE LEASE OPTION CONTRACT)THAT IN RETURN FOR ME TAKING OVER HER PAYMENTS AND STOPPING THE FORECLOSURE I CAN BUY THE HOME AT ANY POINT IN TIME IN THE NEXT 15 YEARS FOR THE BALANCE OF THE MORTGAGE.GETTING THE SELLER TO ACCEPT YOUR TERMS WHEN THEIR LESS THAN A MONTH AWAY FROM FORECLOSURE, SERIOUSLY IS THE EASIEST PART,BUT REMEMBER YOUR CONTRACTS HAVE TO BE NOTARIZED AND THEN YOU NEED TO RECORD THEM,I HAD A TRAVELING NOTARY IN MY AREA MEET ME AT THE PROPERTY AND NOTARIZE THE LEASE OPTION AND THE MEMORANDUM OF OPTION FOR $60.00.WHICH I DID WITH DONNA AND THEN WITH PERRY (THE TENANT) THE NEXT DAY.

KEEP IN MIND I ALREADY HAD A BUYER WHO WANTED THIS PROPERTY AND HAD THE DOWN PAYMENT,BUT EVEN IF HE DECIDED HE DIDNT WANT THAT HOUSE I STILL HAVE 11 PEOPLE ON MY BUYERS LIST.
DONNA WAS BEHIND 3 PAYMENTS PLUS A $1200 DOLLAR PENALTY FEE,THE MONTHLY PAYMENTS ARE $1400/MONTH,I TOLD HER TO GIVE ME AT THE MOST TWO WEEKS TO GET THINGS SET UP.
I ALREADY TOLD PERRY WHO IS THE TENANT NOW ,THAT IF I COULD GET HIM A LEASE OPTION ON THE HOME I WOULD GET BACK TO HIM ASAP AND HAD ALREADY TOLD HIM AND EVERYBODY ELSE ON MY BUYERS LIST BEFOREHAND THAT I TAKE CASH DOWN PAYMENTS AND IF HE WANTED THE HOUSE TO BRING CASH SO WE COULD SIGN AND NOTARIZE THE CONTRACTS RIGHT THERE AND THE HOUSE WAS HIS.MY LEASE IS 15 YEARS BUT HIS IS 5 YEARS,HE GAVE ME $16,000 FOR OPTION CONSIDERATION MONEY ,WHICH IS NON REFUNDABLE.WHEN YOU DO A DEAL USE AN ESCROW COMPANY TO SEND THE PAYMENTS TO THE MORTGAGE HOLDER ON THE PROPERTY,THE TITLE COMPANY I USE FOR PAYMENT PROCESSING CHARGES $38.00 A MONTH FOR MONTHLY PAYMENTS UNDER $2,000 AND $48.00 A MONTH FOR MONTHLY PAYMENTS OVER $2,000-$2,500.ON MY FIRST 4 DEALS I DID NOT USE AN ESCROW AGENT TO PROCESS MY PAYMENTS,THAT WAS A MISTAKE I CORRECTED AND NOW ALL MY PAYMENTS ARE SENT TO MY ESCROW AGENT FOR PROCESSING.SO I TOOK THE CASH I GOT FROM PERRY AND SET UP THE ESCROW ACCOUNT,THEN DEPOSITED $5,438 FOR THE LATE PAYMENTS AND PENALTY FEES, THAT MONEY WAS SENT TO BANK OF AMERICA(THE MORTGAGE HOLDER) TO REINSTATE THE LOAN AND STOP THE LOAN FROM BEING FORECLOSED.SO THE ESCROW COMPANY WILL SEND PERRY A PAYMENT COLLECTION NOTICE EVERY MONTH,KEEP IN MIND TO HAVE YOUR PAYMENTS FROM YOUR TENANTS COLLECTED 15-10 DAYS BEFORE THE PAYMENT TO THE MOTGAGE HOLDER HAS TO BE MADE,THIS WAY YOUR TENANTS CAN BE A COUPLE DAYS LATE IF NEED BE.TO DO THIS JUST TELL THE ESCROW AGENT THAT YOU NEED A DIRECT PAYMENT ACCOUNT, WHAT DAYS THE BANK PAYMENTS NEED TO BE MADE AND WHAT DAYS TO COLLECT THE TENANTS PAYMENT.SO ON THAT DEAL I MADE $10,500 AND SOME CHANGE.PERRY WILL BE PAYING $1800 EVERY MONTH TO MY ESCROW ACCOUNT,WHICH $1400 AND SOME CHANGE WILL GO TO BANK OF AMERICA ,$38.00 WILL GO TO THE ESCROW AGENT AND I'LL GET ROUGHLY $360 A MONTH CASHFLOW.KEEP IN MIND THAT i DIDNT FIND AN ESCROW AGENT RIGHT AWAY.I TALKED TO SEVERAL UNTIL I FOUND THE ONE I'M CURRENTLY USING TO PROCESS PAYMENTS FOR ME.

