My wife and I enjoy using a 3 year lease option, a loan servicing company, and an initial consolidated credit pull for the buyer(s) from our mortgage broker. With this approach, the broker offers to the buyer a list of “to do’s” to prepare them for purchase in 1 year. Any rent received late will immediately null the accumulated rent credit, and all payments will be applied to the rent. One month’s rent is received to purchase the option to buy. As a bonus to the buyer, if the home purchase occurs within year 1 the amount received for the purchase option will be applied to the rent credit.
In the Chicago suburbs (taxes are stable) 5-10 year old homes (keeps repairs minimal) where neighborhoods are established, we have had success with an agreement of:
Year 1 Fixed Rent plus $200 monthly rent credit = $2,400
Year 2 Fixed Rent increases by $25 per month & $100 applies toward monthly rent credit = $1,200
Year 3 Fixed Rent increase by $25 per month & $50 monthly rent credit = $600
This model will create the urgency to the buyer to purchase in the first year. As the investor/seller we have already agreed on a sales price, so this is the greatest win for both parties. My wife and I understand there is risk and additional “landlord costs” if the purchase occurs in year 3 verses year 1. When buyers see these levels of credits along with FREE feedback (mortgage qualification strategy) from the broker there is a positive response. If after 3 years they can not even qualify for FHA financing which only requires 3% down and a moderate Fico score, the odds of EVER qualifying are remote.
[addsig]
Classimg,
Great strategy. I will use this as a model for my business plan. Do you have any additional information that might be helpful to know or be aware of?
Thanks
housebyr
As we know the L/O buyer desires a creative approach to obtaining the home. By creating a plan with measurable milestones, the buyers understand the vision and build an emotional attachment to the deal. I often say, "If you show dedication and work on your credit within the first 12 months you receive the greatest discount along with the tax savings right away. You will feel so proud and excited to reach this goal. Can you see the added money in your pocket when you take advantage of the discount offer?!" The emotional attachment is generated and the buyer wants to receive this incentive.
As the investor, do not give up/cave in quickly and NEVER be ashamed of your researched sales price. I have learned while negotiating not to reduce price, instead reply to understand which items (low in cost) increase the value. These are inexpensive cosmetic changes, used by my and I, to negotiate when price (value) is an issue for the buyer: Fresh paint, new energy efficient storm door, replace old outdoor or indoor light fixtures, new railing for the stairs, add flowers to the landscape, replace the tattered screens in windows, provide a cover to the outdoor air-conditioning unit, change the bathroom faucet, provide two new outdoor hoses power wash the wooden deck, or seal coat the asphalt driveway.
[addsig]
Housebyr,
I do not give monthly rent credits!! As an incentive, I tell the t/b that if all 12 payments are made ON TIME, then I will deduct another $2500 off the purchase price. If they go for 24 months, then I will deduct 5k off purchase price. Since you have already marked up the purchase price to your t/b, this should work out well. It has for me......
Incentive is what you need to think about. Marketing it so it seems like they are getting a good deal and they use it.
I give 3 options always (use $500 as base):
They can pay regular $500 rent, no credits.
If they can pay $600, every time they pay on time, I put $100 towards the final price of the home.
If they can pay $700, every time...etc I put $200 towards the final price of the home.
Basically it is a wash to you because what happens is no matter the scenario you are going to get the same money at the very end anyway.
You will get more cash flow each month if they chose other options, but you will get less on the backend, but truthfully in any scenario you will come out the same in total profits.
It is an easy way to raise the rent without even trying. You will find that people who said they could only pay x per month will now pay y per month because they want the "extra" off their final payment.
I saw an question/answer in the RE section of LA Times this past Sunday regarding l/o. The question was that a t/b was saying the owner was trying to negotiate a price higher than the current FMV for the home. The "expert" answer was to not accept anything over CURRENT FMV. I suppose that is good for the t/b, but not so good for the owner/seller, right? Do t/b's usually resist the idea of setting a price higher than current FMV using generally accepted value increases for a geographical region?
I saw an question/answer in the RE section of LA Times this past Sunday regarding l/o. The question was that a t/b was saying the owner was trying to negotiate a price higher than the current FMV for the home. The "expert" answer was to not accept anything over CURRENT FMV. I suppose that is good for the t/b, but not so good for the owner/seller, right? Do t/b's usually resist the idea of setting a price higher than current FMV using generally accepted value increases for a geographical region?
Thanks!
