Lease Option / Rent To Own...Or What????

[OKRICHLAND]

Hello everyone,
OKRICHLAND here.
I have a question about a lease option or rent to own.
I will owe $68,000 on a home after I refinance and I have someone who only has $10,500 to put down for a purchase of this house.
My monthly payment will be approx $430.00 per month, at 7.25% on a 30 year fixed.
I would like to sell them the house for approx $70,000 - $73,000.
The house has over 2,677 s/f with brand new 35year shingled roof and decking, totally new electric and new heat and air units.
The rest is replacing a few doors and cosmetics.
The three above mentioned updates will be completed for the sale.
They will do the rest of the cosmetics, approx $5,000 worth.

Since they are unable to cash out on the deal and I will have a refinance to pay off, over a 30year period.
I would really like to know what options I have in order to make this work?
**On a lease option, aside from there deposit, do there monthly payments count towards the purchase price?
**If they wanted to go a shorter term, how would the amortization work, especially if they wanted to pay on principal each month?
**How would I work the deposit in with my refinance payoff?

Do I have any other options?

[malcolan]

Hello everyone,
OKRICHLAND here.
I have a question about a lease option or rent to own.
I will owe $68,000 on a home after I refinance and I have someone who only has $10,500 to put down for a purchase of this house.
My monthly payment will be approx $430.00 per month, at 7.25% on a 30 year fixed.
I would like to sell them the house for approx $70,000 - $73,000.
The house has over 2,677 s/f with brand new 35year shingled roof and decking, totally new electric and new heat and air units.
The rest is replacing a few doors and cosmetics.
The three above mentioned updates will be completed for the sale.
They will do the rest of the cosmetics, approx $5,000 worth.

Since they are unable to cash out on the deal and I will have a refinance to pay off, over a 30year period.
I would really like to know what options I have in order to make this work?
**On a lease option, aside from there deposit, do there monthly payments count towards the purchase price?
**If they wanted to go a shorter term, how would the amortization work, especially if they wanted to pay on principal each month?
**How would I work the deposit in with my refinance payoff?

Do I have any other options?

Hi OKRICHLAND,
I will try and answer some of your Lease Option questions. Please keep in mind though, that I am by no means an expert in this area. I have done a couple of these, though, and this is what I am trying to focus my investing on. I've been doing this part time for about a year now.

Some questions for you. What is the appraised value of the house? Also, if your goal is to sell, and you have a buyer that has $10K to put down, what is stopping them from obtaining a conventional mortgage and cashing you out at your asking price?

Okay, what I know about lease options. First, you should have a standard lease agreement with them. You then have a second option agreement to buy the property. It's important that you NOT call the money they pay up front a "down payment". This needs to be called an "option consideration". You could, if you like, collect an additional "down payment" for the lease agreement, although I don't do this. I usally just collect 1st & last months rent, along with the option fee. Their monthly payments can have "rent credits", if you like. This can be anywhere from 0% to 50%. I wouldn't go any higher than that, and I determine this number based on the individual. The option consideration and any rent credits can go towards the agreed upon purchase price.

Knowing this, it seems to me that this property is not a candidate for a L/O, unless you can sell it for maybe 85K. When I work with tenant/buyers, they usually have some credit issue that prevents them from buying a house right away. I work with a Mortgage company to find out what needs to happen to straighten them out to qualify for a loan. Usually, I show that they have been making payments on time, the buyers take care of any other small credit issues, and they get approved for the loan after anywhere from 3 months to a year. That's when I get cashed out. The bank will do 100% loans, and I usually sell it for about 5% over current market value (the buyers and the mortgage company usually have no problem with this). The option money and rent credits, then, help cover closing costs and/or some of the sales price.

You need to have a decent equity spread in this type of deal, though, because their rent credits (if given) will outpace your loan ammortization (this makes a great selling point to tenant buyers, by the way). I guess you could give the $10K to the mortgage company to pay down the principle, or put the cash in a money market and collect interest and then just pay the difference when you go to closing. I don't think that I would do this, though, and I am sure that I wouldn't offer rent credits in this scenario.

Again, I must reiterate that I am no expert at this. Just calling it like I see it. Good Luck!

--Andy

[brian-gibbons]

Hello everyone,
OKRICHLAND here.
I have a question about a lease option or rent to own.
I will owe $68,000 on a home after I refinance and I have someone who only has $10,500 to put down for a purchase of this house.
My monthly payment will be approx $430.00 per month, at 7.25% on a 30 year fixed.
I would like to sell them the house for approx $70,000 - $73,000.
The house has over 2,677 s/f with brand new 35year shingled roof and decking, totally new electric and new heat and air units.
The rest is replacing a few doors and cosmetics.
The three above mentioned updates will be completed for the sale.
They will do the rest of the cosmetics, approx $5,000 worth.