HOW I STRUCTURED THIS DEAL "I'LL USE ROUND NUMBERS"
YOU SEE (OBVIOUSLY) HOW THE HOME IS UPSIDE DOWN.MARKET VALUE IS AROUND $210,000 BUT THE MORTGAGE IS $309,000,SO THATS $99,000 UNDER.WHAT I'M GOING TO DO IS MAKE $30,000 IN 5 YEARS ON THIS HOME IF NOT I'LL SHOW YOU MY OTHER EXIT STRATEGIES,THE MORTGAGE BALANCE IS $309,000 SO I ADDED THE $30,000 THAT I WANT TO MAKE FOR PROFIT,AND THEN I ADDED PERRYS DOWN PAYMENT ON TOP OF THAT WHICH WAS $16,000.SO I TOLD HIM HIS PURCHASE PRICE IS $355,000.MINUS THE $16,000 DOWN PAYMENT = $339,000.NOW REMEMBER YOUR PURCHASE PRICE IS THE MORTGAGE BALANCE SO THAT LEAVES A $30,000 PROFIT SPREAD.I ALSO TOLD PERRY THAT $1400 A MONTH WHICH IS THE MORTGAGE PAYMENT WOULD BE CREDITED TOWARDS THE PURCHASE PRICE LEAVING ME THE CASHFLOW.SO AS PERRY PAYS THE MORTGAGE BALANCE DOWN WHICH IS MY PURCHASE PRICE, HIS PURCHASE PRICE WILL ALWAYS BE $30,000 MORE THAN MY PRICE.THIS WAY ANY TENANT YOU HAVE WILL REALIZE THEIR NOT THROWING THEIR MONEY AWAY AND ON THIS DEAL IN 5 YEARS PERRY WILL HAVE PAID DOWN THE MORTGAGE BY ABOUT $84,000 SO WHEN HE EXERCISES THE OPTION AND BUYS HE'LL PAY $255,000 AND I'LL PAY $225,000.THERES MY $30,000.NOW IF PERRY DOESNT BUY THE PROPERTY AND BY THEN THE MARKET VALUE HAS GONE UP ON THE HOME TO NORMAL AROUND $390,000 I'LL FLIP THE HOME IF WERE IN A GOOD MARKET AND MAKE $100,000 MAYBE MORE,IF WERE STILL IN A SHADY MARKET I'LL JUST RELEASE THE HOME TO SOMEONE ELSE AND GET ANOTHER DOWN PAYMENT AND CASHFLOW.I ALSO AGREED WITH PERRY THAT IF HE MAKES HIS PAYMENTS ON TIME FOR THE TERM OF THE LEASE I WILL EXTEND THE LEASE OPTION IF HE CANT QUALIFY FOR FINANCING IN 5 YEARS.
ALWAYS HAVE A BACKUP PLAN FOR THE PROPERTY'S YOUR WORKING WITH INCLUDING YOUR EXIT STRATEGIES, SAY IF THE FIRST TENANT MOVES OUT AND THE HOME NEEDS NEW CARPET AND SOME PAINT,YOU DONT WANT TO GIVE THE HOME BACK TO THE OWNER AND LET YOUR LEASE COLLAPSE,ESPECIALLY GIVING THEM BACK THE HOME IN BAD CONDITION,WHAT I'LL DO IS IS GET AN UPFRONT PAYMENT FROM A NEW TENANT AND USE SOME OF THAT MONEY FOR NEW CARPET AND PAINT.DONT LET YOUR LEASE COLLAPSE ON ANY HOME,BECAUSE WHEN YOU CONTROL A HOME YOU FORCE IT TO PAY YOU LEVERAGING OTHER PEOPLES MONEY,DESIRES AND NEEDS.

