Can I Spend The Option Money?

I have a house for sale that a couple wants to buy from me. They qualified for a loan but not enough ($15,000 short) as the bank wants them to keep credit clean for one year then will loan amount needed. I had them use a loan broker friend of mine so the loan issue is sold information. Im considering a lease option for 14 months so they can keep credit clean and then complete the puchase in 14 www.months.The couple wants to give me a "non-refundable" option payment of $10,000 for a deposit and will sign the earnest money sales agreement for the purchase set to close in 14 months allowing them the one year to keep credit clean and qualify for proper amount needed to purchase. The lease payments will cash flow for me at $600+ per month which is an awesome return for a 14 month venture. The question is whether there is a solution that will let me use the $10,000 now. The couple is committed to buying the house and understands the deposit is non-refundable and I really want to spend the $10,000. Can I have an agreement prepared that will allow me to spend that $10,000 or am I stuck putting it in neutral escrow and waiting to get my hands on it in 14 months. I really want to do some traveling and enjoy the money.

Comments(14)

  • edmeyer16th February, 2004

    I don't see why you can't spend the option consideration now. What needs to be done is for the paperwork for the sale to be drawn up and ready to execute so that the optionee feels secure that they can exercise the option even if you are not around. An escrow might be opened now to accomodate this. Option consideration is not taxable until the option is exercised , abandoned or the option period runs out.

  • NancyChadwick16th February, 2004

    The only thing I would add to the above is that if the non-refundable option fee is that -- a fee -- then I would make sure the contract is clear that the option fee does not apply to the purchase price. To be absolutely sure, run it by your attorney.

  • GJB16th February, 2004

    Im not sure if it would matter but the $10,000 option "would" be applied towards purchase price. Sale price $156k ,option payment of $10,000, remaining $146k at closing.

  • rajwarrior16th February, 2004

    Then the answer to your question is yes and no. IF the option payment is written as NON-refundable, then it's yours once they sign the option agreement. However, IF the option payment will be applied to the purchase price then you MAY have to physically produce that money at the time of the closing. It will really depend on the lender's requirements. So you can spend it now, but be prepared to have it later, too.

    Roger

  • Stockpro9916th February, 2004

    why not make it a non refundable option fee and discount the price 10K?

  • GJB16th February, 2004

    Quote:
    On 2004-02-16 22:37, Stockpro99 wrote:
    why not make it a non refundable option fee and discount the price 10K?


    As mentioned above thats what I would be doing $156K, minus $10k non refundable option payment which applies to price thus the remaining balance of $146k.

  • edmeyer17th February, 2004

    My sense is that you are OK with this regardless of whether the option consideration is to go to the purchase price. The money is to go to you regardless and your escrow would reflect that the buyer is credited with paying you the $10,000. The only issue that I see is that if an existing loan needs to be paid off and the remaining funds ($146K )are not enough to cover the payoff and seller closing costs.

  • mortgageman17th February, 2004

    If you can clearly document taht the $10,000 was given to you, taht's all the lender will care about.. "the Option fee is non-refundable whether or not the option is excersiced" essentially amkes the $10,000 yours.

    Nice deal by the way! But with lease option, you usually can make money 3 ways. You have listed two. Besides the $10,000 and the $600/month positive cash flow, will you be making any more when the deal closes? This comes from simply being able to sell the property fro a little more than what you bought it for.

    With lease option, you usually can make money 3 ways

  • InActive_Account17th February, 2004

    NO YOU CANNOT SPEND THE OPTION CONSIDERATION!!!!!! You should invest the option consideration. To spend the option consideration, which you appear anxious to do, is heresy.

    I'm sure that the optionee is giving you $10K to be applied towards the purchase price. You have a nice down and a good monthly cash surplus. Keep a copy of the option money and each months payment for the lender (this should be their obligation-but you're the pro , right??).

  • bgrossnickle17th February, 2004

    My option says that all option consideration is applied towards the principle balance. So if my original selling price is $150,000 and I get 20,000 of option consideration then I sell the house for $130,000. Why can I not spend the option money???

    Brenda

  • InActive_Account18th February, 2004

    Brenda

    You don't spend the option money because it
    should be used for OTHER INVESTMENTS.
    Spending it on a trip, timeshare, car, etc,etc, is a REI's path to perdition. This is the same mindset you see on late night TV where the idiot say, "I put $10,000 in my pocket. If I can do it anybody can do it". Two years later, he's broke and filing BK. Option money should be put to use for asset enhancement. OK???

  • melobrien7518th February, 2004

    To answer your question, yes, you CAN have your contract prepared so that will allow you to spend your $10,000 option money. Just make sure you have your RE attorney structure your lease and option documents to allow this.

    Now, with that being said, SHOULD you spend it? Well, that's a matter of opinion. And it's your choice. Of course, most of us on this site want you to achieve your financial goals and would advise that you re-invest your money...but ultimately, you have to weigh your goals and priorities and make that decision for yourself.

    Even if you decide to spend it, I would strongly recommend saving part. A couple things to consider:
    1) make sure your contract spells out who is responsible for maintenance; if you have any liability here, you'll want a "reserve" to take care of any issues that arise. Also,
    2) what if, for some crazy reason, your buyers can't or decide not to buy (crazier things have happened and with a L/O, it's still only an option, not an obligation)? Will you have enough money to tide you over until you found a new tenant buyer?

    Those are just a couple things to think about!

    Good luck.

  • tinman175518th February, 2004

    I agree with Sammyvegas, heres the problem in the good ol usa. We want to spend tomorrow's money today. Then buy a house with zero money down.

    Please listen to him I have seen 5 investors file a bk between 09/2003-12/2003. All from not being able to control thir spending.

    what does REI mean
    REAL ESTATE INVESTING

    Investing does not mean get $10,000.00 and go on a trip. It means get 10k INVEST in another venture.
    The spending mentality of investors is what gives people who work hard a bad name.
    lori
    [addsig]

  • cmyke18th February, 2004

    I too would agree. You will absolutely kill the compounding effect that REI creates for you. Now if you have like $200k in your account then maybe rewarding yourself would be okay but if you are still not financially independent, then use the 10 grand to control more property hence controlling more money. However, in the end, it is your money and you are the one responsible for your financial future. Good luck and happy investing!

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