L/O Questions
Hi, could you tell me please how this works,If i get a down payment(option payment) up front of say $10,000 and then $300 a month positive cash flow.Does this mean i can use that money straight away for other investments or is this money meant to be held in an escrow account or something until they decide to either exercise or not exercise the option to buy? And this does come off the agreed upon sales price of the house right? and if so when they are applying for their mortgage 3yrs from now is this money from downpayment and $300 monthly for 36mnths to be used towards the downpayment on the loan for the lender say bank of america?I realise how the lease option numbers work just not how to work out what you can spend now(what is truly yours) and what is yours again after 3yrs is up.Please help with clarifying this for me with an www.example.Thanks and i appreciate those who help me to understand this side of the business.
You can spend it all now. The nonrefundable Option Consideration is taxable in the year they either exercise their Option or default. The positive cash flow is yours and is taxable in the year received. Did you offer them rental credit? If so, that is applied towards the purchase price. The Option Consideration can go toward purchase price OR be applied as a down payment, whichever your Contract stipulates. (I prefer the latter, because I want my T/B to actually close). No escrow account is required; however, be sure that you can document they paid the down payment.
[addsig]
Quote:
On 2004-12-24 05:04, LeaseOptionKing wrote:
You can spend it all now. The nonrefundable Option Consideration is taxable in the year they either exercise their Option or default. The positive cash flow is yours and is taxable in the year received. Did you offer them rental credit? If so, that is applied towards the purchase price. The Option Consideration can go toward purchase price OR be applied as a down payment, whichever your Contract stipulates. (I prefer the latter, because I want my T/B to actually close). No escrow account is required; however, be sure that you can document they paid the down payment.
So if the Option Consideration can be applied towards the down payment, how does the lender work that out with the T/B? How does it affect the investor?
A word of caution. When the option consideration is called a "down payment", I understand that courts have ruled that the tenant buyer has an equitable interest and the deposit was ordered to be refunded.
never call it d/p.......the option consideration payment is money paid for by the t/b to have the option to hold the prop. at a predetermined price and at a pred/ed time, unless you state otherwise in your contract. for you to have the ability to keep the money and do as you please you must sell above purchase price or have equity to draw from or it will be taken from proceeds or you pay outright at a later date........km
its all in how "you' structure your l/o deal......km
If your Contract is worded properly, you can call it nonrefundable option consideration and also have it convert into a down payment only if the property is purchased. If the T/B goes to a conventional lender, that lender will want proof of a down payment, and if your Contract only applies the amount received towards purchase price, the T/B will have to come up with a full down payment (again) and will not be a happy camper.
[addsig]
Quote:
On 2005-01-11 06:43, LeaseOptionKing wrote:
If your Contract is worded properly, you can call it nonrefundable option consideration and also have it convert into a down payment only if the property is purchased. If the T/B goes to a conventional lender, that lender will want proof of a down payment, and if your Contract only applies the amount received towards purchase price, the T/B will have to come up with a full down payment (again) and will not be a happy camper.
So if the contract is worded such and the t/b goes to a conventional lender and works the option as a downpayment, how does that fit in the scheme of things? Say, the t/b purchase price is 100 K, they've paid 5K on the option and another 5K in rent credit. Suppose the lender requires 15% down. The price the rei pays the s/o is 80K. How do they work it out in the closing? Thanks....new at this.
If they require 15 percent down, the T/B would still have to come up with another $9250 (based upon the lower sale price). That's better than $13,500 (what they would need if the whole $10,000 were just applied towards purchase price).
[addsig]
So, the total loan amount for them in that case would be 95K? Or 90K? I guess I don't see how I could pocket the deposit in the beginning and not lose it in the end. How does the lender recoup the deposit (Option consideration)? Or is that deducted my share of the profits?
Thanks for your patience.
PinPointEnt,
You buy for $80K, L/O at $100K. Your total profit on the sale is $20K. The t/b gives you $5K today as option consideration which will be allowed as a downpayment against the purchase price.
The t/b finds applies for a loan for $85K, but this requires $15K down. The buyer's down payment comes from the $5K option consideration converted to down payment, the $5K rent credit you allowed, and from another $5K cash the buyer brings to settlement.
At the end of the day, your potential $20K profit is reduced to $15K because of the rent credit allowed. Here is how the money flows. The sale price is $100K. You gave a $5K rent credit, and the buyer has already given you a $5K down payment. At this point, the buyer only needs another $90K to complete the sale.
The buyer brings $5K cash to the settlement table, and the buyer's lender contributes $85K for a total of $90K. Out of the $90K you have to pay $80K to your seller, leaving $10K on the settlement table for you. The $5K you already have in hand from the option consideration plus the $10K you receive at the settlement table constitutes your $15K profit on this deal.
Now, the question we have to ask rocinv is why he appears to be giving back all of his rental cash flow as a rent credit.
What NewKid said, except for the part about the credit being applied towards down payment. Normally, it will just lower the sale price.
[addsig]
OK, pinpointent. Why do you want to give back all of your cash flow as a rent credit? Your example cited a $5K rent credit?