YOU CAN DO THIS ON ANY HOME THAT IS UNDERWATER EVEN IF THE MORTGAGE IS 50% MORE THAN THE MARKET VALUE.JUST GIVE YOUR TENANTS CREDIT TOWARDS THE PURCHASE PRICE,IF THE HOME IS DAYS UNDERWATER YOU'LL HAVE TO STRUCTURE A LONGER LEASE OPTION AND FIND SOMEONE WITH HORRIBLE CREDIT WHO NEEDS A LEASE OPTION THAT EXTENSIVE.

IF THE HOUSE IS COMPLETELY UNDERWATER WHICH ALL THE HOUSES I'VE DONE LEASE OPTIONS ON HAVE BEEN,YOU'LL JUST HAVE TO STRUCTURE THE DEAL ALOT DIFFERENTLY THAN DEAN DESCRIBES IN HIS BOOK.FIRST FIND THE MARKET VALUE,THEN HOW MUCH IS OWED ON THE HOME WHICH IN CALIFORNIA WILL PROBALBLY BE ALOT MORE THAN MARKET VALUE LIKE MY DEAL ABOVE.THEN ADD YOUR PROFIT TO THE MORTGAGE BALANCE AND THE TENANTS DOWN PAYMENT ON TOP OF THAT AND THATS YOUR TENANTS PURCHASE PRICE.THEN DEDUCT THE DOWN PAYMENT FROM THEIR PURCHASE PRICE.YOU CAN DO THIS ALL DAY LONG,IF THE HOME YOU GET IN PRE FORECLOSURE IS NEAR MARKET VALUE ADD $50,000 FOR PROFIT.THERES ALOT OF PEOPLE OUT THERE WHO HAVE MONEY AND GOOD JOBS BUT HAVE HORRIBLE CREDIT AND RENT HOMES.WHEN YOU ADVERTISE DEALS LIKE THIS THROUGH MARKETING YOU'LL PULL ALOT OF BUYERS WHO ARE SERIOUS ABOUT GETTING A LEASE TO OWN HOME WHO HAVE BEEN THROUGH BANKRUPTCY AND FORECLOSURE.

HERES AN EXAMPLE OF ADDS I USE FOR CRAIGSLIST
LEASE TO OWN,3BD 2BA 2100 SQ FT HOME IN GREAT LOCATION,POLISHED WOOD FLOORING THROUGHOUT LOWER LEVEL,MASTER BEDROOM HAS MASTER BATH,GRANITE COUNTER TOPS,STAND ALONE SHOWER,OPEN FLOOR PLAN AND HUGE LIVING ROOM,INSIDE LAUNDRY,2 CAR GARAGE, HOME IS VERY WELL MAINTAINED,LEASE WITH OPTION TO PURCHASE,$15,000 DOWN PAYMENT FULLY CREDITED TOWARD PURCHASE PRICE,$1900/MONTH WITH $1600/MONTH CREDIT TOWARD PURCHASE,PURCHASE PRICE IS $267,000 ON 5 YEAR LEASE OPTION,BAD OR NO CREDIT OK,CALL YOU YOUR NUMBER AND EMAIL.

IF YOU ALREADY HAVE THE HOME THEN JUST GIVE A THOUROUGH DESCRIPTION OF IT.WHEN PEOPLE CALL ON AN ADD THAT YOUR JUST PUTTING OUT THERE TO GET BUYERS TELL THEM IT WAS ALREADY LEASED BUT YOU COME ACROSS LEASE OPTIONS REGULARLY,THEN GET THE CRITERIA OF THE HOME THEIR LOOKING FOR,JUST LIKE IN THE BOOK,IF YOU HAVE A LIST OF PRE FORECLOSURES FROM AN AGENT YOU MIGHT HAVE A HOUSE FOR THEM RIGHT AWAY,BUT IF NOT LOOK FOR NOTICE OF DEFAULTS OR CALL FOR RENT ADS.I HAVE MY AGENT SEND ME PRE FORECLOSURE LISTINGS ON AN AUTOMATED SYSTEM STRAIGHT FROM THE MLS,THIS WAY YOU HAVE PICTURES OF THE HOME ALSO.

IT DOESN'T MATTER HOW MANY DEALS YOU HAVE OR HAVE NOT DONE OR IF YOUR JUST DOING YOUR FIRST DEAL,YOUR KNOWLEDGE AND ABILITY TO LEVERAGE OTHER PEOPLES MONEY TO SOLVE PROBLEMS IS YOUR POWER.DONT GET STUCK ON HOW MUCH MONEY YOUR GOING TO MAKE ON A DEAL,WHEN YOUR AT A HOMEOWNERS HOUSE YOU NEED TO CONCENTRATE ON HELPING THEM,WHEN YOU SOLVE THEIR PROBLEMS FIRST YOU'LL GET PAID.