Since they are unable to cash out on the deal and I will have a refinance to pay off, over a 30year period.
I would really like to know what options I have in order to make this work?
**On a lease option, aside from there deposit, do there monthly payments count towards the purchase price?
**If they wanted to go a shorter term, how would the amortization work, especially if they wanted to pay on principal each month?
**How would I work the deposit in with my refinance payoff?

Do I have any other options?

Hi Brian here from www.creiu2.com :SM135:

Your motivation is paramount in the deal:
Why are you selling via seller financing?
Cash Flow?
Decrease Tenant-Landlord Headaches?
This is a pivotal question.

What do you know/What is your DIRECT EXPERIENCE with seller financing?
For Instance, You Knowlege About:
Contract for Deeds?
Lease Options?
Wraps (aka AITDs or All Inclusive Trust Deeds?)
Create a Marketable Note and Sell it in 90 days?

This is not a quiz, but a general discussion about Seller Financing.

If you do not care about the Tenant Buyer exercising their option and getting financing, do a Lease Option at above market rent with generous Rent Credits.

The FHA does not like that.
Or the FNMA.

See the below article.
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Excess credit not accepted by FHA
Note that (some investors) give $200 MORE RENT CREDIT per month toward the purchase price than the amount by which is the required monthly payments exceed the MARKET rent value.

At least one loan guarantor, the FHA, will NOT accept that (EXCESS RENT) as down payment money. NO LENDER SHOULD.

Obviously, if the lessee gets to live in that rental property, they are getting fair market USAGE of that property for FAIR MARKET RENT.

To ALSO GET A credit toward the purchase price FOR THE SAME MONEY is DOUBLE COUNTING.

It could be utilized by an unscrupulous lessee/optionee and lessor/optionor to do a higher loan-to-value-ratio deal than the lender permits.

For example, let's say a property is:
Worth $100,000
Fair Market Rent is $1000 per month
The lessee/optionee wants a $100,000 mortgage from the FHA.

But they won't lend 100% of FMV or the INFLATED SALES PRICE.

So the lessee/optionee and lessor/optionor CLAIM the PURCHASE PRICE is $110,000,

and draw up a lease option which gives the lessee/optionee 100% credit for all rent paid.

At that rate, the lessee/optionee would have earned enough CREDIT in RENT CREDITS for the ENTIRE $10,000DOWN PAYMENT in JUST 10 MONTHS.

But, in fact, the lessee/optionee got $10,000 value in the form of occupancy in the house for 10months.

So the representation that the lessee-optionee made a $10,000 down payment is obviously false.

Don't get me wrong. You WANT such EXCESS CREDIT if the seller will agree to it.

Just do NOT EXPECT FHA to BE IMPRESSED WITH IT when it comes to showing them HOW MUCH YOU ARE PUTTING DOWN ON THE PROPERTY.

The Federal National Mortgage also has STRICT REQUIREMENTS bout how much a SELLER CAN CONTRIBUTE to a home purchase because such contributions are, in effect, reductions in the sale price.

On August 5, 1985, FNMA announced tighter standards which included the following:

4. All payments by seller to buyer are considered buy-downs. Buy-downs may not exceed 3% of the sale price if the buyer is putting less than 10% down or 6% of the price if the buyer is putting down more than 10%.

6. Buyer must make at least a 5% down payment from his own funds. Gifts cannot be the source of that 5%.

Logic requires the conclusion that credit for monthly payments below the amount of the fair rental value is a gift from the seller.

Long-term seller financing increases the probabilitySacramento investor, Dan Kinter (916-965-6716) gives his tenants long-term (30-year) wraparound seller financing when they exercise so he has had no walk-aways. The underlying mortgages on his houses were all FHA or VA so they had no due-on-sale clauses.

Right to assignYou want the right to assign (sell) the option. That way, you may be able to cash in on at least part of your equity if you cannot or choose not to exercise your option.

The option should contain a clause saying that you have the right to assign the option. If there is no such clause, you may still be able to assign the option if the buyer of the option is a cash buyer.

Miller and Starr say,

The trend of the law is in favor of the assignability of contract rights (Don Rose Oil Co., Inc., 1984, 160 CA 3d 752) and when a contract is assignable and it is assigned, the assignee who assumes the contract obligations in writing can enforce the contract. [Emphasis in original] § 1: 15

If the option says you can pay for the property in installments (seller takes back a mortgage) after you get legal title (exercise the option), you probably can NOT assign the option.