Kevin
I thought with lease options you factor in the estimated appreciation in that particular area from year to year into your set sales price. So if you are set for a 2 year term, what are the average appreciation rates in the last 3-4 years? From there you base your set sales price 2 years from now. Is this feasible?
Hello everyone.
It seems to be clear to me that there isn't any standard with regards to rent credits, Sale price, etc. If you don't offer rent credits, you don't have to give them. If the perspective t/b asks for them, you have the right to be flexible. You could even use rent credits as a negotiating tool for the sales price. If you want to.
you can base your sales price on the current value of the home, or base it on the estimated value, or an actual appraisal when and if they excercise their option. You can be "creative"! I would recommend using two contracts, 1 for the lease agreement, and a separate purchase and sale agreement. Put a clause in the purchase agreement stating that if they default on the Lease, the Purchase Agreement is Null and Void, and that the "Non-Refundable Earnest Money Deposit" is forfiet. Keep the rents, and the "Non-Refundable Earnest Money Deposit" separate. That was you can evict them for non-payment of rent if you need to. The eventual lender may require "proof of deposit" when they excercise their purchase option, and bacause they are writing you two cecks each month, (1 for rent, and 1 for "Non-Refundable Earnest Money Deposit", this gives you a great way of accounting for all of their deposit, and they can provide cancelled checks as well.
I'd also recommend that you use a Loan Servicing Company to handle the Billing, Maintenance, and Collections and to keep the books for you. Keep your contracts shorter than three years, so your lease won't be classified as a disguised sale if you ever have to go to court.
Good Luck,
Jeff
I heard that if you give rent credits, that they are building equity in the property. If they build equity in the property, I have been told that they would have to be foreclosed on vs evicted if they defaulted on paying.
I don't know if that is true only in MN, but you might want to double check with an attorney.
Actually this whold string should be in the Lease Option Forum. And I would like to steer you there now. The following post has an excellent quick description of how you deal with rent credits, Option downpayments etc. http://www.thecreativeinvestor.com/ViewTopic11404-25-4.html
Hope this helps,
Jeff
My wife and I enjoy using a 3 year lease option, a loan servicing company, and an initial consolidated credit pull for the buyer(s) from our mortgage broker. With this approach, the broker offers to the buyer a list of “to do’s” to prepare them for purchase in 1 year. Any rent received late will immediately null the accumulated rent credit, and all payments will be applied to the rent. One month’s rent is received to purchase the option to buy. As a bonus to the buyer, if the home purchase occurs within year 1 the amount received for the purchase option will be applied to the rent credit.
In the Chicago suburbs (taxes are stable) 5-10 year old homes (keeps repairs minimal) where neighborhoods are established, we have had success with an agreement of:
Year 1 Fixed Rent plus $200 monthly rent credit = $2,400
Year 2 Fixed Rent increases by $25 per month & $100 applies toward monthly rent credit = $1,200
Year 3 Fixed Rent increase by $25 per month & $50 monthly rent credit = $600
This model will create the urgency to the buyer to purchase in the first year. As the investor/seller we have already agreed on a sales price, so this is the greatest win for both parties. My wife and I understand there is risk and additional “landlord costs” if the purchase occurs in year 3 verses year 1. When buyers see these levels of credits along with FREE feedback (mortgage qualification strategy) from the broker there is a positive response. If after 3 years they can not even qualify for FHA financing which only requires 3% down and a moderate Fico score, the odds of EVER qualifying are remote.
[addsig]
Classimg,
Great strategy. I will use this as a model for my business plan. Do you have any additional information that might be helpful to know or be aware of?
Thanks
housebyr
As we know the L/O buyer desires a creative approach to obtaining the home. By creating a plan with measurable milestones, the buyers understand the vision and build an emotional attachment to the deal. I often say, "If you show dedication and work on your credit within the first 12 months you receive the greatest discount along with the tax savings right away. You will feel so proud and excited to reach this goal. Can you see the added money in your pocket when you take advantage of the discount offer?!" The emotional attachment is generated and the buyer wants to receive this incentive.
As the investor, do not give up/cave in quickly and NEVER be ashamed of your researched sales price. I have learned while negotiating not to reduce price, instead reply to understand which items (low in cost) increase the value. These are inexpensive cosmetic changes, used by my and I, to negotiate when price (value) is an issue for the buyer: Fresh paint, new energy efficient storm door, replace old outdoor or indoor light fixtures, new railing for the stairs, add flowers to the landscape, replace the tattered screens in windows, provide a cover to the outdoor air-conditioning unit, change the bathroom faucet, provide two new outdoor hoses power wash the wooden deck, or seal coat the asphalt driveway.