That's powerful stuff. Thanks for sharing.

Thank you for that. I am just about yo do my 1st lease op. and had no real clue. I can say that helped with most of it, but still it's the first one and mistakes are bound to happen. (learning experences) THANK YOU RODNEY

thanks for the great information! were you an Army Ranger?

Yes I'm an Army Ranger.Discharged "thank God".

Hey DG's.I thought i would update my post today and brag about my latest deal,Just kidding.This is my 19th deal/sandwich lease option with $210/month
cashflow for seven years with a $30,000 profit spread built in at closing.I hope all you other members out there are getting some deals done and moving forward even if its tough to do so,believe me i just didnt jump in and snatch up deals either but after i got the concept of negotiating its gotten a little crazy because i push myself to make calls on any and every rental or pre foreclosure that fits the description of what my buyers are looking for.I think thats all it really takes is self confidence/(the know how) motivation and the ability to push yourself to take action everyday or everytime you see a potential deal no matter what.I would like to hear of more DG'S having success and sharing their stories on this website so other members out there struggling or confused will have the confidence and know how to jump into action and accomplish some of their goals.

I just read your long post about how you do your Lease/option deals. I am very impressed,and now look at underwater L/O differently. Thanks for the thourough explanation.

Cathyb

Brian,

How do you handel repairs, like if hot water heater or heater goes while the place is occupied? How do you structure this?

Thanks Jay C

thanks for this informations very kind of you to share this with us.i will read this again
you mayed this easy to understand.

hey Jc
you can have all the repairs covered in your contract.its all what you agree to with your tenants.in my contracts the tenants agree that they are responsible for up to $10,000 dollars in repairs,if their buying the home their responsible for it and can make the repairs,None of the buyers i've worked with have had a problem with this at all,their just excited to get the home.

Regarding the Perry/Donna deal.....What are the terms on the sellers existing $309,000 mortgage? What will be the remaining balance to pay off the seller's mortgage in 5 years should Perry decide to buy the house? I'm thinking you may have a problem with this deal.

Donnas mortgage is fixed rate.The balance to pay off the mortgage in 5 years will be around $225,000 give or take a couple months payments,what if the home is still underwater and has not appreciated enough for me to sell to perry?We'll I already told perry before we signed any paperwork that this might be the case when he qualifies to buy,I also put in the terms of the contract that I would extend the lease option if that is the case and lower the monthly payments to the amount i pay every month and forfit my cashflow until we close.you could even forfit some of your profit in order to make the deal work but thats up to you.

Great job Ranger and thanks for the great info!! I've been gathering information and studying lease options before I dive in and I have a couple questions that you may be able to answer. Who is responsible for the property taxes in a lease option and who gets to claim the mortgage tax deduction? Thanks and continued success!

Bill

I trying to find out where I can find a Hud 1 form for a foreclosure deal I'm doing a "Short-Sale" on. I thought it would be listed somewhere on the site. If anyone can help me in the right direction, please do. Thanks, Dirk

Thank you very much for all of your information Ranger16. I hope you don't mind but I had cut and paste because it was so much GREAT stuff. Bill9710 had some great questions about the taxes? I like to know about the taxes also and how about the insurance on the home??? What is the process with the title company? fees for anything more than collecting to rent?? All this information has been of a great help. I am so happy to be a part of this DG Family everyone helping everyone to get to the next level with our learning.

Thanks alot,

Bertha

Full lease payment goes towards the mortgage? What about the interest due on the mortgage? The mortgage will only be paid down by the amount of the principal on the loan, not the full $1400. The loan must be pretty near its ending years, because you pay mostly interest on a mortgage until the 22nd year, which is when you are finally making more than 1/2 of the payment towards the principal. This seems too good to be true, that it seems like the leasee is getting 100% financing going 100% towards principal with 0% interest.

I'm confused. What about taxes and insurance? DO the original owners pay for that or did you do a net/net lease for the option so they have to pay that as well? Is there any monthly cash flow for you in the deal at all?