That's because it's based on your credit. (1 Witkin, Summary of California Law Contracts §§921-953)

The optionor may not like the credit of the assignee.

Although one could argue that the optionor's right to prevent you from assigning an option in such a case is limited to approval of the credit of the assignee, which approval may not be unreasonably withheld.

In other words, the optionor ought to have the right to stop you from assigning the option to a person with bad credit.

But there's no logic to his having the right to prevent you from assigning it to a person with credit equal to or better than yours.

There was a bankruptcy court case in which an option which contained a prohibition against assignment was held to be assignable nevertheless. (In Re James Moore, 99 Bankruptcy Reporter 27)

If you can't assign, exercise using the "assignee's" money
If you want to assign (sell) the option-but it has a no-assignment clause-and your attorney says the clause is enforceable-

Have the person to whom you want to sell pay the necessary money into escrow with instructions that the money is to be used partly to exercise the option and partly to be paid to you.

For example, suppose you had an option to buy a house for $100,000:

The house was now worth $121,000.
You find a buyer for the option equity who agrees to pay you $10,000 for your $21,000 equity.
He pays $110,000 into escrow.
The escrow company gives $100,000 to the optionor and he deeds the property to you.
Then you deed the property to the ultimate buyer in return for $10,000.

Finding a buyer for your option
You can find a buyer for your option the same way you would sell the property if you owned it already.

Run an ad in the paper under "house for sale." Or list the property with a real estate broker. You would have to disclose prior to the signing of the purchase agreement that you owned an option to buy the house rather than the legal title to the house itself. But that's not a real problem if the option is enforceable.

Some real-estate agents and buyers may balk at the fact that you just have an option. But I suspect that plenty will just say, "If my attorney says it's enforceable, I don't have a problem with it."

You are causing the real-estate broker and buyer to go to a little extra trouble. So you should expect to sell at a discount.

That's why I had you selling a $121,000 property for just $110,000 in the example above.

You should offer the property at a price above your option price and any commission and other transaction costs you would have to pay but below the fair market value of the property.

Because you have to offer a discount and the transaction costs of selling real estate are high, it's hard to sell your option at a profit unless your equity in the option is substantial.

How will you finance the purchase?
In the example above, the lessee/optionee would be seeking a $109,800 mortgage at the end of two years.

Lenders typically will not lend more than 80% of value in the absence of some high credit guarantee like private or government mortgage insurance or an investment grade tenant like IBM.

$109,800 is an 80% mortgage on a house worth $109,800 + 80% = $137,250.
That will only happen if there is phenomenal appreciation.

You are speculating on interest rates
The person who buys a house now using fixed-rate financing is not worried about what his interest rate will be in two years. But a person who lease-options a house, does need to worry about what interest rates will be when he tries to finance the exercise of the option.

He can hedge by using an interest-rate futures option.

See my article "How to lock interest rates even if the lenders refuse" in the July 1989 Real Estate Investor's Monthly.

Order at my Web site www.johntreed.cQm/REIM.html.

Very narrow applicability
A lease option is the best approach for buying a home in only a very narrow range of circumstances. The lessee/optionee must:

. Not be able to come up with a down payment now . Be able to afford the high monthly lease-option payments
. Negotiate a rent that does not exceed fair-market- rental value
. Negotiate full credit for any amount paid in excess of fair-market-rental value
. Negotiate an option price that is at or within about 5% of current market value
. Be virtually certain that he will be able to get a mortgage big enough to exercise the option before it expires
. Be virtually certain that he will be able make a down payment big enough to exercise the option before it expires

The article above is an excerpt from John T Reed's SINGLE-FAMILY LEASE OPTIONS (http://www.johntreed.com), one of the most compelling and valuable tools we have in the CREI LEASE OPTION categories.
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At www.creiu2.com we research all day, not just theory but REAL WORLD CREI Issues.

Just one of the ways we create our lease options is:

1. TBer Full Market Rent, nothing more (say $1000 a month, 5% rent increases every 12 months).

2. 5% Option Paymetn to move in as NON-REFUNDABLE OPTION CONSIDERATION, either ALL CASH or CASH PLUS PROMISSORY NOTE at a FAIR INTEREST RATE (12%).

3. They must pay at least 20% EXTRA in the form of EXTRA OPTION CONSIDERATION THAT IS NON-REFUNDABLE IF THE OPTION EXPIRES and THEY CAN NOT GET FINANCING.

4. We like Option to Purchase Contracts that Convert to Owner Financing

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Option With Conversion To Owner Financing Contract (SEE DISCLAIMER)
OPTION TO PURCHASE REAL ESTATE

1.
PARTIES: The parties to this agreement (Option) are the owner of the Property, __________________________________________________ _____ (Seller), and __________________________________________________ __(Buyer).