[addsig]
Housebyr,
I do not give monthly rent credits!! As an incentive, I tell the t/b that if all 12 payments are made ON TIME, then I will deduct another $2500 off the purchase price. If they go for 24 months, then I will deduct 5k off purchase price. Since you have already marked up the purchase price to your t/b, this should work out well. It has for me......
Prosperous investing,
td
I do a little different.
Incentive is what you need to think about. Marketing it so it seems like they are getting a good deal and they use it.
I give 3 options always (use $500 as base):
They can pay regular $500 rent, no credits.
If they can pay $600, every time they pay on time, I put $100 towards the final price of the home.
If they can pay $700, every time...etc I put $200 towards the final price of the home.
Basically it is a wash to you because what happens is no matter the scenario you are going to get the same money at the very end anyway.
You will get more cash flow each month if they chose other options, but you will get less on the backend, but truthfully in any scenario you will come out the same in total profits.
It is an easy way to raise the rent without even trying. You will find that people who said they could only pay x per month will now pay y per month because they want the "extra" off their final payment.
Good luck
[addsig]
Hi all!
Great thread, as I am learning about l/o.
I saw an question/answer in the RE section of LA Times this past Sunday regarding l/o. The question was that a t/b was saying the owner was trying to negotiate a price higher than the current FMV for the home. The "expert" answer was to not accept anything over CURRENT FMV. I suppose that is good for the t/b, but not so good for the owner/seller, right? Do t/b's usually resist the idea of setting a price higher than current FMV using generally accepted value increases for a geographical region?
Thanks!
Kevin
Quote:
On 2003-09-03 20:15, kevbostic wrote:
Hi all!
Great thread, as I am learning about l/o.
I saw an question/answer in the RE section of LA Times this past Sunday regarding l/o. The question was that a t/b was saying the owner was trying to negotiate a price higher than the current FMV for the home. The "expert" answer was to not accept anything over CURRENT FMV. I suppose that is good for the t/b, but not so good for the owner/seller, right? Do t/b's usually resist the idea of setting a price higher than current FMV using generally accepted value increases for a geographical region?
Thanks!
Kevin
I thought with lease options you factor in the estimated appreciation in that particular area from year to year into your set sales price. So if you are set for a 2 year term, what are the average appreciation rates in the last 3-4 years? From there you base your set sales price 2 years from now. Is this feasible?
Hello everyone.
It seems to be clear to me that there isn't any standard with regards to rent credits, Sale price, etc. If you don't offer rent credits, you don't have to give them. If the perspective t/b asks for them, you have the right to be flexible. You could even use rent credits as a negotiating tool for the sales price. If you want to.
you can base your sales price on the current value of the home, or base it on the estimated value, or an actual appraisal when and if they excercise their option. You can be "creative"! I would recommend using two contracts, 1 for the lease agreement, and a separate purchase and sale agreement. Put a clause in the purchase agreement stating that if they default on the Lease, the Purchase Agreement is Null and Void, and that the "Non-Refundable Earnest Money Deposit" is forfiet. Keep the rents, and the "Non-Refundable Earnest Money Deposit" separate. That was you can evict them for non-payment of rent if you need to. The eventual lender may require "proof of deposit" when they excercise their purchase option, and bacause they are writing you two cecks each month, (1 for rent, and 1 for "Non-Refundable Earnest Money Deposit", this gives you a great way of accounting for all of their deposit, and they can provide cancelled checks as well.
I'd also recommend that you use a Loan Servicing Company to handle the Billing, Maintenance, and Collections and to keep the books for you. Keep your contracts shorter than three years, so your lease won't be classified as a disguised sale if you ever have to go to court.
Good Luck,
Jeff
I heard that if you give rent credits, that they are building equity in the property. If they build equity in the property, I have been told that they would have to be foreclosed on vs evicted if they defaulted on paying.
I don't know if that is true only in MN, but you might want to double check with an attorney.
Actually this whold string should be in the Lease Option Forum. And I would like to steer you there now. The following post has an excellent quick description of how you deal with rent credits, Option downpayments etc.
http://www.thecreativeinvestor.com/ViewTopic11404-25-4.html
Hope this helps,
Jeff