I'm about to do my first lease option (except I'm taking the property 'subject to') and I planned on making my lease monthly payment = to the principal, interest, PMI, taxes, insurance, HOA, property management (if I don't do it myself, which I am)a small profit for me each month, and an additional amount to put towards the downpayment in addition to the principal of the loan, when the option is executed. Am I calculating the monthly payment unrealistically? I'm also offering different options for different lengths of the lease option, each year being a higher price by a certain %. IE 1 year lease is 100K, 2 year lease purchase price is 110K, 3 year lease is 120K, etc, but with each increase, I allow for more of the payment to go towards the downpayment because the amount of monthly rent goes up too. (counting on the RE market coming back some point in time! LOL)

Thanks for posting this extensive detailed strategy! I look forward to your reply!

It is CERTAIN we will SUCCEED!

"Donnas mortgage is fixed rate.The balance to pay off the mortgage in 5 years will be around $225,000 give or take a couple months payments,what if the home is still underwater and has not appreciated enough for me to sell to perry?"

I'm with Zion.....for the payoff balance to be $225k in 5 years, all of the $1400 monthly payment would have to go towards principal reduction of the sellers loan.....that isn't going to happen. You need to look at Donna's original note and post the following....
1) original amount financed
2) interest rate
3) how many years she financed it for
4) how many payments she has made
5) are the taxes and insurance included in the $1400 payment

By giving Perry a $1400/mo credit, I think you may have entered into a contract you cannot fulfill, namely giving Perry the option to purchase the house for $255k when that won't be sufficient to pay off the mortgage balance. It is very important that you post those numbers. From those numbers I can run an amortization schedule and let you know exactly what the payoff will be in 5 years. I'm guessing the payoff in 5 years will be about $295k if not more.

remained the same, and the non refundable down payment and the amout per month simply went towards the down payment of the property. Maybe you meant that he would only have to finance for $255K, and have all that money already invested in the home as equity? But then, he just paid rent as a 0% interest loan for the entire 5 years, a GREAT deal for him! And, when he does buy, you will need to come up with the difference between the loan and the 255K, so you better keep at least 40K of the accumulated monthly cash flow handy ,correct?

So, maybe that is what is being misunderstood here? That the purchase price will actually remain 339K and the equity is at 84K? A clarification would certainly clear things up for me! Thanks!

It is CERTAIN we will SUCCEED!

How do you keep from having the loan called in by the mortgage co? All the info I have seen keeps mentioning that if the mortgage co. sees another name on the payments they can claim the property is being sold and call in the note. Have you heard of this?
Thanks Gary

You mentioned in your post that the tennent/ buyer is paying down the existing mortgage by $1400 a month, or $84,000 over the 5 year period. However, most of that $1400 payment goes to the bank in the form of interest. Only about 1/3 of that payment is actually reducing the principle balance. there is no way that the mortgage balance will be that much lower after only 5 years.

Mark

Firstly, thank you for your service...we love you for that.

Now, you've gotten yourself into a major jam here. Your strategy falls into the too good to be true category. Based on the loan balance, it seems that this is a fairly new note. As noted here previously, the mort. balance DOES NOT decrease by the size of the payment on a monthly basis...in fact nothing like that. Please refer to an amoratization table to get the figures but be sitting down when you do. I hope we are not understanding your post properly because if we are you've got yourself a real problem here. I'm keeping my fingers crossed for you! GOOD LUCK

Thanks for the post, it was very informative.I learned alot today, I never would have thought you could have done all that with a house underwater.
Thanks for your post,

Curtis Fillers,
(Charlotte,NC)

Gary

you are correct, that is called an acceleration clause(due on sale), meaning that the bank can call the note if ownership is transferred. Also there could be another issue if the seller obtained the mortgage from BOA and it's classified as an owner occupied/primary residence. I would appreciate feedback/advise from anyone.

Regards
Tom

With a due on sale clause (aka acceleration clause), the banks have a right to call the entire balance of the loan due if title to the property changes hands. This due on sale clause came about back in a time when mortgages were assumable. When interest rates began to rise, the due on sale clause came about to enable lenders to write new loans at higher interest rates when the property changed hands. The due on sale clause is not usually addressed these days for 2 reasons. One, in the current environment, do you think the banks want another foreclosure or would they rather have someone, anyone, making the payments. Two, mortgages rates are at 40 year lows and the banks would prefer to keep the existing higher interest rate mortgages in place rather than writing new loans at lower interest rates. However, that being said, in a lease option the title to the property doesn't change hands so the due on sale clause doesn't enter into the picture. The original owner still owns the house and still makes the payment. This is where you may want to consider having an escrow company make the payments to insure that the owner actually continues to make the payments and the property you are lease optioning doesn't go into foreclosure.