2.
PROPERTY: Certain real property known as

together with all its improvements.

3.
TERM: The Option term shall commence on _____________________ and expire on _____________________ (original term).

4.
OPTION TO PURCHASE: It is agreed that Buyer shall have the right (Option) to purchase said property from Seller for $____________________ (purchase price) payable in cash at any time during the original term of the Option. If Seller should sell said property during the Option term to any other person, such person shall be furnished with the copies of this Agreement and shall agree in writing to be fully bound by the terms with regard to the Buyer’s rights under this Agreement.
5.
OPTION CONSIDERATION: The consideration for the Option is:


A. Buyer’s payment of $______________ in cash (Option Fee) to be paid upon entering this Agreement: and
B. Buyer’s performance on the Lease entered between the same parties on subject property. If Buyer is in default in payment on the Option Fee as provided above, or Buyer is in default under the Lease Agreement, Buyer shall forfeit his/her rights granted by this Option without recourse.

6. CREDITS EARNED TOWARD PURCHASE:
If the Option is exercised during its term, all Option Fees paid by Buyer shall be applied to the purchase price reduction, and/or Buyer’s closing costs, and/or down payment at Buyer’s choice.
7. NOTICE TO EXCERCISE THE OPTION.
Buyer may exercise the Option by giving Seller a 60 days advanced written notice of Buyer’s intent to do so.
8. FINANCING.
To exercise the Option Buyer shall:
a) Obtain a 3rd party financing or pay cash at closing, or
b) Notify Seller of Buyer’s intent to convert to Owner Financing no later than 30 days from expiration of Option. Such conversion shall be provided as described in the “Seller Financing” section.
9. EXTENTION OF OPTION.
There shall be no extension of the Option.
10. EXPIRATION AND/OR FORFEITURE OF OPTION.
If the Option is not exercised during its term or forfeited due to default, the entire Option Fee shall be forfeited and shall not be refunded.
11. CLOSING. At closing (for cash purchase or 3rd party financing, but not Seller Financing):
A) Seller shall deliver to Buyer a general warranty deed to the property.
B) Seller’s closing costs will be the cost of preparing the warranty deed, cost of obtaining releases of liens, cost of recording the deed and one-half of the escrow fees from title company.
C) Buyer’s closing costs will include all costs associated with new financing obtained by Buyer, costs associated with recording new loan, owner’s title policy, and one-half of escrow fees from the title company.
D) Property taxes shall be prorated as of date of closing.
E) The rent for the month of closing shall not be prorated and is due in full for the entire month.
12. SELLER FINANCING. Buyer shall have the right to convert this Option from a cash purchase into a purchase with owner financing on a Contract for Deed (prepared by Seller) on the following terms:
A. Buyer shall pay Seller an additional $______________ in cash as a down payment.
B. The purchase price of the property shall be increased to $_____________ from the original price.
C. The balance financed on the Contract for Deed shall be $_____________________. This balance shall be amortized over _______ years with all amounts owed under the Contract for Deed maturing (becoming due and payable in full) at the end of _______ months from the origination date of the Contract for Deed.
D. The interest rate on the balance due under Contract for Deed shall be ________%.
E. The monthly payments shall include principal, interest, and escrow for property taxes, fire insurance, and reimbursement for mortgage insurance (only if Seller’s mortgage loan has mortgage insurance).
F. There shall be no closing costs, document preparation fees, underwriting fees, or any other expense to Buyer in converting to a purchase on Contract for Deed owner financing.

Seller _____________________ Date ____________

Buyer _____________________ Date ____________

DISCLAIMER: www.creiu2.com are NOT attorneys or tax advisors. This information is not a legal advice, nor is it intended to substitute legal advice in full or in part. All users are encouraged to seek legal, accounting or other professional counsel. This information is provided for educational purposes as an illustration only. The information presented herein is subject to all applicable federal, state and local laws and regulations concerning business practices, licensing, advertising and all other aspects of doing business in the United States, or any other jurisdiction of the world.
User is specifically advised that these landlord/Tenant agreements are governed by local and state laws and legal counsel on applicability and use of this information is encouraged.
The user assumes full responsibility for the use of this information. The author assumes no responsibility or liability whatsoever for the reader's use of this information.

[OKRICHLAND]

OKRICHLAND here.
Thank you both for the vast amount of information.
I will do my best to sort through it all. :beard:
I will be back over the weekend with a list of questions
after I have read through it all.

[Dan Auito]

Thanks for stepping up to the plate fella's I think I'm taking a break from trying to answer each question myself.

Just taking a little break Dave, I think you're in very good hands my friend. :SM139: