Dumb L/O Question
'Renter" pays me non-refundable option of $10,000 on $150,000 house. At end of 12 mo. lease term we get them perm. financing from Mortgage Co.
Don't they have to come up with at least 10% down? If so, if they had that much to start with, why didn't they get an 85% loan? What am I missing?
Signed,
An Obvious Newbie
In your scenario, they do, but there are many financing options as far as mortgages go. Now, one of the things you can do is to structure the deal so some of their rent becomes a rent credit that can be put toward the purchase price.
That's why it's important for the Option to state that their consideration payment will convert into a down payment if they exercise the Option. Try to use a program where the lender will treat the L/O as a refi after twelve consecutive on-time rent payments are made. That way, the down payment is inconsequential. Some lenders will allow rental credit to be applied towards additional down payment if the Option states so, but only the amount that's above fair market rent. I just make all rental credit apply towards the purchase price.
For 12 month L/Os....OK.
But for longer terms, don't you give up[ too much by having all the rental payments contribute to the down payment?
perfecto
Only a percentage of the monthly rent (which the seller and buyer agree on) are applied as rent credits and you negotiate and stipulate that in your contract
Dave
You really aren't giving up anything. If anything, you are ahead, because now you can use that money on other projects. You aren't reducing the price, You are still getting the same price. The difference is you are getting some of your price now.
Have any of you taken your profit out as a 2nd to make the re-fi workable?
DV,
I am not sure what you mean about taking out the second. If you are talking in response to LeaseOptionKing's post, he is talking about your buyers. There are many lenders who will consider your buyers getting a loan as a refi instead of a purchase. The process for a refi is much easier than for getting purchase money.
Theoretically you could take out a second if you are the owner. If you are working a sandwich, obviously you cannot. The problem is that most option contracts stipulate that you will not incur any additional debt.
Lyn,
A couple of things. First, when an insurance pays off it is to those who are insured. If there is a mortgage, then the mortgagee (the bank) is generally one of the insured. Basically in this situation, those in lien positions and listed as additional insured on the policy get funds first. The borrower is generally last in line.
Now one of the opportunities comes in when the insurance company pays off, and the homeowner just wants to get out of dodge. They have already been paid by the insurance company, so they will probably either abandon the property, or sell to someone at a huge discount. This is where you step in. You help the homeowner out of the situation, rehab or rebuild, then sell retail.
In a situation where they are upside down (meaning what is owed is greater than the value of the real estate) you then work a short sale with the lenders.